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On San Onofre, Edison is trying to pull a fast one

Don't be fooled by Edison's PR push. It is shareholders, not ratepayers, who should pay for the utility's massive screw-up at its San Onofre nuclear plant.

Michael Hiltzik

9:23 PM EDT, August 20, 2013

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If you love political campaigns, you should be grateful to Southern California Edison. That's because it has already started its campaign to get you to pay for its egregious blunder in wrecking its San Onofre nuclear plant.

San Onofre, of course, is that full-figured fiasco on the coast in northern San Diego County. Replacement steam generators that Edison installed at the plant in 2010 and 2011 to extend its useful life for 20 years proved to be defective, leading to a complete shutdown in January last year. For more than a year the utility claimed it could fix the generators and eventually reopen San Onofre, but it finally decided in June to mothball the plant permanently.

Since then, Edison, its regulators at the Public Utilities Commission, and ratepayer advocates have been girding for a long battle over who should pay for the disaster. The costs at issue include not only the higher price of electricity Edison has had to buy to replace San Onofre's lost output, but the original expense of building the existing San Onofre plant in the 1980s (one older unit was built in the 1960s and shut down for old age in 1992), and the $680 million Edison paid for the defective generators.

Edison is asking the PUC to allow it to recover about $2 billion for its capital expenditures alone through 2017, including a return on its capital investment of more than 5.5%. The PUC would have to decide how to apportion that sum between ratepayers and shareholders.

PUC hearings on this all-important question are scheduled to begin in mid-October, with a public forum scheduled for Oct. 1 in San Diego. Edison plainly has decided to start making its case to the public now.

The first major shot in this effort — the firing on Ft. Sumter, if you will — was sounded last week, when the utility published an open letter to its customers in the form of an ad in The Times and several other Southern California newspapers. To the credit of Edison's publicity department, the letter bore all the hallmarks of high-priced campaign advertisements so familiar to us in California: It was misleading, disingenuous and altogether untrustworthy.

The letter's key point, buried beneath layers of ad-speak, was this: You, the customer, should bear a share of those costs. "The American utility system works because everybody is in it together," Edison said. "Everyone shares the benefits and the costs," a line which I believe was part of the original lyrics to the song "Kumbaya."

Edison said that it would be doing its damnedest to recover damages from its insurers and from Mitsubishi Heavy Industries, which designed and built the faulty generators. But it's leaving little doubt that, regardless of what it's able to recover, it wants its shareholders and its Wall Street investors to be "made whole" financially. Instead, it's hoping to make you, the customer, pay.

"They're attempting to change the debate on the politics of money by painting themselves as victims," observes Matthew Freedman, a lawyer at the consumer advocacy group Turn who is following the proceedings closely.

That's been Edison's approach almost since the shutdown began. According to its official narrative, Edison was an upstanding, prudent utility snookered into thinking that Mitsubishi knew what it was doing in developing the state-of-the-art generators. Imagine Edison's shock at discovering that the units, which were supposed to last 20 years, suffered debilitating wear and tear because of internal vibrations after less than two.

Indeed, that's the theme of the claim Edison filed against Mitsubishi in July. The Japanese firm "specifically assured Edison that it had the tools and expertise to analyze factors that could lead to tube wear," the claim states. "It is now clear that many of Mitsubishi's representations and promises were false."

But these statements sound less like factual assertions than the sort of accusations flung around in the course of a bitter divorce — which the Edison-Mitsubishi relationship rather resembles.

What's left unsaid is that Edison participated in the generator design and manufacturing. A federal inspection report last year documented that Edison's oversight was thorough.

Edison knew that the project would tax Mitsubishi's capabilities — the units would be "a significant increase in size from those that Mitsubishi Heavy Industries has built in the past," an Edison executive wrote to his Mitsubishi counterpart in 2004. Accordingly, Edison engineers signed off on many elements of the generator design. When potential problems arose, Edison and Mitsubishi engineers sat down to work them out together. Edison quality-control staff were in residence at Mitsubishi's manufacturing plant all the while the generators were being built.

You won't find an acknowledgment of that in Edison's open letter to its customers, not even between the lines. Instead, it suggests that the shutdown of San Onofre was an unavoidable event, an act of God, as though the plant was devastated by a Sharknado.

Edison's basic pitch is that the Wall Street investors who originally put up the money to build and upgrade San Onofre should recover their investment, plus a tolerably decent profit, regardless of what Edison did with their cash (such as sinking it in a nonfunctional power plant).

The investors, Edison said in a filing last week with the PUC, deserve to be "made whole for their original investment over the course of the [plant's] estimated useful life" — for San Onofre, that period originally ran to 2022.

The fact that San Onofre didn't make it to that point is immaterial, Edison says. Sometimes a plant lasts a lot longer than its estimated life, in which case ratepayers get the excess output effectively for free; sometimes it falls short, in which case the ratepayers should eat the shortfall. The idea is that things will even out over time, the way an ump's bad call against the home team in the eighth inning just makes up for a bad call against the visitors in the third.

Edison says the consequence of limiting its payback from ratepayers, and thus loading the costs of the shutdown on shareholders and investors, would be to increase its cost of capital, which would impose higher costs on "everyone."

This position would give Edison a free pass for imprudence and incompetence. The investors who supposedly should be made whole put their faith in an Edison management that broke a multibillion-dollar power plant. These investors made a bad call. Tough. Make them shoulder the costs, and perhaps they'll be more discerning in the future about the quality of the management they're investing with.

Ratepayers, unfortunately, had no choice — Edison is the monopoly power provider in its service area, and the customer doesn't get a say in who runs the company.

What's most cynical about Edison's argument is that although it claims it decided to shut down San Onofre for the public interest, it really did so to protect its investors — more precisely, to protect its position in the capital markets. Regulators never said the utility might not or should not be able to reopen San Onofre in time; it just appeared that government approval might take so long that investors would get antsy. Now, although the premature retirement is sure to impose substantial new costs on ratepayers, the investors still should be made whole?

Over the years, the PUC has been rather tolerant of a string of Edison mishaps at San Onofre and elsewhere. That era may be coming to an end. Just last month PUC Commissioner Mike Florio, a former Turn attorney who is overseeing the San Onofre proceedings, said he would have a "hard time" understanding why he should vote to let Edison collect the full cost of replacement power for San Onofre from ratepayers while still allowing the utility to collect the full cost of the plant itself.

Edison's recent filing and its letter to customers are indirect responses to that. It sounds as if the utility knows it's on thin ice. That's where it belongs.

Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at mhiltzik@latimes.com, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @hiltzikm on Twitter.