Another Nuclear Plant Bites the Dust

 | Jun 07, 2013 | 5:35 PM EDT  | Comments
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Today, Edison International (EIX) surrendered. The company ended its attempts to keep a 2,350-megawatt San Onofre Nuclear Generating Station (SONGS) operating. Edison decided to retire the units. While many expected this outcome, few knew it would happen so soon.

According to the Nuclear Energy Institute, Edison owns 75.1% of SONGS, Sempra Energy (SRE) owns 20% and local municipal utilities own the rest (Anaheim Public Utilities Department and Riverside Public Utilities). All four utilities lose access to low-cost power.

Today's announcement does not mean it is over. The facility must undergo a costly decommissioning process. Under federal rules, owners of nuclear plants are required to remove or entomb hazardous materials and restore the site back to its original condition. The decommissioning process will take years and hundreds of millions of dollars to complete.

The Nuclear Regulatory Commission requires all nuclear power plant owners to maintain a sinking fund. SONGS is no exception.

There is a concern SONGS's fund could be inadequate. All SONGS units must be dismantled, including a third unit, which was retired in 1992. According to the NRC, dismantlement of the older unit is essentially complete. However, owners were unable to ship the reactor pressure vessel for disposal because of its size and weight. Until today, owners planned to store the old vessel onsite as long as other units were operational. They also expected several more years' operations that could defer disposal costs and build up the sinking fund.

Even if sinking fund issues were addressed, there remain financial risks. Edison may have incurred additional liabilities when they replaced SONGS's steam generators. Edison's subsidiary was the managing partner and the operator. It appears that subsidiary may have ignored some important advice, which, if true, cost all four owners unnecessary expense.

Equitable adjustments between the owners may result. If those adjustments should come about, they would likely help Sempra, possibly help municipal utility owners and they would likely hurt Edison. As a result, investors should remain cautious about Edison until most issues of equity are resolved.

Part of the consideration is the fact that SONGS can be fixed. Most of the plant's critical components are in excellent shape. If someone were willing to fix SONGS, it could operate reliably for another 20 years. Today's announcement suggests no one was willing to make the investment.

When any decision of this magnitude is announced, new winners and losers emerge. In SONGS's case, the losers are Southern California's grid, Southern California's environment and the local tax base.

With 2,350 megawatts of base load power missing, California's grid operator must find new sources of base loaded energy. Finding those new sources mean grid operators must pay marginal prices for the same wholesale power. With higher wholesale costs, retail consumers will be forced to pay much higher prices.

With SONGS out of the picture, Southern California loses a massively large clean energy source. Like wind power and solar power, SONGS produced no carbon, no greenhouse gases and no emissions. To replace SONGS requires another nuclear plant or more carbon and greenhouse gas producers.

SONGS also provided massive infusions of cash into the local economy. They employed approximately 1,500 highly skilled workers, paid income, payroll, sales and ad valorem taxes. In addition, SONGS kept power prices low. When SONGS becomes fully decommissioned, all of those economic benefits vaporize.

Some believe Edison can replace SONGS with a couple of combined cycle gas turbines. It is unlikely this option is possible. State and county authorities are unable to grant additional air permits as Southern California is in the middle of a non-attainment area. To acquire air emission rights, Edison would have to buy them from an existing source.

There are winners. They are the owners of Arizona's Palo Verde Nuclear Generating Station. Palo Verde is the nation's largest nuclear generating facility. Palo Verde is a three-unit facility that can produce 3,875 megawatts and it is owned by a collection of utilities: Pinnacle West Capital (PNW), Salt River Project (public utility), El Paso Electric (EE), Edison International, PNM Resources (PNM), Southern California Public Power Authority and Los Angeles Department of Water & Power.

Because they are physically connected to Southern California's power markets, Palo Verde will likely sell into higher market-clearing prices. This should improve their owners' revenue and margins.

For the nuclear power industry, SONGS's retirement represents a disappointing and unnecessary loss. Like Duke Energy's (DUK) defunct Crystal River Nuclear Generating Plant, SONGS could operate for years to come. Unfortunate maintenance decisions doomed both facilities. 

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