January 6, 2010

by Greg Harman
San Antonio Current

If CPS Energy, San Antonio’s City-owned utility, took a solitary human form, it would be a headless corpse bouncing gently under a white hospital sheet on its way to the morgue. While the events surrounding the demise of this heavyset, middle-aged entity have played out almost daily in frontpage headlines for months now, a handful of residents have been complaining about a suspicious stench for years, warning that the planned expansion of the South Texas Project nuclear plant was a doomed venture promoted with suspect numbers.

Post-mortem examinations, autopsia cadaverum, require the probing of suspicious wounds, chemical analysis, and excavation of foreign objects. The deconstruction of institutional failures isn’t typically as grisly. Bullets and poison pills take the form of leaked documents, alarming quotes dished to the media pool, and – if one is to accept at face value the recent investigation into CPS’s failure to disclose a dramatic price increase in the estimated cost of two new nuclear reactors – a string of "non-malicious"communication faux pas. Perhaps never before has non-maliciousness done so much damage.

When news broke in October, just two days ahead of a key Council vote, that CPS staff had concealed a $4-billion cost increase in the proposed South Texas Project expansion, San Antonio Mayor and CPS board member Julián Castro reacted swiftly and dramatically; he canceled the scheduled Council vote, where Council members were expected to approve another $400-million investment in the project. To general approval, Castro threw CPS GM Steve Bartley overboard, forced the board chair down on her blade, and negotiated the resignation of Board Secretary and Veep of Nuclear Development Bob Temple.

CPS in turn leveled an unprecedented $32-billion lawsuit against its nuclear partners, NRG Energy and NINA, alleging the City-owned utility was the victim of "a campaign of media misinformation, public threats, and disclosure of confidential Project information."

In addition to being 50-50 partners in the planned addition of two new reactors at the Bay City site, CPS and NRG are key stakeholders in South Texas Projects Units 1 and 2, which provide a third of San Antonio’s electricity. NRG created Nuclear Innovation North America in 2008 as a joint venture with Toshiba to develop STP reactors 3 and 4, and future nuclear projects around the country. As undisputed chief reformer of CPS, Castro now seeks to serve as peacemaker, too. In an email to the heads of CPS, NRG, NINA, and Toshiba dated January 4, Castro urged all parties to send representatives to San Antonio January 11 to broker an agreement before a January 25 court date.

"I sincerely believe the parties can achieve an outcome that is respectful of the needs of CPS Energy’s ratepayers and the shareholders of NINA, NRG Energy and Toshiba,"he wrote.

If anyone can keep the parties from a costly divorce, it may be Castro, who, with his May 2009 election, inherited oversight of CPS’s stake in the proposed STP expansion, which was contracted under his predecessor, Phil Hardberger. While he enjoys unparalleled power on the utility’s Board of Trustees, Castro has also developed personal relationships with the heads of both NRG and NINA through a series of closed-door meetings – meetings that have caused concern in some quarters.

Even before CPS filed its claims against NRG and NINA, a widely circulated rumor held that NRG wanted to bump CPS out of the project and develop it instead with Toshiba and possibly Japan Steel Works, the only iron foundry in the world currently capable of forging the needed reactor-containment vessels. By bringing in such prominent Japanese companies as full partners in the STP project, the theory goes, NRG would be able to draw on the comparatively strong Yen and receive a degree of additional insurance from the federal Bank of Japan.

Expecting energy shortfalls within a decade, in 2006 CPS Energy begins planning for the expansion of STP. In the fall of 2007, it submits a joint construction and operating application with NRG Energy to the U.S. Nuclear Regulatory Commission. It is the first new nuclear-power-plant application in the U.S. in 29 years. The initial deal calls for a 50-50 split in investment and ownership between the partners, but they later agree to reduce their mutual shares to 40 percent and find a buyer for the remaining 20.

The effort is led by CEO Milton Lee, who also looses the dogs of middle management on the old and weak among the staff in an effort to drive down operating expenses by upping "voluntary attrition."In 2008, as the utility approaches City Council for its first rate increase in 17 years, Lee brags on the 500 jobs that have been cut during his tenure. (He does not tout the plethora of gender- and racial-discrimination suits filed individually and collectively in a lawsuit brought by the International Brotherhood of Electrical Workers, or linemen complaints about dangerous working conditions caused by delayed upgrades in the mapping department.)

In two votes under former Mayor Hardberger, CPS’s Board of Trustees approves $276 million for what is described as preliminary site-design work for the STP expansion, but public pressure forces the utility’s requested 5-percent rate increase down to 3.5 percent, with strings attached: The new revenue stream is not to be used for the proposed nuclear expansion. CPS instead taps its capital reserve for the funds it needs to maintain the STP development.

