Morro Bay Power Plant May Change Hands

By Jack McCurdy

Synopsis: The Morro Bay Power Plant has been sold again, this time to a corporation that says it has no grandiose plans for the old plant on the 103-acre site. But NRG says it will say more as soon as the deal is done.

The Morro Bay Power Plant, which marked its 55th year of operation on July 8, has tentatively been sold by present owner Dynegy, through an intermediary, to NRG Energy, whose spokesperson said that NRG "is not contemplating any large-scale plans" for the old plant, which operates very little now and has been scheduled to shut down in 2015.

The spokesperson declined the say whether that means NRG will not seek to replace the plant with a new one because, until its purchase is final, it would be premature to comment on its plans for the plant. But it appears that no "large-scale plans" would include not building a replacement plant because, by definition, that is the largest, most expensive plan that could be undertaken. 

However, even if NRG does not propose to build a new plant, there are other options. NRG could seek to install several new, limited capacity, more efficient gas-fired "peaker" units to replace the old units, as Dynegy has reportedly been considering. Such a proposal would require California Energy Commission and California Coastal Commission review and approval. It could not use water from the Morro Bay National Estuary or ocean water, as the present plant does, because use of such water has been prohibited by federal courts over the past six years. 

So any peaker units would have to be operated with some form of closed-cycle cooling, which would not use estuary or ocean in what is called once-through cooling (OTC). Closed-cycle cooling relies on a limited amount of water that is recycled within the plant, much like in a car radiator. The only loss is through evaporation. 

The most immediate question is whether NRG will continue to request extension of the so-called outfall lease of public beachfront property by the city of Morro Bay to Dynegy. This leas allows for discharge of water taken from the Estuary and is used in the plant to cool generators. The water is released at Morro Rock into Estero Bay. The plant cannot operate without the lease to enable OTC to be used.

In fall, 2008, Dynegy requested an extension of the lease for two years, through 2014. The current lease expires in 2012. 

When it requested that extension, Dynegy also announced it would close the plant in 2015. This is the year that the plant has been required to stop using OTC as a result of a new state policy adopted by the State Water Resources Control Board last May restricting and phasing out use of estuary, bay, and ocean water by plants along the California coast. The policy is under review by the state Office of Administrative Law before it becomes final.

Another question is whether NRG, if it becomes the new owner, will request renewal of a federal discharge permit, allowing withdrawal of estuary water and its discharge into Estero Bay. This permit is issued by the Regional Water Quality Control Board and is required of all existing plants that use OTC under the pending state board policy. That policy requires all plants to renew their discharge permits to achieve compliance. Conceivably, NRG could save the expense of going through the application and review process by the regional board for a renewed discharge permit, which could mean closing the plant before 2015. The present discharge permit has been on administrative extension for 10 years, far longer than federal statutes normally allow.

The plant now operates only two of its four generating units, using about six per cent of their limited capacity per year. The two units that are still operating were built in the early 1960s. The two units that were shut down in 2004 were built in the early 1950s.

The city of Morro Bay has a direct financial stake in whether the plant operates, since it receives $750,000 a year from Dynegy under the current outfall lease. Negotiations on a new lease presumably has been under way between the city and Dynegy since the plant owner requested a lease extension two years ago.

An executive session of the Morro Bay City Council reportedly had been scheduled for August 31 to continue discussions of the proposed lease extension. The pending sale of the plant and how that may affect any lease extension was added to the agenda after the sale was reported on August 13. 

Of course, NRG could seek to arrange redevelopment of the plant site for some alternative use, which has been discussed within the community for a number of years. But, that, too would constitute a large-scale plan. 

NRG Energy would become the Morro Bay plant's fifth owner, starting with PG&E, which built the first units of the plant in the early 1950s, followed by Duke Energy, LS Power, and Dynegy, which combined operations with LS Power four years ago. Both Duke and Dynegy sold the plant after getting into financial trouble. Bloomberg Businessweek reported that Dynegy had lost 94% of its market value during the last three years.

