In the lobby of the San Diego Gas and Electric Company’s main office building in downtown San Diego, people come and go across the black stone floor. A receptionist stands behind a long metal desk, checking in visitors and issuing them identification tags. To her left are six elevators that ferry employees and visitors up and down the building’s nineteen floors; they are in almost constant use. Beyond the elevators is a long, glass-enclosed room that houses Customer Information, where calls to the company for service or repairs are answered and processed by nearly one hundred operators.
It is hard to believe that a company with all this could be in financial trouble, but that is exactly the situation SDG&E finds itself in as it heads into its ninety-ninth year of operation. In fact, the company has become a classic example of a power utility struggling to stay on its feet. Its decline has been chronicled by publications such as Business Week, the Wall Street Journal. and the Washington Star. SDG&E no longer owns the nineteen-story building that bears its name, or its most recently built generating unit, the oil-fired Encina Unit 5; both were sold to (and are now leased from) separate banks, in an effort to alleviate the company’s acute shortage of capital funds. The president of the Public Utilities Commission, in voting for a recent. unprecedented rate increase that will give SDG&E millions of dollars to cover the costs of the abandoned Sundesert nuclear power project, noted that had the commission not provided SDG&E with such drastic rate relief, “the company would likely be unable by the end of the year to meet its service obligations.”
SDG&E maintains that its financial plight is due to circumstances beyond its control, in particular to the rapid population growth in its service area (which includes San Diego County and a small comer of coastal Orange County). But its policies have increasingly come under attack from consumer and environmental groups, who claim the company has contributed to its own problems through imprudent managerial decisions and the insistent pursuit of nuclear power, a technology with extraordinarily high construction costs.
Several PUC officials have recently indicated that there is some merit to these arguments; but the commission is committed to protecting the viability of the company, and there are several reasons why it should want to do so. For one thing, when a company of SDG&E’s size fails, or is perceived to have failed, there are repercussions throughout the business world. For another, there is the nagging fear that what happened to SDG&E could happen elsewhere. Because while it is true that unique circumstances have contributed to the company’s plight, it is also true that less than ten years ago SDG&E was the epitome of a healthy utility company, making largely the same decisions on expansion and future technology as its sister utilities nationwide.
From the top of Unit 3 of SDG&E’s South Bay power plant, you can see south to the Mexican border and north to the skyscrapers of downtown San Diego. To the east sprawl the communities of National City, Chula Vista, and Bonita; to the west lies Coronado, and beyond it, the broad gray expanse of the Pacific. The view somehow brings home the fact that all of the power for the entire San Diego area is supplied by SDG&E; that, as company spokesman Fred Vaughn puts it, “There is essentially no one in the county who isn’t our customer.”
Vaughn is a thirty-year-old, pleasant-looking man with wavy, light brown hair. He wears glasses and immaculate three-piece suits, and is not inclined to smile much. An employee in SDG&E’s news bureau, it is his job to act assort of a filter between the company and the media, and generally to portray company policies in their most favorable light. But like many of his fellow employees, Vaughn seems genuinely proud of SDG&E’s size, service, and tradition. And it is certainly true that the company has come a long way from its inception some ninety-nine years ago.
It was on a Saturday night, June S, 1881, that power first came to the City of San Diego in the form of gas-lit street lamps. The lamps were located on Fifth Street, downtown, and the gas was supplied by the San Diego Gas Company, a newly formed partnership of eight local businessmen. Although the city’s population was only 3000 at the time, there was much talk of gaining railroad connections to other parts of the country, and the backers of the San Diego Gas Company were gambling that the railroads would attract more people. Fate dealt them a royal flush. When the Santa Fe Railroad completed a link to San Diego in 1885. it touched off a land and population boom never since equalled in this area. In the words of one local historian, “Insane real estate speculation swept the citizenry off its feet.
By 1887 the population had risen from 3000 to some 25,000, and the fortunes of the San Diego Gas Company had risen with it. That same year the company merged with two small suppliers of electricity, and became the San Diego Gas and Electric Light Company.
