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Deregulation's Ill Wind Blows Windfall to Morro Bay

Finances: The tourist town is expected to reap $2.4 million this year from a little-known tax on the use of natural gas pipelines.


For years, the little beach-side community of Morro Bay has struggled with problems not uncommon in boom and bust tourist meccas. While the restaurants downtown served world-class cuisine, the roads went unrepaired. The Police Department is in a downtown storefront, and some city offices are in an old bank.

In the last couple of years, however, the potholed streets winding out of the fog-shrouded hillsides have been repaired. There might be enough money this year to splurge a little, said Mayor Rodger Anderson.

"This is my 11th year on the City Council," said Anderson, who owns the Galley restaurant. "This is the first budget we won't have to decide what projects to take off the list."

The source of Morro Bay's good fortune? The same energy deregulation fiasco that is threatening ratepayers' wallets and politicians' futures across the Golden State.

Morro Bay, a compact beach city best known for the 576-foot-tall lump of igneous rock just offshore, will get as much as $2.4 million this year by way of the power plant that looms over the surf shops and restaurants downtown. That is not only an unexpected gift from a much-vilified industry, it is a whopping 30% of the city's current $8.1-million budget.

"I'll be delighted if that's the case," said Jim Koser, the city's finance director.

Morro Bay is not the only happy city. From Chula Vista to Monterey County, a few communities are benefiting from the deregulation disaster that has thrown an embolism into the state's body electric. Since much of the state is living through rolling blackouts and an unending siege of Stage 3 power alerts, it may be a pretty thin silver lining. But not if you have a power plant in town that was recently sold.

The money is gushing from a little-known franchise tax paid to communities through which natural gas pipelines run. The tax was created in the early 1990s but, before deregulation in 1996, it was nominal. That's because both the gas pipelines and the power plants were owned by the same companies, which paid little tax because they were simply supplying gas to themselves.

After deregulation, the utilities sold off their natural gas-fired plants and began selling gas to the new owners. With that, the surcharge fee ballooned.

For some communities, that has meant an unexpected boost. Monterey County last year received $1.4 million from its power plant in Moss Landing, said Al Friedrich, county budget official. "It's been very helpful to our general fund," he said.

The tax is so little known that even some recipients are in the dark about how much they are getting. Hearing that Chula Vista may get $1 million this year on its South Bay plant near the Mexican border, Treasury Manager Nadine Mandery said, "I'll be looking forward to that."

In Morro Bay, "the city didn't even know it was coming," said Tom Williams, a spokesman for Duke Energy, which bought the power plant after deregulation from Pacific Gas & Electric.

"There was a rumor around town that, after the first check came in for $250,000, it screwed up their labor negotiations," Williams said.

Koser, the city finance director, denied that the money was used for salaries. He also denied another rumor floating around town that the money was used to hire a police officer to catch out-of-town drunk drivers at the city limits. But he admitted that the windfall has come in handy.

"We need it," he said. "We probably wouldn't have brought on some staff" without it.

Before deregulation, the money from the tax would not have been enough to hire a dogcatcher. In Monterey County, the total in 1996 payments was $29,000. Two years later, it had grown almost 20 times. The next year, it tripled.

This year, said Williams, the Duke Energy spokesman, the total could rise to $3.1 million. Although that is only a fraction of Monterey County's $358.7-million budget, it's still significant. And it would have been more if the Moss Landing plant hadn't been out of service for several months while a catalytic converter was installed.

In a $90-million budget, the $1 million that Chula Vista is expecting "isn't going to make or break us. But every little bit helps," Mandery said.

Exactly how much the tax now generates statewide is unclear. No state agency compiles a list, and the utilities, which collect the tax and pass it along to the cities, won't say. The change has not had as much effect in Southern California because, even before deregulation, Southern California Edison did not sell gas.

However much other communities benefit, it is little Morro Bay, population 10,000, that seems to have hit the jackpot. Its budget is small enough that the utility money makes a big difference.

Mayor Anderson said the power plant payments are particularly important because Morro Bay's infrastructure is badly deteriorated. The new money is allowing the city to do some catching up.

"We did more street paving than was done in the past 25 years," he said.

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