When Castro becomes Mayor in ’09, he keeps his campaign promise to the business community to retain Lee, who had been scheduled to retire, at the head of the utility through the nuclear-power decision, although co-GM Steve Bartley has been running the day-to-day business for more than a year. It is Bartley who campaigns for the project all summer, pledging a total project cost of $10 billion –$13 billion with financing. At that level, the public is told, the city could pay its share in a 40-percent stake of $5.2 billion with 5-percent customer bill increases every other year for the next decade. San Antonio doesn’t actually need the full 40 percent, CPS admits, but at that buy-in, it can set terms and sell off extra power on the wholesale market.

In early August, Castro surprises nearly everyone by announcing in an Express-News editorial-board meeting that CPS should only invest in the percentage of additional nuclear-power generation that it needs, which he understands to be 20 percent. In October, the CPS board votes unanimously to proceed with the STP expansion, although at the lower 20-25 percent backed by the Mayor. Castro works hard to deliver unanimous City Council backing for the next $400-million investment. Then, just a few days before the Council’s scheduled October 29 vote, NRG lobbyist and Castro supporter Frank Burney tips the Mayor’s office to the unreported $4-billion increase in Toshiba’s cost estimate. The Express-News receives a similar tip the following day, but has not revealed the source. Fallout ensues.

An investigation by CPS’s in-house ethicist and local attorney Robert Bettac ordered by the Mayor and dated December 7 found that key staff members knew about the $4-billion gap and failed to alert Bartley or Lee or to inform the Board. Nearly two weeks after Bartley was finally clued in, he had made no effort to brief the board or Council. According to the report, NRG officials tried to pressure CPS staff to release an updated cost estimate in late October, ostensibly to avoid a possible civil meltdown following a Council vote assembled on false assumptions.

On October 22, NINA’s John Bates asked Jim Nesrsta, vice president of power-plant construction, "Is the CPS Board aware of the current status of the estimate? Or will there be some update prior to the city council vote?"NRG/NINA planned to present the new number, then hovering at $12.6 billion, at a November NRG Analysts Conference, he said, and "since there will be 200 analysts there it’ll be reported in the press."

Nesrsta replied that the "discussion of incomplete cost estimates in public in November is a major problem,"and that CPS staff had no plan to update the board until January.

Kotara, formerly CPS vice president in charge of energy development, lamented way back in June, when news of the gap between CPS and Toshiba’s number was first reaching CPS, that he was "very disappointed that we have come this far, and only now are learning of how wide the gap is between our estimate and Toshiba’s. It is hard to understand how we can spend in excess of $200 million, and still have $1-2 billion gap between us and our contractor. … Our project costs and rate projections are clearly understated."

Until CPS filed its lawsuit December 6, public attention was mostly focused on CPS’s failure to disclose the newer figure, and public opinion seems to hold that CPS Energy did itself in – and by extension, the ratepaying public.

CPS board member Steve Hennigan, however, suspects that NRG and NINA manipulated the city and its utility into an untenable position in order to gain total control of the South Texas Project development. It’s a theory supported by District 10 Council member John Clamp, and most recently, CPS’s lawsuit against its partners.

Despite pressure from the Mayor, Hennigan has refused to relinquish his board seat – at least until someone with significant financial experience is brought in. He has been critical of Castro’s attack on board members over what in his mind amounted to a staff failure. "Most of the time the failures are system failures, they’re not people failures,"Hennigan said. "So you have to be really careful when you start putting people up to be shot. Are you shooting them because the system’s bad, or are you shooting them because they’re bad?"

To Hennigan, an eight-year veteran of the Board, the $4-billion price increase was never real; it was a glitch of the global economic imbalance that rolled out of the imploding U.S. lending market last fall.

"Basically, the world fell apart in 2008,"Hennigan recalls. "The frickin’ banks are blowing up, you got commodities going crazy, you got credit markets melting down. So, basically [Toshiba] say[s], ‘Whoa, we can’t even give an estimate right now.’"

CPS and NRG pressured Toshiba to factor in the new, lower commodity prices for its 2008 estimate, but the Japanese company balked, deciding instead to defer a new cost estimate until 2009. Although that new number was due to CPS by December 31, 2009, it has not yet been made public. However, in the summer of 2009, the unreleased 2008 figure of $12.7 billion – $4.1 billion higher than the 2007 Toshiba estimate of $8.5 billion that CPS used to come up with its $10-billion figure – is shared in a PowerPoint presentation with members of the STP Nuclear Operating Company along with a disclaimer calling the figure "outdated and not effective today."To Hennigan, the figure was "invalid on arrival."When the price discrepancy became public, Bartley and others claimed the Japanese company was simply playing negotiation hardball.