Unfortunately, the boom collapsed the next year when the railroads moved their construction and servicing facilities north to Los Angeles, and the area's population began to decline. But after the turn of the century it began to rise again, and ironically. by 1905 the San Diego Gas and Electric Light Company was having trouble meeting the demand for its services. The company was sold that year to a Chicago-based firm, and renamed the San Diego Consolidated Gas and Electric Company. Included as the company’s main assets in the deal were an electric generating plant with four steam-driven turbines, a gas processing plant, thirty miles of power lines, thirty-four miles of gas pipes, and the accounts of exactly 3426 customers.
The new ownership had plenty of money to expand facilities, and gas and electric service was rapidly extended to outlying areas. By 1911 the utility, which had previously served only metropolitan San Diego, was supplying gas or electricity. or both, to National City. Chula Vista. Lemon Grove. La Mesa. Spring Valley. El Cajon. Santee. Lakeside, and La Jolla. That same year the state Public Utilities Commission was established, and was given the authority to review the finances of power and water utilities and railroads, and to set their rates of return. For the first few years of its existence, though, the commission spent most of its time sorting out disputes over railroad rights of way.
Throughout the next decade the San Diego Consolidated Gas and Electric Company continued to expand freely its capacity and service, much like other power utilities in the state. But in 1922 a furor erupted over utility involvement in the defeat of a proposed system of state-owned hydroelectric plants. After the proposal had died, a state senate investigation was launched. It revealed that the Pacific Gas and Electric Company, Southern California Edison Company, and “their affiliated utilities" had paid more than half a million dollars to individuals who had spouted propaganda against the proposed system in clubs, unions, churches, and lodges, under the guise of independent advice. It was. in the words of one state legislator, “a low plane of propaganda and political trickery.” After this the PUC began to devote an increasing amount of attention to power utilities, and in particular to their lobbying and public relations expenses.
Although the stock crash of 1929 posed a major setback for the company’s expansion plans, it proved to be temporary. In 1932 the San Diego Consolidated Gas and Electric Company introduced natural gas (replacing its oil-derived gas), which provided the same amount of heat for fifty percent less cost. Since this would have meant a drastic loss of revenue, the company simultaneously embarked on a major sales program for gas-fired furnaces, and attempted to persuade building contractors to supply them as a standard feature in new homes. The program was tremendously successful and actually increased overall gas usage.
To comply with federal law, the company ended its corporate ownership in 1940 and made its stock available to the public, renaming itself the San Diego Gas and Electric Company. With the expansion of naval facilities here during the war, and the subsequent arrival of large government contractors such as Rohr and Convair. SDG&E gained a strong commercial base which seemed to insure its future prosperity. And in fact, throughout the Fifties and Sixties the company continued its efforts to increase power consumption, promoting its gas and electricity like any other commodity. Programs like those of its home economics department were typical: by presenting cooking demonstrations and printing recipe booklets, the company sought to increase oven usage. During this period the population of SDG&E's service area began to mushroom, and to stay ahead of the overall increase in demand the company built large gas- and oil-burning generators at its Silver Gate power plant (on Sampson Street near Harbor Drive), at Encina (just south of Carlsbad), and in the South Bay (off Interstate 5 near Chula Vista). Construction began on the nuclear reactor at San Onofre (a joint project with the Southern California Edison Company, which owns eighty percent), and the first unit of the plant came on line in 1968. At the time, SDG&E officials, like their counterparts in power utilities nationwide, expected such reactors to become the major source of electricity in the future. What they didn’t foresee was that the nuclear technology, with its surrounding controversy and its rapidly mounting costs, would prove to be one of the primary factors that would drive the company into a financial crisis.
"This company is like a miniature city,’’ Fred Vaughn remarked one afternoon recently in SDG&E’s downtown headquarters. At the time, Vaughn was referring to the company’s photography lab and printing plant, which turns out numerous pamphlets in addition to a monthly in-house journal, NewsMeter Digest. But he might just as easily have been referring to the company’s many office buildings and other properties throughout the county, or its 4000-plus employees. SDG&E is like a miniature city in some ways; an Orwellian city the sole objective of which is to distribute power efficiently and profitably.
