Morro Bay Power Plant closure means less revenue for city, county agencies

The Morro Bay Power Plant's three towering smokestacks have been a city landmark since the 1950s.
The Morro Bay Power Plant's three towering smokestacks have been a city landmark since the 1950s. The Tribune

Together, the city of Morro Bay and the county Air Pollution Control District stand to lose more than $1 million in annual revenue when the Morro Bay Power Plant closes.

Last week, Dynegy announced plans to shutter its power plant in February. The natural-gas-fired plant is antiquated and has been operating only intermittently in recent years.

Morro Bay gets more than $800,000 annually from Dynegy as part of its lease of the plant’s cooling water discharge structure. The air district gets $270,000 a year from the plant in air-pollution fees.

Both government agencies say they have plans in place to deal with the revenue loss. Both plan to use a combination of reserves and new revenue sources to make up for the shortfall.

“It’s been clear that they are in the process of closing the plant down,” said Larry Allen, county air pollution control officer. “We’ve been preparing for this for quite some time.”

The city has been collecting various amounts of outfall lease fees since the city incorporated in 1984 and assumed control of the lease.

In December 2012, Dynegy signed an agreement with the city to pay more than $800,000 in various annual fees. The largest chunk — $525,000 — is due in January and is earmarked for the city’s reserve fund.

An additional $275,000 will go to the city’s general fund or to specialized funds to cover planning, firefighting and other costs. The city expects to receive its payment in 2014 but no payments in subsequent years, City Manager Andrea Lueker said.

The city expects to make up for the loss of revenue through reserves and cost savings and possibly new revenue sources.

For many years, all the fees paid by the owners of the power plant went into the city’s general fund, but the city recently began putting most of it into a reserve fund to cushion the financial blow of the plant closing, Lueker said.

“To date, the reserve fund contains about $2.7 million,” she said.

The contract also calls for Dynegy to give the city various deeds and leases on property that it owns in the city. These include a 10-year lease for Lila Keiser Park near Atascadero Road and Highway 1, a right-of-way along Front Street for development of a maritime museum, property for the bicycle and pedestrian path along the Embarcadero, and the deed to a triangular parcel adjacent to the plant.

The lease for Lila Keiser Park is unaffected by the plant’s closure, Dynegy spokeswoman Katy Sullivan said. But the fate of the other agreements in the lease is not clear.

Such details will be worked out after Dynegy receives official permission from state regulators to close the plant. At the end of February, the agency that runs the state electrical grid, the Independent System Operator, is expected to rule that the Morro Bay plant is no longer needed to maintain grid reliability, paving the way for the plant’s closure, Lueker said.

Dynegy owns the property on which the plant sits. The company has not decided what it will do with this prime real estate once the plant closes.

“Right now, we are looking at alternatives but have made no decision,” Sullivan said. “We are committed to keeping the city and community involved in the future of the plant.”

Morro Bay has the authority to charge Dynegy annual fees because it manages tidelands within city boundaries in lieu of the state. A canal that carries cooling water from the plant to the ocean crosses the tidelands at the base of Morro Rock, requiring a lease from the city.