CPS internal report reveals scandal’s details

December 8, 2009

By Tracy Idell Hamilton and Anton Caputo
San Antonio Express-News

The night before CPS Energy publicly rolled out a $13 billion cost estimate for a nuclear expansion project last summer, a top executive was exasperated that the utility and its main contractor were billions of dollars apart.

Nonetheless, utility officials presented a price to the public some knew was $4 billion less than contractor Toshiba Inc. was asking for.

"Our project costs and rate projections are clearly understated," Mike Kotara, the utility’s vice president of energy development, wrote in an e-mail June 28. He was responding to word that Toshiba had said it couldn’t endorse CPS’ number.

A portion of that e-mail, along with more than a dozen others, was contained in a draft report of the investigation produced by CPS’ internal auditor, which was obtained Monday afternoon by the San Antonio Express-News.

A final version of the report was released Monday to the CPS board. It will be made public Wednesday after attorneys strike any information deemed proprietary.

The report’s conclusions support CPS management’s assertion that Toshiba’s "unofficial preliminary estimate" was only "a posturing/bargaining position."

Anxiety and anger

But the e-mails contained in the body of the report seem to tell a different story.

At the end of June and again in October, statements made by CPS nuclear officials indicate that they were anxious about getting Toshiba’s $12 billion cost estimate down and angry that partner NRG Energy said it would have to release that figure at its November analysts’ meeting.

Still, CPS executives working on the nuclear project seemed to be in agreement to keep the high cost numbers from their board.

"As far as I know, we had no intention of giving the board a new estimate for the project until we were done working on this, i.e., in January," CPS executive Jim Nesrsta wrote to an NRG official Oct. 22. "I think your discussion of incomplete cost estimates in public in November is a major problem."

The lack of disclosure ultimately felled CPS interim General Manager Steve Bartley, who resigned Nov. 25 in the wake of the report’s findings.

The auditor concluded that other executives on the nuclear team had, at worst, failed in their "responsibility of prompt disclosure."

In Bartley’s case, the report was more critical, saying "he should have recognized that news of a 50 (percent) increase in Toshiba’s cost estimate could have a devastating effect on the (City) council’s vote."

Board Chairwoman Aurora Geis said Bartley’s position held the ultimate responsibility.

"The interim general manager is accountable," she said Monday.

Robert Temple, who served as secretary of the board and vice president of nuclear development, is the only other executive to lose his job. His resignation is effective Dec. 15.

But the investigation found "no evidence of a failure to disclose material information" on Temple’s part.

Geis would not comment on why he was forced out.

Toshiba’s estimate

The first signs of trouble that would lead to the potential collapse of the nuclear project started with Toshiba’s 2008 cost estimate, which utility officials contend they didn’t officially receive until July of this year.

That’s because, while Toshiba was prepared to give the partners a cost estimate in late 2008, the world economy had just cratered, prompting CPS and NRG to ask for an estimate that took the financial downturn into account.

Toshiba instead said it would defer its estimate until 2009’s recalculation. In the meantime, CPS came up with its own estimate: $10 billion without financing.

In mid-June, a Toshiba executive sent an e-mail to Temple that it couldn’t "endorse" that amount. A week later, Kotara gave a progress report to the CPS board, offering up the $10 billion figure – $13 billion with financing. To hit that, Toshiba’s cost would have to be about $8 billion.

The board approved releasing that estimate June 29, kicking off CPS’ campaign to pitch the project at dozens of public meetings across the city.

A flurry of e-mails the night before, from a nuclear executive at the South Texas Project, John Bates of Nuclear Innovation North America and the CPS nuclear team reveal anxiety that Toshiba wouldn’t endorse CPS’ numbers and that it hadn’t signed a contract with its main subcontractor, Fluor Corp., because Fluor’s estimate was deemed too high.

NINA, a partnership between NRG Energy and Toshiba, owns 50 percent of the nuclear expansion project. CPS owns the other half.

In that e-mail chain, Kotara expressed disappointment that "we have come this far, and only now are learning of how wide the gap is between our estimate and Toshiba’s."

Temple and Nesrsta suggested that the figure was "just part of the negotiation." To which, Kotara replied: "That’s all well and good, but we should not have used an ‘optimistic number’ for our Long Range Resource Plan analysis."

Castro’s role

The report briefly touches on Mayor Julián Castro’s role in the controversy. While news of the higher estimate broke Oct. 27, a day after Castro said the estimate was leaked to his office, the report suggests he knew earlier.

He said his aide learned of the higher estimate from NRG attorney Frank Burney on Oct. 26, but the report says Castro had a conversation with Bartley on Oct. 19 in which Castro asked him, "Where are the numbers going?"

Bartley answered that "we could end up with $1 billion more," according to the report.

Castro said Monday that he was never asked by the auditor about that conversation, which he says was about whether San Antonio could afford the project, not Toshiba’s estimate. "I asked how far up the price could go and still be in the affordability range. He said up to $1 billion more."

Download CPS South Texas Project Investigation Report.

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