When a customer calls SDG&E for service, his or her call is fed into Customer Information, where operators seated at clusters of computer terminals can refer to the status of the account, the consumption history for both gas and electricity at the given address, and the most recent billing information, all within a few seconds. Orders for service or repairs are made at Customer Information, and automatically feed into baskets at the company’s service center, located halfway across town at Tenth and Imperial. Within a few days one of the company’s service people is dispatched. usually in one of the familiar bright yellow pickup trucks. SDG&E also owns heavy equipment such as bulldozers, tractors, and tank trucks — in all, some several hundred service vehicles.
SDG&E purchases all of its natural gas from the Southern California Gas Company (who in turn buys it mostly from suppliers in Texas and New Mexico), but by far the bulk of its business is in electricity. The company has four main generating stations: South Bay, Silver Gate, Encina, and San Onofre. In addition, it has eighteen smaller generators distributed throughout the county, which are used only in times of emergency or peak demand; nine of these are located on the site of the old Tu-Vu drive-in theater in Kearny Mesa. The total generating capacity of the company’s combined facilities is more than 2500 megawatts (one megawatt equals one million watts), which is well ahead of its highest peak demand. 2019 megawatts, set on September 19 of this year during a prolonged heat wave.
The state of the company’s power at any given time is monitored in a bunker-like cement building on the northern rim of Mission Valley, only half-jokingly referred to as the Mission Control Center. There, company employees are able to watch San Diego County’s power consumption ebb and flow on a bank of gauges, and they can switch on back-up generators or arrange to buy additional electricity from outside the system on a moment’s notice. The generators in the main power plants are designed to adjust automatically to fluctuations in demand, however, speeding up when they sense a need for additional power and slowing down when the need disappears. But the way the system works overall is perhaps best illustrated when something goes drastically wrong.
On March 8, 1978, an operator at the South Bay power plant activated a switch that had mistakenly been left grounded. The plant's newly generated electricity surged toward it (electricity seeks the shortest path to the ground), and when a circuit breaker failed to open, leaped earthward in the form of a lightning bolt that sounded like a gunshot to those within several hundred yards of it. It was as if a hole had been punched in the system, and the electricity had slipped through. The plant’s generators sensed a skyrocketing demand for power, sped up to try to meet it, and almost instantly shut off, having been designed to disconnect themselves from the system when they begin spinning too fast. One by one, SDG&E’s other generators around the county did the same. In a matter of seconds virtually every power source the company owned had switched itself off, causing a countywide blackout that lasted for more than four hours. Office lights went out, refrigerators shut off, even stoplights failed to work as commuters made their way home in the stalled traffic. It was an eerie experience — as if the sun had gone into eclipse and stayed there far too long.
Except for the nuclear reactor at San Onofre, SDG&E’s power plants are in essence huge gas- or oil-fired boilers, heating water to steam that in turn drives turbines similar to those used in jet engines. (In fact, some of the turbines are jet engines, specially adapted for the generation of electricity.) Of these fossil-fuel power plants, the South Bay plant is fairly typical: from Interstate 5 the main structure housing its four generators looks like a nondescript oil rig, or a building under construction. It is only from up close, walking among the myriad floors, walkways. pipes, and gauges, that you begin to gain a feel for how unusual it all is. Fred Vaughn might argue that the essence of SDG&E is in its employees, but here amid the roar of the boilers and the whine of hundreds of pumps and fans, where you must shout to be heard, it is apparent how utterly wrong he would be. Suddenly it all comes into focus: this is the soul of the company, these massive gray girders, ten-foot-high air ducts, and fifty-ton rotors turning, turning, turning twenty-four hours a day. This is where motion becomes electrical energy; this is where the blood of the modern world is made.