Duke's application to build a new plant was approved by the Energy Commission in 2004, but the Commission never made its approval final, pending review and action by the regional water board. That review did not take place since Duke did not seek the board's approval. Instead, it sold the plant to LS Power.

Dynegy has 40 days to consider other offers before accepting a $4.7 billion bid from the Blackstone Group to acquire Dynegy, including its power plants in the East, Midwest and the West plus debt. That 40-day period expires on September 23 when, if NRG's acquisition is finalized, it would be in a better position to comment on plans for the plant, the spokesperson said.

NRG has agreed to pay $1.35 billion to the Blackstone Group for the three California plants in Morro Bay, Moss Landing, and Oakland and the Casco Bay plant in Maine. The Moss Landing plant is the most valuable and productive of these, with four operating units, two of which were built in the past 10 years. However, a major, potentially-precedent setting lawsuit that has gone through lower courts for the past five years is now before the California Supreme Court. It challenges the plant's right to continue to use OTC at the Moss Landing plant in light of recent federal court decisions prohibiting that widespread practice. The U.S. Clean Water Act, as amended in 19777, does not allow use of estuary, bay, ocean, river, stream or lake water for power plant cooling. That was affirmed by landmark federal court decisions in 2004 and 2007, the latter specifically applying to existing power plants.

Oakland is a small plant that only operates during periods of peak demand for electricity.

NRG, a Princeton, N.J. company, already owns power plants in El Segundo, Carlsbad (the Encina plant), Long Beach, and three peaker plants at Kearney Mesa, Miramar, and El Cajon in the San Diego area. NRG is building new closed-cycle cooling plants in El Segundo and Carsbad, replacing OTC units. 

NRG had filed an application with the Energy Commission to build a new OTC plant in El Segundo and won approval, but that was appealed to the State Supreme Court, which upheld the Commission's decision. But instead of going ahead with a new OTC plant, NRG decided to build a plant with closed-cycle cooling, apparently without being forced to. It also is building units with closed-cycle in Carlsbad on its own.

When the Energy Commission, in 2004, approved Duke's plan for a new Morro Bay plant that would have used OTC, the Commission rejected staff's recommendation that closed-cycle cooling, not OTC, be required. But the Morro Bay City Council opposed a new plant with closed-cycle cooling while supporting Duke's plan for an OTC plant. So even if NRG wanted to build a new Morro Bay plant with closed-cycle cooling, as it is in El Segundo and Carlsbad, it may face city opposition, although the membership of the Council has changed since 2004.

However, the City is not the final authority. If the City were to support a new plant with closed-cycle cooling under new plant ownership, such a proposal would likely be required to undergo a new review by the Energy Commission, as one Commission staff member speculated last week. That would likely mean taking account of the Commission staff's position expressed during the Duke project review—that if a new plant with closed-cycle cooling was approved, there would be no justification for a new plant being built in Morro Bay because the plant would no longer be coastal-dependent, i.e. no need to use water for cooling. The staff concluded that there are more appropriate sites in less-populated areas in the San Joaquin Valley area that would have much lower impacts on public health from a new plant's emissions.

In addition, such a proposal would require review by the Coastal Commission, which could be expected to concur in the Energy Commission staff's recommendation because of environmental impacts in Morro Bay. The Commission opposed a new Morro Bay plant with OTC.

 On another front, the Shareholders Foundation has reported that an investigation on behalf of Dynegy investors has been started by a law firm over whether the Blackstone Group and Dynegy directors "breached their fiduciary duties by not acting in Dynegy . . . shareholders' best interests" in connection with the sale of Dynegy. The report questioned whether the Dynegy Board of Directors failed to adequately "shop the company" prior to entering into the sales agreement and by not seeking a deal with better value for stockholders.

There has been no mention of a lawsuit challenging the sale, but if one were filed, it could delay its completion.

Jack McCurdy is co-president and co-founder of CAPE.
This article was not written on behalf of CAPE and does not necessarily reflect its views.

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