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Strike three? 

How the odds are stacked against the Morro Bay Power Plant

Perhaps the worst kept secret in Morro Bay these days—for years, really—is the eventual demise of the Morro Bay Power Plant.

click to enlarge DEAL MAKER :  Morro Bay City Attorney is still trying to reach a deal with Dynegy so the company can continue to pump its outfall into the Morro Bay National Estuary. Without a new lease the plant can’t run, and the city won’t realize the annual payments. - PHOTO BY STEVE E. MILLER
  • DEAL MAKER : Morro Bay City Attorney is still trying to reach a deal with Dynegy so the company can continue to pump its outfall into the Morro Bay National Estuary. Without a new lease the plant can’t run, and the city won’t realize the annual payments.

The aging gas firing facility, with its three towering smoke stacks piercing the fog-banked shores of the Morro Bay Estuary, has been slowly sputtering out its death rattle for at least two years, if not more. Faced with an energy market that doesn’t want or need it; a parent company, Dynegy, locked in financial duress; and a bevy of newer and sexier technologies, the Morro Bay Power Plant seems to be literally and figuratively running on fumes.

It’s a veritable unwanted orphan among California’s power-generating facilities, traded and swapped like baseball cards on the playground. First, Pacific Gas & Electric sold the plant to Duke Energy as part of restructuring following the California energy crisis. Then Duke sold to LS Power in 2006. And finally, LS sold the plant to Dynegy, a Houston-based power company with a portfolio of gas and coal-burning plants nationwide.

Then Dynegy tried to, but couldn’t, offload the Morro Bay plant. In 2010, the company negotiated a tentative deal to sell its majority stake, some of its debt, and the Morro Bay plant—and its two other gas-firers at Moss Landing and Oakland—to the Blackstone Group. But shareholders cried foul and the deal was scrapped. At the time, Dynegy officials said the company would look for other investors, but that never happened.

“The company has focused on running its operations and completing a financial restructuring,” Dynegy spokeswoman Katy Sullivan said in an e-mail.

Morro Bay City Attorney Rob Schultz has been there for every milestone with the plant for the past 15 years.

“None of them want to take this plant,” Schultz said. “This is the one where they say, ‘You take a couple of these good looking girls, but you have to take this ugly one.’ It doesn’t have the appeal as other plants do.”

But getting a Dynegy official to outright say that the plant will close is about as easy as getting your kid to admit he’s tired and needs to go to bed.

“It’s impossible to get anything out of these people,” Schultz said.

The problem for a guy like Schultz is if the Morro Bay power plant is limping on its final leg, he and other city officials need to know now.

In 1954, when the plant first went online, PG&E paid the city $50, gave Morro Bay its Veteran’s Memorial Hall, and agreed to a 50-year lease to use a city pipeline to pump water from the plant’s cooling system into the bay.

Without a so-called outfall lease with the city, the plant can’t operate. And for the past eight years, Morro Bay has received at least $750,000 a year, guaranteed, through its most recent agreement with the plant operators.

“They need us and we need them,” Schultz said. But, he added, the city has been weaning off that money on the assumption it will some day disappear altogether.

After that first 50-year lease expired, Morro Bay negotiated a new eight-year lease with then-owner Duke Energy. At the time, it was expected that Duke would “modernize” the plant. Translation: build a new facility on the same site. That plan fizzled largely due to protests from environmental groups such as the Coastal Alliance on Plant Expansion. Actually, the plant achieved a permit from the California Energy Commission, but never moved forward. The permit stagnated.

Those plans to modernize the facility were all but dead years ago, but on May 22 of this year, Dynegy notified the Energy Commission the company was officially terminating its plans to modernize. It was more of a symbolic gesture, if not completely moot, said David Nelson of the Coastal Alliance. No one had any delusions the plant was going to get bigger.

“We finally did the happy dance,” Nelson said. “But after 13 years, nobody really remembered what the dance was about.”