It takes ten million watts just to operate the South Bay power plant; Bob Cole, the plant’s manager, says with a twinkle in his eye, “We’re our own best customer.’’ Cole, who is a twenty-year veteran of SDG&E, adds, “The idea, of course, is to generate more than you use. We use ten million watts, but the plant’s capacity is about 720 million.
“Behind this whole concept of steam generation." he continues, "is water. We use a lot of water. You can heat it, turn it into steam, run it down all over the place, and then condense it back into liquid form. ... It’s the handiest thing in the world, and it’s also the cheapest." (Water is also used to condense the plant's steam. At the South Bay plant, some six million gallons a day of this “coolant” is pumped out of the San Diego Harbor and returned to it after a temperature increase of about fifteen degrees. The heated water has had little effect on the already severely affected environment of the harbor, but at the San Onofre nuclear plant, where “coolant" is returned to the ocean after an increase well above the federally allowed limit of twenty degrees, concerns persist over the resulting effect on the offshore kelp beds and other marine life.)
Just north of the South Bay plant lies a barren dirt yard several hundred feet across. In it stands a network of tall black transformers, designed to step up the generated electricity to as much as 230,000 volts and send it out toward more than 150 sub-stations around the county. At the substations the voltage is then stepped back down — to what level depends on whether it is for industrial, commercial, or home use — and distributed to the surrounding areas. In general, electricity will follow the shortest route it can to get out of the system, but. as Fred Vaughn pointed out, SDG&E has more than 70,000 miles of power lines, and once the electricity is in the wires it is impossible to tell where it came from. It is just there.
“What led to our company’s current financial position was primarily not getting rate relief from the Public Utilities Commission in a timely manner," said Ron Watkins a few weeks ago. Within the somewhat military hierarchy of SDG&E, Watkins could be considered “brass"; his official title is vice-president of resource planning, and his office occupies most of the northeastern corner of the eighteenth floor in the company’s downtown headquarters. He is a tan, trim-looking man in his forties, with longish dark hair, and he is frequently called upon to present SDG&E’s views to the media and the public. But Watkins’ opinion of how SDG&E got into financial trouble is disputed by many people, including officials at the PUC. “I don’t buy that as a prime reason,” said Commissioner Leonard Grimes in a telephone interview recently. "In some cases we contribute to their problems, but I think the main thing was Sundesert. With that project, they bit off more than they could chew." And Martin Mattes, a legal advisor to PUC president John Bryson, said, “As far as we can tell, the major causes for their current financial position have been several large projects that haven’t worked out, particularly the Sun-desert project.”
SDG&E first began actively pursuing the construction of Sundesert — a proposed 1900 megawatt nuclear power plant to be built near the Colorado River, seventeen miles south of Blythe — in 1972. The company was getting into a financial bind due to the rising price of oil and the continued rapid population growth in its service area, which was greater than the company’s ability to keep up with it. But Walter Zitlau, president of SDG&Eat the time, was banking that future rate increases would not only improve the financial picture but perhaps even cover the cost of the Sundesert plant while it was under construction. The company spent freely on design, land acquisition, and lobbying costs for the project.
But Zitlau had a hard time getting along with the PUC, according to a former veteran employee, who asked not to be identified. By early 1975 the relationship between the company and its prime regulatory body was at a low point, and when the PUC denied a multimillion dollar rate increase that summer, Zitlau, the former employee said, vowed to cut the company’s budget where it would create the biggest stir — in the customer assistance departments. In October of that year thirty percent of the marketing department’s personnel were laid off, along with forty percent of the customer extension planning department (the department responsible for the design of all gas and electric connections for newly developed areas). Within a few days Zitlau met with the company’s board of directors and threatened to resign because of the problems the company was having with the PUC. “He asked if the directors would consider hiring executive vice-president Marty Engler [a hard-line Zitlau supporter] as his successor. The directors said that it was all right with them if Zitlau wanted to resign, but with all the problems they were having with the PUC, they didn’t really want to see as his successor someone who would carry out the same policies,” the former employee said. Zitlau quit anyway, and the directors appointed as president Robert Morris, a senior vice-president relatively new to the company.
