CommentaryMarch 2011
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Sale of Morro Bay Power Plant Stalled 

by Jack McCurdy

The sale of the Morro Bay Power Plant and its parent company, Dynegy, which could open the way to long-awaited redevelopment or some alternative use of the prized 107-acre plant site on the north shore of the Morro Bay National Estuary, has bogged down in a bidding war that has led to the resignation of Dynegy's top management.

In addition, the remaining members of the Dynegy board said they would not be candidates for re-election at the next board election expected in June.

Icahn Enterprises, a diversified holding company owned by billionaire investor Carl Icahn, who is the largest owner of Dynegy stock, most recently had made an offer of $665 million to purchase Dynegy. Its first offer was made last December and extended several times after a prior bid by the Blackstone Group fell through.

But Icahn was unable to win majority support of stockholders because, analysts said, the second largest stockholder, Seneca Capital, a hedge fund, argued that the company was worth more than what Icahn had offered.

Thus, a stalemate—at least for now. 

Analysts have said they believe that if Icahn or Seneca bought Dynegy, they would sell the 17 power plants that Dynegy owns nationally on an individual basis, most of them likely to energy companies. Dynegy is the third-largest independent power producer in the country.

But that doesn't mean the Morro Bay plant would be bought to operate the existing plant or replace it. Because of it's age—56 years—and inefficiency, it operates very little now. New federal court decisions and a new state policy adopted last year prohibit the operation of a replacement plant that would use water from the Morro Bay National Estuary to cool the plant, as it does now. 

That state policy prohibits new plants that use estuary, bay, or ocean water for plant cooling (called once-through cooling) and requires that the 19 plants along the California coast that do use such water for cooling to phase it out. It requires the Morro Bay plant to halt its use by 2015. Dynegy two years ago informed the city of Morro Bay that it would do so by that date. Whether it should be ended sooner is the question since state agencies have concluded that the Morro Bay power plant is not needed for supplying electricity to the public as of now, the only plant to be so designated.

Other state and federal policies and regulations would be expected to block construction of a replacement plant that would use some form of cooling (called closed-cycle cooling) that does not use once-through cooling. Plus the explosion in the development of solar power in California is drastically reducing reliance on power plants along the coast for generation of electricity.

Therefore, the focus on alternative uses of the plant site has steadily increased over the past four years after Duke Energy's plans to build a new plant using once-through cooling fell apart for a number of reasons, including a 2007 federal court decision that prohibits the use of once-through cooling by new or used power plants.

The latest developments in the sale of Dynegy, which is said to be in dire financial trouble, reportedly included Icahn withdrawing its purchase offer after extending it beyond deadlines for acceptance.

"Natural gas oversupply, driven by new production from U.S. shale formations, has driven down the value of the fuel and is expected by many to keep prices low for years to come," the financial website MoneyNews reported. "Dynegy has argued that it faces serious risks if it remains a stand-alone company, saying that weak market conditions could force the power company into a liquidity crisis if the deal was not completed."

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