Dynegy’s current outfall lease will expire in November, and to date, the company hasn’t negotiated a new lease with the city. In e-mail exchanges between Schultz and company officials, it’s clear he’s had trouble simply organizing a meeting.

“Can someone, anyone please provide me with an update on the status of negotiations!” Schultz wrote to Plant Manager Steve Goschke on Jan. 3.

In the following weeks and months, Schultz was able to meet with Dynegy representatives, and they’re working toward a tentative deal. But it’s tenuous, to say the least.

If a lease is agreed upon, it will likely only be for three years, Schultz said. And while the company was once talking about continuing the same payments to the city for the right to pump into the bay, company officials are now leery of providing a financial guarantee and have instead offered to carve out pieces of property to gift to Morro Bay.

Think of it as a gigantic industrial yard sale.

Despite it all, Dynegy won’t say it plans to close the Morro Bay Power Plant, but it drops hints like crazy.

“Dynegy will continue to operate the Morro Bay Power Plant as long as it is economically viable,” Sullivan said.

Yet most signs point toward its imminent closure.

EXIT STRATEGY :  If the Morro Bay Power Plant does, indeed, shut down, there’s been no plan announced as to how it will happen. And the estimated bill could hit as high as $150 million. - PHOTO BY STEVE E. MILLER
  • EXIT STRATEGY : If the Morro Bay Power Plant does, indeed, shut down, there’s been no plan announced as to how it will happen. And the estimated bill could hit as high as $150 million.

Strike One:

The state

Of all the issues laid before Dynegy and the Morro Bay Power Plant, the most definitive is a looming deadline passed down by the State Water Resources Control Board. In 2010, the board approved new regulations requiring 19 power plants to drastically change their cooling systems.

Most power plants are kept from overheating by what are known as once-through cooling systems. These systems operate simply by pulling water from a nearby source—such as an ocean or lake—using the water to cool the facility, and pumping the heated water back into the same source. The systems, however, can wreak havoc on aquatic ecosystems, both from sucking in fish larvae and by heating ocean water.

California power plant operators were presented with two options: Replace the outdated cooling systems with less environmentally destructive closed-cycle cooling systems, or come up with some other method to satisfy state regulators.

Of the 19 power plants subject to the regulations, seven have indicated plans to install closed-cycle cooling systems. Two of the plants—the Diablo Canyon and San Onofre nuclear stations—are subject to different requirements. Four other plants have already shut down or will shut down soon. One plant has yet to announce any plans while it negotiates a new utility contract to sell its power, but it could also go offline. And five plants intend to produce alternative plans to comply with the state’s requirements.

Of those five, two plants—Morro Bay and Moss Landing—are owned by Dynegy. Company officials told the state it would be economically infeasible to install closed-cycle cooling at either of its facilities. The alternative? Well, no one’s announced what that will be, and Dynegy told the Water Board it will provide its plan by 2013.

“We continue to discuss those plans with the [state] and review technology options for each site,” Sullivan told New Times.

But Andrew Kean, an associate professor of mechanical engineering at Cal Poly, said it would be difficult to comply with the state regulations without a closed-cycle system. At least, he can’t think of many alternatives.

“They gave [power providers] quote, flexibility, but practically speaking, there aren’t a whole lot of options,” he said.

Dynegy has until December 2015 to comply locally, which has led many people to the conclusion that the Morro Bay Power Plant has another 3 1/2 years left in its lifetime.

For the plant to reduce its impacts with an alternative, Kean said it would take a large financial investment from Dynegy. The plant is a “peaker plant,” meaning it’s fired up only during times of peak power generation when the grid needs an electrical boost. When both the San Onofre and Diablo Canyon nuclear plants were simultaneously offline earlier this year, for example, Morro Bay was really hauling.

Most of the time, however, the plant is on standby. According to a 2010 Energy Commission report, “The Role of Aging and Once-Through-Cooled Power Plants in California,” the Morro Bay Power Plant plummeted from producing nearly 1 million megawatt hours per year in 2002, to less than 100,000 in 2008.