Under Morris SDG&E improved its communications with the PUC, but continued to pursue Sundesert, even after the passage of the nuclear safeguard laws in 1976. (The laws stipulate that no nuclear power plant can be built in California until the federal government has approved a site for permanent storage of nuclear waste.) SDG&E hoped that the state would exempt Sundesert from the laws, and along the way picked up the verbal support, at least, of Mayor Pete Wilson, State Senator James Mills, and assemblymen Larry Kapiloff and Peter Chacon. But the company met with the opposition of the San Diego Energy Coalition, an affiliation of three local consumer organizations which insisted from the start that Sundesert was unnecessary. Dave Durkin, a law student at the University of San Diego, eventually attended state energy commission hearings which explored the need for the plant, making statements and filing briefs on the coalition’s behalf. Durkin, who has since graduated from law school and is awaiting the results of his bar exam, recently recalled, “I felt that the project was unnecessary and illegal. Illegal because of the nuclear safeguard laws, and unnecessary because there were other ways for San Diego to meet its electrical demands than this huge power plant — conservation and smaller, decentralized plants." Meanwhile, testimony from SDG&E’s witnesses, including Ron Watkins, indicated that Sundesert was essential to the company’s ability to meet future demands for electricity in the area. It was also true, however, that SDG&Estood to make a great deal more money on a large, high-cost plant because of the rate structure fixed by the PUC (see insert below).
In the end, in January of 1978, the energy commission voted 4-1 that SDG&E couldn’t assure permanent storage of Sundesert’s radioactive wastes, and that conservation and alternative power sources could meet the future demand for electricity in SDG&E’s service area. Part of the commission’s decision read: “It should be made clear to the Governor and the legislature that there are many, many options available to the utilities of California, and if they don’t do the job (to begin exploring them], the state must do it.” Three months later, in April, a company-supported bill to exempt the plant from the nuclear safeguard laws died in an Assembly committee. Finally, on May 4, SDG&E’s board of directors officially scrapped plans for the plant. In all. Sun-desert had consumed an enormous amount of the company’s effort for six years and a total of more than $106 million.
Almost immediately SDG&E moved to recover the vast majority of its expenditures on the project — some $90.5 million, including $650,000 spent “to influence the decisions of public officials” — from the ratepayers. New hearings, this time held by the PUC, began in July of 1978. and dragged on until last June. SDG&E argued that its management had not been imprudent in pursuing the project, and that it was therefore reasonable for them to expect some sort of rate relief. But their proposal was opposed by the San Diego Energy Coalition, again represented by Dave Durkin, who argued that the Sundesert project represented a corporate gamble which should be paid for by its investors. (Another party at the hearings, the City of San Diego, opposed having the ratepayers pay for roughly one-third of Sundesert’s costs, including the $650,000 spent on lobbying expenses.)
Before the PUC’s ruling, Durkin was hopeful that the commissioners would deny SDG&E’s proposal. “There was a lot more disagreement than agreement,” he said recently, “but one thing everyone seemed to agree on was that a decision to allow the costs of Sundesert into the rate base would provide a dangerous precedent.” Never had a utility been allowed to charge its customers for the cost of a project that had produced no power: never, that is. until June 5. 1979. when the PUC announced its decision on Sundesert. That decision, in effect, reimbursed SDG&E for the bulk ($84.5 million) of its expenditures on Sundesert. and also allowed the company the highest rate of return of any utility in the state.
Along with the decision, commissioners John Bryson and Leonard Grimes issued statements in which they explained their reluctant concurrence. Grimes noted that he felt ”a very strong responsibility to ensure the economic strength of SDG&E as an independent utility among giants in California." He recently elaborated, “On one hand, SDG&E is a big company, but on the other hand, as utility companies go, they’re not all that big. ... I wouldn't want to see the company become prey to larger companies that would buy it up. I’d hate to see the state in a situation where a few huge, powerful utility companies that are hard to deal with control all the power.” Bryson, calling Sundesert an “unfortunate and monumental failure,” concluded. “I wish to state clearly that my concurrence is based on the company's critical current status, and should not be taken to indicate either a guarantee as to future rates to be allowed this company or any sort of trend in this commission’s regulatory policy.”’