Hennigan views the release of the discredited figure by NRG through the Mayor’s office as a maneuver intended to poison the deal in the public’s mind. He says his intent is not to throw darts at the Mayor, but he also doesn’t discount the possible significance of Castro’s private meetings with NRG and NINA reps that preceded the partnership’s meltdown – he worries that those meetings might have undermined CPS’s resolve and ceded our partners the upper hand.

According to documents provided by the Mayor’s office in response to an open-records request, the Mayor and his staff met with NINA CEO Steve Winn and NINA Chief Operating Officer John Bates for an hour on July 31 – four days before Castro announced to the Express-News that CPS should partner in STP at only 20 percent. Earlier on the same day that Castro met with Winn and Bates, Winn intimated to Bartley in a separate meeting that NINA and/or NRG might be interested in buying out CPS’s share of STP 3 and 4. CPS had previously declined an NRG offer to buy 10 percent, according to sources close to the discussion.

That overture was followed by a proposal from NINA’s Winn to Bartley that San Antonio enter a purchase-power agreement with the other partners, which, the internal-investigation report notes, implies that CPS would sell its entire interest in the project to NRG and/or NINA.

On August 31, Castro had a half-hour meeting with Winn, NRG CEO David Crane, and NRG lobbyist Burney. In handwritten notes taken at that meeting, Castro Chief of Staff Robbie Greenblum recorded Winn telling the mayor: "Once a decision is made, then need to begin negotiating a refined operating agreement."

The late-October breakdown has been followed by subsequent revelations in the press that the new Toshiba estimate is inching toward $20 million, a number, we’re told, well out of San Antonio’s purchasing power. But even at a lower buy-in of 20 percent, the City could still afford to participate in the STP development, even if the costs came in as high as $13.9 billion before financing, according to Cris Eugster, the utility’s sustainability officer. Hennigan, for one, believes the STP expansion prices floated this fall and winter were meant to scare San Antonio off the deal.

At this point in the drama, however, price may no longer be the issue. Said one official close to the deal: "It’s dead."

Councilman Clamp wonders at the City Council’s apparent lack of interest in the CPS investigation, saying that the Council hasn’t even formally reviewed the report. "I mean, I don’t care who’s in it or what’s in it. This is the biggest fiasco and we’re not even going to talk about it? We have not even talked to the board since this happened [on October 27]. I have no idea what’s going on with that."

This is not the first time that Clamp, a supporter of the STP expansion, self-identified fiscal conservative, and, like Hennigan, a trained CPA, has found himself on the same side as the grassroots environmental lobby. While he discussed the Council’s ability to commission an independent investigation and wield the power of subpoena, SEED’s Hadden suggested Bartley was merely the "fall guy."

"There has not yet been an independent, outside investigation, and that is sorely needed still before all the records disappear. I don’t think we have the real story before us. I think we have a sanitized version that’s been scripted. It’s time that the public gets to know the truth,"Hadden said. Not that she clears CPS – or Milton Lee, who still has his job – of any wrongdoing.

"It’s really convenient to blame NRG, but I think CPS should be scrutinized thoroughly. It’s amazing what they’ve been able to get away with."

Castro has chosen to leave speculation over NRG’s motives and behavior to CPS’s lawsuit, and instead focus on the failures within CPS that nearly led the Council into a potential black hole. He said he has explained his meetings with NRG and NINA to his fellow board members. "I said, ‘I’m the mayor. … These people requested to meet with me. I didn’t go out trying to negotiate or anything. The meetings we had were not negotiatory. I was very upfront."

Castro said the message delivered by the likes of NRG CEO David Crane in their meetings was the same as has now been heard in public: They wanted to know if San Antonio was in or out.

"They would say basically what they are saying now,"Castro said. "They were saying, ‘Look, we need to know at some point. We need to know.’ At that time they were saying by December, but we didn’t get into what were the conditions that would determine this and all that. There wasn’t any new information."

When the Mayor was working in October to round up a unanimous vote on the $400-million bond, the project still looked good, Castro said, though that changed quickly. "There was a moment just before the revelations on the cost estimate I think we had some stable play on the numbers and the process, but of course everything took a U-turn after that."

With CPS on the hook for its 50 percent of the project until a buyer is found or a resolution is negotiated with NRG and NINA, to date there is one clear winner: the opposition – especially the opponents who questioned the project’s cost estimates from the beginning.

In the spring of 2007, NRG had just raised its estimate for the STP expansion from $6 billion to $8 billion to stay in line with Toshiba. But on the steps of City Hall, anti-nuclear forces issued what has turned out to be a prescient warning to the City Council: Costs were likely to cruise at least $4 billion higher– to at least $12 billion and possibly up to $17.5 billion, according to work performed by Arjun Makhijani of the Institute for Energy and Environmental Research.

