October 16, 2002

By Rachel Brahinsky

THE MIRANT CORP . – which has plans to expand its Potrero Hill power plant by 540 megawatts and hopes to become a central fixture of San Francisco's energy future – has a dismal record in California and in San Francisco.

Residents of the neighborhood near the power plant site are concerned about the health risks posed by living so close to the behemoth generator. But they're also worried about the whole concept of allowing Mirant to build a plant that could give the Georgia-based company control over the city's electricity market. After all, this is the same company that has been accused of gaming the state market for excess profits, and of withholding power in the days when the state was forced into rolling blackouts, in the middle of the energy crisis.

And it's the same company that wants a $7.3 million deduction on its city taxes.

Mirant first came onto the scene in San Francisco as Southern Energy in 1997, when Southern bought the Potrero plant from Pacific Gas and Electric Co. (along with two other power plants PG&E sold off in response to the state deregulation law). Southern, which was busy running utilities in southern states, created Mirant as a subsidiary and then spun it off as a separate company. A subsidiary called Mirant California manages the plant.

By 2001, Mirant was considered by Morgan Stanley Dean Witter to be one of the top three energy marketers in the country, and among the most lucrative in California.

A bit too lucrative, perhaps.

A March 2001 report by the California Independent System Operator showed Mirant was the second-worst abuser of the state market, in financial terms. The ISO calculated how much profit companies should have made in a competitive market. Any earnings above that were considered "excess." Using this method, the ISO showed that Mirant earned $96.8 million in excess profits between May and November of 2000. That's more than the combined total of excess earnings by Dynegy, Enron, and Reliant for that same period.

Part of Mirant's strategy was to manipulate the market by withholding energy at key times, according to an analysis published by the California Public Utilities Commission in September of this year.

The CPUC report shows that Mirant – along with the rest of the five largest independent generators in the state – withheld power from the market during the blackouts of 2000 and 2001. On one occasion, the CPUC found, "by itself, Mirant had enough available but unused power to meet the needs of non-firm customers whose service was interrupted on that day."

In other words, the CPUC says Mirant could have stopped the blackout that day on its own – but it didn't.

Mirant denies the charges. "We've been accused of a lot of things over the past year," Mirant spokesperson Patrick Dorinson told us. "Mirant has not manipulated the market. Mirant has not withheld power from the market. Mirant has gone above the call of duty to provide power to California."

A company response to the CPUC report says the CPUC overstated the company's ability to produce power and that operational problems and planned outages were to blame for the company's output.

The CPUC is still reviewing Mirant's analysis.

Money manipulations

Mirant's alleged manipulative behavior has local officials worried about what could happen if the company expanded its power production here. Mirant has one 206-megawatt natural gas-fired plant, three backup plants (known as "peakers"), and plans to build a new 540-megawatt gas-fired plant on the same site. The city's power use historically fluctuates between about 400 and about 940 megawatts on any given day, depending on the weather and other factors.

If the current proposal moves ahead as suggested, Mirant will control generation of enough electricity to serve the entire city, except on peak power-use days. That would give the company inordinate control – what's known to insiders as "market power" – over electricity production in the city.

As Ed Smeloff, San Francisco Public Utilities Commission assistant general manager for power policy, explained to a state senate panel in September 2001, "the restructuring of the electric power industry in California has made San Francisco particularly vulnerable to the abuse of market power by private power plant owners." Because of the way PG&E built the transmission system into the city, San Francisco has to generate as much as 40 percent of its electricity within city limits.

"The only private-sector entity proposing to build new power plants in San Francisco is Mirant, which could end up owning generation roughly equivalent to San Francisco's peak demand for power," Smeloff told the panel. "That situation is unacceptable to San Francisco since its businesses and residents would be subject to possible price gouging for years to come."

And there are other financial concerns about the company. Last July, Mirant confessed – on the heels of similar confessions throughout corporate America – that it had overstated as much as $253 million in assets and liabilities for 2001. The Securities and Exchange Commission is investigating.

Mirant's Dorinson told us he had little to say about the SEC investigation. "I'm sure it's still proceeding. You have to ask the SEC," he said.

