SCEcorp finds its 'green' reputation in jeopardy.

Mexico plant purchase raises environmentalists' ire

SCEcorp, the Rosemead-based utility holding company that has garnered high praise for its environmental sensitivity in Southern California, is trying to keep its "green" image from wilting under increasing heat from federal officials, environmental activists and Texas residents who are expressing concern about an SCE unit's pending $1.8 billion acquisition of a heavily polluting power plant in a Mexican border town.

That 1,400-megawatt coal-burning plant, scheduled to begin commercial operation July 24, does not have any "stack scrubbers" to reduce sulfur oxide emissions, as are required on new U.S. power plants. As a result, the Mexican plant and an adjacent sister plant are expected to spew 240,000 tons of sulfur dioxide into the atmosphere each year once both plants are fully operational.

The Mexico plant, as well as several other pollution-heavy foreign plants, are being purchased by SCE's Mission Energy Co. subsidiary. SCE, through its Mission subsidiary, is expanding into foreign power plants to take advantage of the relatively high financial returns provided by such plants and to supply the exploding demand for electricity in developing foreign nations, such as Mexico.

SCE's foreign investments are also likely being motivated by flat or declining demand for electric power in recession-plagued Southern and Central California, where its Southern California Edison subsidiary operates, and by the California Public Utilities Commission's continual reducing of Southern California Edison's maximum allowable return on equity.

"While Southern California Edison is getting good press about its supposed environmentally friendly improvements (in California), Mission Energy is busy building more coal-fired power plants around the world," stated Tom Lent, energy policy analyst at Greenpeace USA in San Francisco. "While Edison reduces CO2 emissions by just under 6 million tons (per year), Mission Energy will add four times that amount, nearly 24 tons (per year)."

While most federal officials and environmental activists said their biggest concern about the foreign power plants is sulfur dioxide emissions, such plants also emit carbon dioxide, which contributes to global warming.

SCE Chairman and Chief Executive Officer John E. Bryson was a prominent co-founder of the Natural Resources Defense Council, a highly regarded national public interest environmental law firm. In addition, Southern California Edison has no fewer than 144 programs to help its customers use electric power more efficiently, thereby reducing demand for power and the need to build new power plants, said Michael Hertel, the utility's manager of environmental affairs.

In May 1991, the utility made a highly publicized announcement that it would voluntarily reduce its carbon dioxide emissions by 20 percent by the year 2010. And Southern California Edison was praised for installing anti-perching devices on utility poles after two California condors were inadvertently electrocuted.

But while SCE basks in a green glow of favorable publicity here in Southern California, it is facing some troublesome clouds on the Mexican border of Texas.

Miguel Flores, chief of the Monitoring and Data Analysis Branch of the U.S. National Park Service, reported that his office has done some preliminary air-quality computer modeling, based on anticipated emissions from the Mexico plant SCE's Mission Energy subsidiary plans to buy.

Those studies show the plant's projected sulfur dioxide emissions could cause significant air-quality damage to as many as 16 national parks, including Grand Canyon National Park, as they drift northward across the U.S. border. Hardest hit by far would be Big Bend National Park, about 100 miles north of the plant, where maximum allowable pollution levels would be exceeded by more than 300 percent, Flores said.

The plant's northward-drifting sulfur dioxide, a major component of acid rain, is also expected to virtually or totally exhaust the air-pollution allotment for southern Texas, severely stifling industrial development of that region, sources said.

Air-pollution allotments, or "increments," are set by the EPA. Responsibility for monitoring air quality lies either with the EPA or with the state, if the federal government grants the state such authority. The federal government just recently ceded air-quality monitoring and enforcement authority to Texas state officials.

The EPA recently received a draft environmental assessment report on the plant, which was done by Los Angeles-based Dames & Moore for Mission Energy and its partners. "We are doing some (computer) modeling based on that report, and hope to get preliminary results of that modeling by July 16," said William Tyndall, a policy analyst with the EPA Office of Air in Washington, D.C.

But based on information available so far, Tyndall concluded: "That this (plant) could be built in 1993 with absolutely no controls for SO2 (sulfur dioxide) is something that most of us at the EPA wouldn't have believed. This plant points up a huge hole in Mexico's environmental laws. And that's a blow to NAFTA (the North American Free Trade Agreement), which is based on Mexico having roughly equivalent environmental laws (to U.S. laws)."

On June 30, a U.S. District Court ruled that the federal government must complete a full study of the environmental effects of the NAFTA pact, which is expected to remove tariffs and other obstacles to free trade among the U.S., Mexico and Canada.