But the commissioners’ comments didn’t satisfy many of those who had followed the course of the hearings. Although they had stressed the fact that SDG&E’s poor financial situation had figured greatly in their decision, the commissioners seemed to sidestep the obvious conclusion that Sundesert was one of the major reasons for that poor financial situation. “They said later that the company shouldn't have just gone ahead with Sundesert, hoping that the ratepayers would bail them out,” commented Durkin. “But in essence their decision was the biggest bail-out of all. A few weeks after the PUC’s decision, the Evening Tribune ran a short article which reported that, as a result of the Sundesert rate decision, the average residential electric bill in San Diego would immediately jump by $3.13 a month.
Within rapidly growing San Diego County. SDG&E extends service to an average of one hundred new customers every day. The same PUC regulations that grant the utility a monopoly in its service area require it to keep up with this new growth, and company officials say that in recent years it has cost them about $100 million a year to do it. The main problem has always been the expense of laying the wire and pipes that will carry the power, not so much where the power is going to come from; but with little money available for new generating facilities, company officials say the latter question has begun to weigh heavily on their minds.
Thus, in the company's scheme for supplying electricity in the next decade, the San Onofre nuclear power plant figures importantly. Two new generating units are currently under construction there at a cost of $2.4 billion, and when they are completed (sometime around 1983), San Onofre will be the largest nuclear power plant in California. SDG&E, which owns twenty percent of the plant, hopes to gain 440 megawatts from the new units, enough electricity to serve about 400.000 people. But the expansion of San Onofre is being bitterly opposed by a number of consumer and environmental organizations, which are gearing up for an all-out battle at the Nuclear Regulatory Commission’s licensing hearings sometime next year. The hearings, originally planned for early 1980, may be delayed pending review of the NRC’s full report on the reactor failure at Three Mile Island, which was released last week.
"These hearings used to be nothing but formalities, but things have changed," says A.S. ("Bill”) Carstens, who is helping to spearhead the opposition of groups such as the Friends of the Earth. Community Energy Action Network. Sierra Club. CalPIRG. and Campaign for an Economic Democracy. Carstens, 74, is a former insurance salesman who has spent more than $35,000 of his own money over the last six years in an effort to halt the expansion of the San Onofre plant. Tall, white-haired, and friendly, he is an articulate speaker who occasionally closes his eyes while he talks, recalling specific figures or the names of obscure government agencies.
"I'm not kiddin' myself — I’m not so naive that I don’t realize it would be a difficult decision for the NRC to not license the plant," he admits. "But since Three Mile Island, the credibility of the NRC is at a low point. They’ve got to take this hearing stuff seriously. And other people will change their views if they feel they’re threatened."
Carstens has a list of some nineteen separate issues he will bring up at the hearings, including earthquake hazards, the need for a comprehensive plan for evacuation in case of an accident, the impact of heated discharge water on marine life offshore, and the lack of a permanent storage site for the plant’s highly radioactive spent fuel. But perhaps the strongest argument against the plant is an economic one. For some time utilities nationwide have been touting nuclear reactors as the cheapest available way of generating electricity, but the rapidly rising costs of such plants are beginning to wear that argument thin, according to Carstens. Nuclear power plants are now nearly twice as expensive to build as coal-fired plants ($1900 per installed kilowatt hour, as opposed to $1000 per installed kilowatt hour for coal). And the price of uranium fuel, one of the cheapest aspects of nuclear power, is also rising rapidly. Since the early Seventies the price of fuel oil has gone up by some 260 percent, but during the five years from 1973 to 1978 the price of uranium has increased by an astonishing 470 percent, according to a report released by the House Committee on Government Operations.
