A Look at Palo Verde's Mushrooming Costs

It wasn't the fault of Arizona Public Service Co. customers that the Palo Verde nuclear plant wound up with a badly designed pump. But the bean counters hired to look at expenses at the $9.3 billion plant think the customers should pay big bucks because of it.

To no one's surprise, the accounting firm of Ernst & Whinney concluded last week that only $173 million in construction and interest charges at the plant west of Phoenix were misspent. APS, the project manager for the plant and owner of 29.1 percent of its three reactors, ballyhooed the report as evidence that Palo Verde "was a well-built, well-planned, well-designed power plant."

But the report by the Big Eight accounting firm is evidence that if you limit the questions asked, you can predetermine the outcome. The incident with the pump is the prime example.

During testing of Unit 1 in 1983, parts to the pump for the reactor's cooling system broke off and wound up in the reactor core. An investigation revealed that the pump was improperly designed. It was back to the drawing board, with some work coming to a halt, the completion date pushed back and interest charges on the money borrowed to build the plant piling up.

But Ernst & Whinney wasn't asked to find how much more the plant costs because of foul-ups. Instead it was told to determine what costs APS could not pass on to customers because of "imprudent" actions by the utility and its contractors and suppliers. In the case of the pump, the accountants concluded that everyone involved acted "reasonably" in responding to the situation. But Ernst & Whinney wasn't told to look at the big picture, only to examine how APS responded when problems arose. The bottom line is that the electric customers of APS get to pay for the mistake.

APS knows there was a foul-up--it has filed suit against Combustion Engineering, asking the pump builder to reimburse it for the costs of the delays. But that hasn't stopped APS from asking the Arizona Corporation Commission to charge its customers just in case it loses the suit. Otherwise the cost would have to be borne by the stockholders of Pinnacle West, APS' parent company.

As early as 1983, APS chief Mark DeMichele said higher costs--at least half because of delays in completing the plant--would translate into $95 million more that the company would have to charge its customers annually over the life of the plant. That dwarfs the $5 million annual savings the Ernst & Whinney audit is supposed to save customers.

The narrow scope of the Ernst & Whinney audit left other questions unanswered. The auditors were asked to look at the APS decision to continue building a nuclear plant while other utilities in the Seventies were canceling construction plans for nukes. They found that the utility's decision-making process was reasonable. But the auditors never addressed whether the decision itself to go nuclear was reasonable.

Consider: Tucson Electric Power bailed out early, selling its 15.8 percent interest in Palo Verde to a California utility in 1976. TEP decided instead to put its dollars into coal-fired plants. Salt River Project, which started out like APS with a 29.1 percent share, has rid itself of more than a third. (SRP customers shouldn't take any joy in the troubles of their APS neighbors: As an unregulated utility, it has been passing on the escalating costs of its share of Palo Verde to ratepayers for years.)

Renz Jennings, a member of the Arizona Corporation Commission, defends not asking the auditors to look at the APS decision to stay nuclear. "You don't want bean counters to make policy decisions," he says. But all may not be lost. Jennings says he believes the commission still may have the authority to cut APS rates to what would have been charged had the company built a coal-fired plant instead.

The audit isn't the end of the issue--or an end to higher electric bills for APS customers. Despite the crowing about how the report vindicates the costs of the plant, APS officials say they will challenge even the minuscule annual reduction that the accounting firm recommended. The cost of fighting the audit's conclusions about the $5 million savings will be added to the bills of APS customers, as was the $6.5 million fee for the audit itself and the estimated $30 million APS says it spent in "responding" to the audit.

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Howard Fischer