"We want [the City Council] to take their time to look at the real numbers … and to get the right information,"said SEED’s Hadden at the time, who added that it would be the ratepayers of San Antonio who would be stuck with the consequences of bad or manipulated math.

A second analysis later suggested the final figure could even top $20 billion. This soothsaying ability allowed members of Energía Mía and Southwest Workers Union to sing a re-tuned "Deck the Halls,"called the "We Told Ya So Jingle,"outside CPS Energy’s downtown offices this past December: Doctor Arjun Makhijani/ Ha ha ha ha ha ha ha ha ha/ He predicted costs arising/ Ha ha ha ha ha ha ha ha ha/ City Council didn’t listen/ Ha ha, etc./ See Toshiba’s eyes a’glisten/ Ha ha, etc.

It wasn’t just the project’s cost estimate from which the CPS board and the public had been shielded. Other CPS expectations have been turned on their head since the utility’s leadership fell under Castro’s ax. The strong economy back in 2006 convinced staff an energy shortfall was right around the corner; more recent estimates have pushed that anticipated need back to 2023.

"They thought we’d need power in 2016. We were in a boom, one of the biggest booms going in this century,"said Councilman Reed Williams. "Well, now we’ve got one of the biggest busts."

CPS also projected the city would need around-the-clock – or "baseload"– power, such as coal and nuclear provide. The utility’s revised model now shows the city will need "peaking"power for periods of high energy use that generally fall during a few hours in the late afternoons, something best met at the present time by natural-gas peaking units.

"What I’m trying to get people to do is recognize, ‘Gentlemen, the world’s changed,’ Williams said. "We don’t need power, and if we do, we need peaking power, so [STP is] probably not the right project for us right now."

While there is more to Hennigan’s critique of NRG than the mainstream press has allowed, and Clamp’s concern over the Council’s failure to even review the investigation report deserves attention, the STP-deal meltdown has led leaders at the utility and Council to re-engage with a potential energy future built on renewable power and natural gas. As the hero of the CPS debacle, Castro has positioned himself to lead that movement. The Mayor said that this month he will encourage the Council to finally formally adopt the Mission Verde sustainability plan, an economic plan for the city based on a low-carbon future and advances in energy-efficiency technologies first created by his predecessor. Castro hopes to rapidly develop a plan of attack to drastically reduce the amount of wasted energy leaking from City-owned buildings and San Antonio’s housing stock.

"It’s the silver lining in this experience that we’ve had,"Castro said last week. "There’s so much promise [in renewables]. San Antonio should be a leader in this 21st century and not overly reliant on a 20th-century model of energy provision."

The challenge now is to find a new CEO and a board chair to help shock the utility back to life. Whether due to a sluggish economy or the negative press that has dogged CPS, or both, the pool of applicants for vacating Board Chair Geis’s position is not what it was when she joined the board eight years ago. Some 80 applications flooded in in 2002; this round has produced a baker’s dozen of eligible candidates, Hennigan said. Topping a short list this week is Charles Foster, former exec at AT&T, and retired technology entrepreneur Nancy Kudla. But Castro’s peace summit, scheduled for next week, could go a long way to creating a more hospitable energy environment.

Though San Antonio’s hand is finally played out on the nuclear deal, we could, by virtue of the millions we’ve already spent and the billion-plus our share of the STP site value is worth, inherit a 5-10 percent share in an expanded STP, according to a source close to the negotiations. Key to finding closure with NRG may be penning a dilution clause into the current contract, something CPS staff had initially refused to do. But that’s something for the Mayor’s Round Table to determine next week, if Castro can get all the players to the table.

While CPS interim GM Jelynne LeBlanc-Burley was not available to speak with the Current, spokesperson Ana Nelson said that when CPS and NRG squared off in court last week for a preliminary hearing, CPS extended an offer to "sit at the table and talk."

"As far as I know that is still an open offer,"she said.

NRG’s Crane issued a statement Monday, reiterating NRG’s position that it "favored negotiation to litigation"and was "most appreciative of Mayor Castro’s leadership in pushing for a speedy and equitable solution that will enable the project to go forward without interruption."

So far, the young mayor has gotten everything he’s asked for – except for Steve Hennigan’s head, that is. But even the most hard-won victories aren’t without their disappointments. Mary Shelley’s Dr. Frankenstein knew something of setbacks, too. After Castro has grafted a new head onto CPS’s shoulders it will take time to teach the creature to walk again, especially in the new world of smart-grids, decentralized solar, and energy efficiency. Chapter One in the death and resurrection of CPS Energy is nearly complete.

© 2010 San Antonio Current