"Uranium costs are going up all the time," says Carstens. “And it's only getting harder to get out of the ground. The utilities don’t know how much they’ll be paying in the future." He also points out that funding of nuclear power by the federal government (which spent $441 million in 1978 to enrich the uranium used in commercial reactors) has made the technology’s costs artificially low.
SDG&E refers queries about San Onofre to the Southern California Edison Company (the majority partner in the plant), whose officials have steadfastly contended that the environmental hazards of the plant have been adequately addressed. But the management of SDG&E is counting on the new units at San Onofre to be licensed for operation regardless of the objections raised at the upcoming hearings. “We still think nuclear power is the cheapest and safest source of power for our customers." Ron Watkins said recently. "I think Three Mile Island proved the safety of it." Utility critics like Carstens retort that the accident at Three Mile Island. with its estimated $400 million clean-up bill, is hardly a good example of the low cost of nuclear power, not to mention the safety. The Metropolitan Edison Company of Pennsylvania has admitted that it will try to pass on the costs of the Three Mile Island accident to its ratepayers, and if that move fails, the federal government will likely have to assume the financial responsibility. And even Watkins admitted that within the current political climate of California, nuclear power is a high financial risk for a utility, and that SDG&E has “begun to recognize ‘risk’ more. With the advent of regulatory commissions, we now not only want to minimize cost, but risks.”
Even if the two new units at San Onofre are licensed, though, the question of how SDG&E will ultimately meet the continuing growth of its service area remains a major one. Among the various options open to it, the company has shown a strong interest in solar energy, and in an experimental program in 1978 sold forty-nine residential solar water heating systems in the San Diego area. Those systems convinced company officials that the cost of heating water with solar compared favorably to the cost of heating it with electricity (when combined with current federal and state income tax credits), and they would like to market them on a wider scale. But the utility has met with the opposition of many local solar contractors who are afraid that.the budding industry could be easily dominated by a company as large as SDG&E, with its vast marketing power. For the past year a state law has prevented any utility in California from actively entering the field while the PUC holds hearings to determine what impact their involvement would have on existing solar businesses.
SDG&E has also been investigating the technology of geothermal energy, but has been reluctant actually to build a geothermal plant because of what its management perceives as high financial risks involved. The company has applied to the Department of Energy for joint funding of a fifty-megawatt geothermal demonstration plant near Heber, California; company officials say it could be operative around 1984, and would answer many of the remaining questions regarding the economics of geothermal technology.
Other than that, SDG&E is beginning to push conservation as a means of "generating" electricity. "It’s said around here now that every kilowatt we save is a kilowatt we can use somewhere else," Fred Vaughn likes to point out. And some of the company’s new conservation programs should prove to be effective; home energy audits that analyze how a household can reduce its energy consumption. and advertising programs which provide incentives to contractors for building energy-efficient homes. But conservation, crucial as it is, will need years to become effectively implemented, and SDG&E officials perceive a gap they must fill over the short term. So they plan to meet the increasing demand for electricity here in part by simply buying it.
“It’s a stop-gap measure." Watkins says of the contracts SDG&E recently signed with the Tucson Electric Company, which could provide as much as 500 megawatts of additional electricity by the late 1980s. "The electricity we’re buying is well priced; the main problem with the contracts is that they run out. When they do. we expect that the people of Arizona are going to need that power and the company will no longer be willing to sell it to us."
Watkins emphasized that whatever options the company does take, it will continue to favor centralized plants. Citing a decentralized system of smaller power plants as uneconomical and potentially unreliable, he noted. "It’s cheaper to run bigger plants. Our South Bay plant is a good example. It generates roughly 700 megawatts — enough for about 700.000 people — and the normal operation of it can be taken care of by just seven people."
But the conventional view of larger plants being the best and most economical has been repeatedly challenged in recent years by both consumer advocates and a growing number of economists (see insert on page 9). John Hardesty, a professor of economics at San Diego State University, claims that "the argument for large-project efficiency used to be a valid one. but with the rising price of oil and nuclear power, it’s becoming more economically feasible for smaller projects to take over.” But Hardesty went on to say that a decentralized system might put SDG&E in an untenable position. “If they’d plan for conservation, less use per family, and were less centralized, they’d have more capital available. Bu then this would lower their sales and their ability to generate profits. The only solution I see is a municipally owned utility that isn’t profit oriented."