Meanwhile the company's stock price has tanked, sinking from more than $45 a share in May 2001 to just $1.27 a share Oct. 14. And a raft of lawsuits accuse the company and its subsidiaries Mirant Americas Energy Marketing, Mirant Delta, and Mirant Potrero of engaging in illegal and anticompetitive wholesale power-market manipulation, which made electricity prices soar. Another case, filed by the California attorney general this past April, charged that the purchase and ownership of the Potrero plant has reduced competition in the marketplace, in violation of state law.

Locally, Mirant has asked that the San Francisco Assessment Appeals Board reduce its assessment of the value of the power plant property by a stunning total of $650 million for the past four years, Appeals Board records show. The potential tax loss to the city for that period: $7.3 million. This comes from the company that played a major role in worsening the state's current economic situation.

The city hasn't yet acted on the request, which may not be addressed for another year.

Fighting the city's energy plans

In addition to market concerns, there are health, environmental, and design problems with the power plant proposal. Although the new plant would be far cleaner than the old one, and cleaner than PG&E's Hunter's Point power plant a mile down the road, it would, each year, emit into the air hundreds of tons of particulate matter, carbon monoxide, toxic gases, and nitrogen and sulfur compounds, according to an analysis by the Oakland-based Communities for a Better Environment. That would increase pollution in southeast San Francisco, an area already inundated with toxins.

One of the major sticking points over the past few months of the power plant siting process is Mirant's controversial plan to use cooling technology that will slurp a full third of the water in the South Bay, which includes everything south of the Bay Bridge, an assessment by the Bay Conservation and Development Commission shows. Mirant's own tests show that more than 500 million fish larvae and millions of plankton and microscopic animals would be wiped out each year the plant operates.

A third design problem – one that could be the death of the proposal – is more technical. Right now the new plant design apparently contains what is known as a "single point of failure," according to the ISO. What that means, essentially, is that if there's a problem with one of the plant's two turbines, the whole thing fails. In a city where consistent power production inside city borders is essential for energy grid stability, that's a major problem (see "Potrero Poison," 3/27/02). Mirant won't confirm to us or to the state whether this description of the design is accurate.

Citing problems with the cooling, air emissions, and design, City Attorney Dennis Herrera filed a motion Oct. 1 asking the California Energy Commission to put Mirant's power plant proceedings on hold. The city has stopped short of opposing the plant so far, but the city's energy plan, which is still in draft form, outlines a vision of the city's energy future that doesn't include Mirant's plant. But the city's Potrero Power Plant Citizens' Advisory Task Force – an advisory panel of citizen appointees – has recommended the city oppose the new plant as currently proposed.

Now it seems Mirant views the energy plan as a direct attack. At a recent meeting of the CEC board, Mirant's attorneys reportedly derided the plan as a backdoor attempt by the city to push for public power. "They claimed the city's plan is naively ambitious and will never get put in place," Greg Karras, senior scientist at CBE, told us. CBE is very supportive of the energy plan's goals and has endorsed Proposition D, San Francisco's public power measure.

Dorinson said that Karras's description was not exactly precise but confirmed that Michael Carroll, one of Mirant's attorneys attending the meeting, said he "was a bit incredulous that the city plan did not include Potrero 7 [the proposed plant]."

The city plan calls for development of smaller, cleaner, more dispersed power plants, along with serious conservation and efficiency projects (see "Competing Energy Visions," page 30). It will also help the city avoid having to say yes to Mirant's proposal. As the SFPUC's Smeloff told the senate panel last year, "To eliminate the opportunity for Mirant to price gouge, San Francisco is exploring opportunities to develop distributed sources of power and energy efficiency that it could finance with tax-exempt bonds that are available to public power entities."

But even if Mirant is granted the permit to build, it's not clear how far the project could go. As one energy industry source familiar with the project explained, "Mirant's market capitalization is about half of what it once was. If they get a license, they probably won't even be able to finance it. And because of the [design] flaws, I think the proposal kind of collapses on itself."

Indeed, even Dorinson admits the company's fiscal woes will slow any new project. "Financially, right now we can't afford to finish it," he told us. "We were going to build a plant in Contra Costa. We had to mothball it.... We had to mothball a plant in Washington. There's not a lot of capital out there on power plant projects." Still, he said, "we're continuing with the application we've submitted."