“Because the power plant is old and relatively inefficient, it only makes economic sense in its current design to run very infrequently,” Kean said. “If you added a huge amount of cost … it’s so close to obsolete as it is, it’s hard to see a world where that power plant in its current technological form would ever make economic sense again.”

Strike Two:

Not buying what they’re selling

On May 30, Dynegy announced that it was still committed to the Morro Bay Power Plant. It was an interesting way of saying that the company lost its long-term contract to sell power to Southern California Edison, one of the largest utility companies in the state.

At the time, Schultz was working on an agreement for a new outfall lease, but after the company lost its sole contract to sell power, “the tone changed completely,” he said.

“Since 2009 they’ve been telling me without that third-party contract, they can’t operate,” Schultz noted.

Dynegy said it would continue to explore other options to sell its power on the open market. Without a contract between a plant like Morro Bay and a utility company like Southern California Edison, these types of exchanges are handled by the California Independent System Operator (ISO), which determines when and where extra juice is needed and puts the demand out to bid.

It’s hard to say how well the Morro Bay Power Plant is doing on the open market. The ISO doesn’t disclose transactions between its various parties, and Dynegy declined to say even how much power it’s generating and selling without the guarantee from Southern California Edison.

“Dynegy does not provide plant level financial or operating data publicly for commercial reasons,” Sullivan said.

What is known, however, is there isn’t a local need for any power coming out of Morro Bay. The ISO reviews the state’s energy needs every year. In its most recent local capacity requirement study, the Morro Bay Power Plant wasn’t listed in any of the agency’s “defined local areas.”

“In other words, we have determined this generating facility is not needed for maintaining local reliability,” said ISO spokesman Steven Greenlee.

The ISO is still compiling a study—expected to be released by the end of the year—on the impact the State Water Board regulations will have on the grid. That study should provide better information on how essential or inconsequential Morro Bay and other similar facilities are to the statewide energy system.

But Morro Bay may have already fallen behind its competitors. On March 22, the California Public Utilities Commission carried out an order for the sole purpose of saving the Sutter Energy Center in Yuba City. Under the order, PG&E, Southern California Edison, and San Diego Gas & Electric were required to enter into contracts with plant-operator Calpine Corporation to keep the plant open, which would otherwise have to close by the end of the year.

On May 7, Calpine announced in a press release that it had finalized contracts with the three utilities to sell its power through at least Dec. 31. Less than two weeks after that announcement, Southern California Edison cancelled its contract with Dynegy.

“It’s barely paying for itself and they don’t have a contract to sell,” said Nelson of the Coastal Alliance. “… Right now, they have no permit to build a new one and this one is pretty much on life support.”

Strike Three:


On July 6, Dynegy Inc. filed for Chapter 11 bankruptcy. It was technically the company’s second bankruptcy filing. Dynegy Holdings filed for bankruptcy last November.

But the initial bankruptcy filing riled investors who filed a class action lawsuit claiming Dynegy had sheltered some of its assets—particularly coal plants—a move investors said screwed them but benefited shareholders, like Carl Icahn, who sits comfortably at No. 50 on Forbes’ list of billionaires.

The more recent bankruptcy filing was made as part of a companywide restructuring, in which Dynegy Inc. merged with Dynegy Holdings in response to some of the initial outcry.

Sullivan said the company doesn’t comment on pending litigation, but she told the Wall Street Journal the filing is a “crucial step to fulfill the obligations created under the settlement agreement with Dynegy Holdings’ creditors and to prepare for the merger of Dynegy Holdings into Dynegy Inc.”

The company has been seeing a steady and steep decline of its stock value for years and, as of press time, was trading at 55 cents per share. Zacks Investment Research, in a May 11 blog post, said Dynegy had experienced “mixed numbers,” both exceeding and failing to meet financial expectations in the first quarter of 2012: “Going forward, the performance of the company will improve only through increases in power prices, drops in reserve-capacity margins, and improvement in wholesale electricity demand. However, the tepid pace of the U.S. economic recovery keeps us on the sidelines about whether the company will be able to generate the requisite cash flow for its needs.”