Hardesty’s views are echoed by local consumer groups such as CalPIRG, CED, and CEAN, who point out that a decentralized system would not only be more environmentally sound, but would create more jobs. And they argue that a municipally owned, nonprofit utility couldn’t help but sell power more cheaply than SDG&E. But PUC commissioner Leonard Grimes doesn’t quite agree. "The notion that a municipally owned utility is better run and cheaper is not a guaranteed situation," he said a few weeks ago. "If you look at so-called nonprofit municipal utilities, you see what normally goes for profits [with a private utility] often goes for capital reserves or to other city departments."
For almost as long as utility companies have been in business, of course, they have spent lavishly to discourage the concept of municipal ownership. And SDG&E spent more money on lobbying in the last year than any other utility in California, according to an account published recently in the Los Angeles Times. But if the question of municipal ownership seems like a tossup, the question of a less centralized power system does not. SDG&E, having spent more than $100 million on Sundesert and an estimated $400 million on San Onofre, is only one of several utilities to have staggered in recent years under the burden of nuclear technology, the most centralized and capital intensive form of power generation ever. And yet lately there has been speculation that SDG&E has not yet given up on a nuclear power plant for the Sundesert site, which the company still owns and which has been fully approved for a generating facility of unspecified type. Observers say that the company could just be waiting for its financial situation to improve, hoping that in the meantime the political climate in Sacramento changes and opposition to nuclear power fades away. They point out that last month SDG&E announced its profits for the third quarter of 1979 were up substantially over those of the third quarter in 1978. But this was largely due to the PUC’s decision on Sundesert last June, and is, in the end, just one more excellent argument that while nuclear power might be cheaper for the company, it is not necessarily cheaper for the company’s ratepayers.
Why the utilities like big power projects
The term "rate base" refers to a utility’s total investment in generating plants. When a new plant begins supplying power, the cost of building it is added to the rate base.
Under the current regulations of the state Public Utilities Commission, the maximum amount of money a utility can make is, in effect, tied directly to the amount of money in its rate base.
This is done by allowing the utility a “rate of return" (maximum profit rate) only on the amount of money it has invested in generating plants.
In other words, the bigger and more expensive a generating plant is, the more money a utility stands to make on it. For example, a ten percent rate of return on a new $500 million plant would yield a company like SDG&E $50 million a year, once the cost of the new plant is added to the rate base.
The same rate of return on a $ 100 million plant would yield the company only $10 million a year.
In its Sundesert decision of June 5, 1979, the PUC raised SDG&E’s rate base (for electricity only — gas is separate) to $874 million. At the same time, the commission allowed SDG&E a 10.59 percent rate of return on that amount — the highest rate of return for any utility in California.
...And How They Contribute to Inflation
The price of every commodity we buy is dependent to a large extent on the amount of energy it takes to produce and ship it. So when the cost of energy goes up, so do the costs of our basic necessities: housing, food, clothing.
When prices go up (inflation), people stop buying as much. Businesses slow down their production, which in turn slows down profits and leads to unemployment. Businesses also begin to get capital-short —that is, they have little or no money available to start new ventures — and this contributes to unemployment.
Large power plants aggravate the situation by soaking up huge amounts of capital. And with the advent of nuclear reactors, the most expensive power plants ever built, more and more capital is being soaked up. It has been estimated that power plants alone now take up nearly twenty-five percent of all capital available for business investments in the United States.
SDG&E is one utility that is critically short of capital. But the company is committed to the concept of building large power plants because it stands to make more money on them under the rate structure fixed by the PUC. The only solution to this seemingly endless cycle would appear to be smaller, less centralized, less costly plants. The problem is to convince SDG&E to build them, since they would mean lower profits.