Several sources familiar with SCE's situation in Mexico characterized that controversy as a prime example of the environmental complications that led to last month's federal court ruling and that are now jeopardizing approval of NAFTA.

"This is potentially an egregious example of what can go wrong with free trade," said Greenpeace energy analyst Lent. "It shows that jumping the Mexican border can not only hurt the Mexican environment, but can come back to hurt the U.S."

Officials at SCE operating units contended that the pending $1.8 billion acquisition of the Mexican power plant, which is scheduled to be consummated in late February 1994, as well as the company's ownership stakes in several other foreign power plants, is not inconsistent with the company's carefully nurtured "green" image in Southern California.

"Whether the energy you use to generate electricity is oil, coal, natural gas or cow dung, the (electric) energy being generated is used as a substitute for fossil fuels. Using an electric motor instead of a gas-powered motor results in a massive CO2 (carbon dioxide) emissions reduction. So I think (foreign) governments should be encouraged to electrify their power systems," said Southern California Edison's Hertel.

But critics contend the appropriate comparison is not between gas-powered motors and electric motors, but between state-of-the-art electric plants with pollution control devices and outdated plants that grossly pollute.

According to internal U.S. Environmental Protection Agency documents obtained by the Business Journal, the Mexico plant that SCE's Mission unit plans to buy is expected to emit between 1.5 and 2.5 pounds of sulfur dioxide per million BTUs of heat input, more than 10 times the 0.1 to 0.2 pounds of sulfur dioxide emitted by a typical new U.S. power plant.

Outfitting the plant with state-of-the-art scrubbers would cost between $200 million and $300 million, according to SCE and federal officials, which SCE is reluctant to spend.

The Mexico plant, known as Carboelectrica Power Station II, or Carbon II, and its sister plant, Carbon I, are near the town of Rio Escondido, about 20 miles south of Eagle Pass, Texas.

Carbon I, a 1,200-megawatt plant, was completed in the mid-1980s and is owned by Mexico's government-owned utility. That utility is also building Carbon II - a four-unit, 1,400-megawatt plant.

The first unit of Carbon II is scheduled to begin commercial operation July 24, the second unit six months later, the third in fall 1994 and the fourth in spring 1995. Once fully operational, Carbon I and II are designed to generate enough electric power to supply a metropolis of 2.6 million people, a city virtually the size of Los Angeles, which has about 3 million residents.

Last May, the administration of Mexican President Carlos Salinas de Gortari announced it would privatize Carbon II. Agreeing to buy that plant is a joint partnership 49 percent owned by SCE's Mission Energy subsidiary and 51 percent owned by Grupo Acerero del Norte, a big Mexican steel company.

The partnership has applied for financing of its $1.8 billion purchase from the International Finance Corp., the private-sector arm of the World Bank, as well as Barclays bank, Citibank and two Mexican banks.

Mission Energy has already invested about $300 million in Carbon II, according to SCE's 1992 annual report. But that investment is fully refundable, with interest, if the acquisition falls through, said Robert Dietch, a Mission Energy senior vice president.

The expansion of SCE's Mission Energy subsidiary into foreign markets is taking on increasing importance for SCE's bottom line. While demand for electric power in SCE's recession-ravaged Southern California and Central California service area has waned, demand for electricity outside the U.S. is surging by double digits in many nations, according to recent media reports.

Those trends are reflected in SCE's earnings. While Mission Energy's 40-cents-per-share contribution to SCE's total $3.32 earnings per share for 1992 is still relatively small, it reflects a pattern of steady growth. Meanwhile, Southern California Edison's $2.94-per-share contribution to SCE's 1992 earnings was down from its $3.11 a share contribution the prior year.

"Foreign plants have been yielding returns on equity that are extremely high - several hundred basis points higher than comparable U.S. deals - because (foreign plant) returns are negotiated, not set by regulatory commissions," said one Wall Street energy analyst, who asked not to be named.

Adding to the attractiveness of foreign plants for SCE is the fact that the California Public Utilities Commission has been continually reducing Southern California Edison's return on equity. The PUC is the state agency responsible for regulating all utility monopolies in the state. As part of that regulatory function, it determines what constitutes a "fair market" return for utilities operating in California. Utilities then set their rates to provide the specified returns.

The PUC is expected by year end to once again cut Edison's return on equity for 1994. And that reduced return is expected to cause SCE's 1994 earnings per share to drop by about 6 cents, according to Wall Street analysts.