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Desperate times for Duke? 

Duke’s deal with PG&E raises more questions for Morro Bay

Duke Energy announced last week that it plans to sell energy to PG&E from its Morro Bay plant, but the city of Morro Bay still has questions it wants answered. The deal is the result of a call for bids that Duke put out in November in an effort to turn some kind of profit from the 50-year-old plant, which has been running in the red for the last two years.

Even though a deal between Duke and PG&E has been reached, the city of Morro Bay wants to know how this deal will affect the revenue it receives from a gas franchise tax, and it also wants to iron out a lease agreement for the plant’s outfall lease. The outfall lease has been a major point of contention between Duke and the city. Water that is used to cool the plant’s generators is discharged into an outfall area in the bay.

The city says that Duke’s offer for the lease is far below market value, and if the city accepted that offer it would be violating a trust granted by the State Lands Commission to manage the estuary.

According to Schultz, the city could actually have its status as manager of the trust revoked for accepting such an offer.

“I’ve never seen a trust taken away for asking too much money,� said Rob Schultz, Morro Bay city attorney. “But [I have] when it’s too little.�

Based on the area for the outfall lease and the appraised land value, the city of Morro Bay has estimated the annual rent for the outfall lease to be between $3.3 million and $10.8 million. Duke’s latest offer for the outfall is lease is $100,000 a year.

In a recent letter to Duke Energy, Shultz wrote, “In order for negotiations to move forward in a meaningful way, Duke Energy must understand that the area where the Outfall is located is on Tidelands Trust property. The City has an obligation and responsibility to properly manage and administer Tidelands Trust property pursuant to grants from the State.�

According to Shultz, Morro Bay manages over 50 Tidelands Trust lease sites — tideland areas used “in trust� on behalf of the state of California. Duke is the only multi-national corporation that has such a lease with the city. Shultz said other city businesses, like the Whale’s Tail restaurant, Marina Square, and the Great American Fish Company, have similar Tidelands Trust lease agreements with the city and have requested temporary relief from rental payments due to hard economic times, but such relief has not been granted.

“During these difficult economic times, the city receives many requests from our locally owned and operated tenants to lower their rent due to economic difficulties,� wrote Shultz. “Although the City attempts to resolve all issues in good faith with its tenants, it cannot give away property that has been entrusted to the City by the State, without fair and just compensation.�

Prior to accepting PG&E’s offer, Duke actually received several bids for the energy generated by the Morro Bay facility, said Duke Energy spokesman Pat Mullen.

“[The deal] gives PG&E the exclusive ability to call on us to run up to 650 megawatts,� he said.

Before PG&E — which had originally sold the plant to Duke six years ago as mandated by deregulation legislation in the mid-’90s — can call on the plant for power, the Public Utilities Commission must approve the deal. Mullen said that will hopefully happen next month.

The contract reached between PG&E and Duke is essentially a three-year deal. It will give PG&E exclusive rights to the Morro Bay plant through 2007. Mullen expects the demand to increase during the summer.

The city of Morro Bay also wants to know how the new contract will affect the gas franchise tax. Previously Duke had paid PG&E a tax for use of the plant’s gas lines, and PG&E then paid the city. However, now that PG&E will be the sole proprietor of the pipelines, the city of Morro Bay is unsure if it will still be able to collect the franchise tax.

In past years of high usage, the gas franchise tax provided Morro Bay with a large percentage of its budget.

“We don’t know yet what the ramifications will be,� said Schultz, who traveled to San Francisco to meet with private attorneys to investigate how the new contract would affect the franchise tax. He was unable to comment before press time.

Mullen echoed Shultz’s sentiments, saying he wasn’t sure how the franchise tax would be affected, if at all. However, Jeff Lewis, PG&E spokesman, said the gas franchise tax would stay intact.

The announcement of the deal came days before Duke Energy announced it will be selling assets and buying back $2.5 billion of its stock. Both of these announcements have fueled speculation that Duke could be looking to sell the Morro Bay plant.

“Any asset is potentially for sale, but we’re not looking into marketing individual assets,� said Mullen. Mullen has repeatedly said that Duke is looking at all options to keep the plant economically viable, and although Duke is not actively marketing the sale of the Morro Bay plant, a Public Utilities permit and a contracted energy purchaser (PG&E) could potentially make the Morro Bay plant more attractive to a buyer.

Schultz agrees with the speculation.

“I bet you they’re going to sell it,� he said.

Of course any sale would include the same stipulations that Duke and the city have been negotiating for the past four years. The city wants an assurance from Duke that it will eventually remove the plant; removal has been estimated to cost $30-$50 million.

The plant has operated since the outfall lease expired in November, and Mullen said the plant would operate again once it receives a permit from the Public Utilities Commission, even if it has not yet agreed to an outfall lease with the city. ³


Staff Writer John Peabody can be reached at


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