According to its July 6 bankruptcy filing, Dynegy Inc. listed about $11.4 billion in assets and about $5.1 billion in debt.

Outside of Dynegy’s noncommittal statements about the Morro Bay Power Plant, there’s a local consensus that the company will keep the plant limping along for as long as possible, whether that’s until 2015 or even as little as six months.

If the plant were to close, that could mean its 38 employees would lose their jobs and the city would lose its payments from the outfall lease and annual payments from a gas surcharge tax that’s averaged about $55,000 per year over the last three years.

Yet the real concern is that closing the power plant wouldn’t come easy or cheap, and to date, no one knows how to bring down the smoke stacks.

“I’m more concerned, not with the revenue, as I am with the fact [that] we don’t have any real mechanism if the plant were to close to getting it torn down and removed,” Schultz said.

If Dynegy were to shut down the Morro Bay Power Plant, the company is required to submit a closure plan to the California Energy Commission, but Schultz said there’s no requirement for the company to demolish the facility. The death of the plant could range from a violent implosion to a slow dismantling to a lock on the gate and a lone security guard stationed to make sure kids don’t throw rocks at it.

The closest comparable model to close a power plant lies in Chula Vista, just south of San Diego, where Dynegy is just beginning to dismantle another of its gas plants, the South Bay Power Plant.

Like Morro Bay, the South Bay plant was transferred from Duke to LS to Dynegy. Unlike Morro Bay, that plant has been preparing for its inevitable death since 1999. The Port of San Diego took on the power plant lease in the ’90s and together with the city of Chula Vista, officials started planning to remove the aging 309-megawatt gas firing station.

According to Port of San Diego spokeswoman Marguerite Elicone, “The public really wanted it off the waterfront.”

Dynegy took on the plant knowing it was on track to go offline, Elicone said. But it wasn’t until the state ISO determined the plant wasn’t needed to meet the local energy needs that the real work started. That was in October 2010, and a year later officials had in hand a coastal development permit from the California Coastal Commission to begin dismantling and demolishing the facility.

“It wasn’t needed anymore,” Elicone said.

But it took years to get to that point. Despite the rather quick process to begin dismantling after the ISO gave its determination on South Bay, officials had been working on plans for what to do once it was gone. The plant has to be dismantled in such a way that it doesn’t interfere with local bird nesting seasons (Elicone said the hope is to implode some of the structures before September), but local officials plan to convert the space into public parks and perhaps build a hotel.

All of the dismantling costs will be borne by Dynegy, she added.

That’s not possible in Morro Bay, according to Schultz, where local regulations make it hard, if not impossible, to convert the Morro Bay Power Plant space into anything profitable. As of the last estimate, it could cost $150 million to remove the power plant from the site. But that’s a bill Dynegy probably doesn’t want to pay and, of course, the city doesn’t want to inherit.

Under the city’s agreement with the plant operators, 15 years after the facility stops generating power, Morro Bay can buy the land for $1. However, that also means the city will take over the dismantling effort.

“Now you own the problem,” Schultz said.

He thinks Dynegy will limp along until the 2015 deadline, keeping it open in hopes of an energy catastrophe that could somehow create a need to turn the thing on and start selling power.

There may be plans for what to do with the plant if and (probably) when it closes, but no one’s divulging details. Gordon Hensley of the group San Luis Obispo Coastkeeper said he’s involved in early conversations, but he declined to give any details yet.

Another group, Ecobaun, has proposed plans to convert the facility into a renewable energy campus highlighting the latest and greatest from geothermal production to wave generation. However, this plan hasn’t gotten much further beyond a loose proposal and website.

Yet, without a definitive word from Dynegy, the future of Morro Bay’s iconic structure remains nebulous.

“I have been on this project for 13 years,” Nelson said. “And as far as the future goes, it’s really impossible to say because of Dynegy’s status right now.”

News Editor Colin Rigley can be reached at [email protected].


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