HOUSTON - San Antonio's municipal utility will make a key decision next week on whether to invest billions of dollars to expand Texas' largest nuclear power station, with the city's mayor raising cost concerns.

Municipal utility CPS Energy is an equal partner with a joint venture formed by NRG Energy and Toshiba in a plan to add two 1,350-megawatt reactors at the existing South Texas Project nuclear station, located about 200 miles southeast of the city.

But the city's new mayor, Julian Castro, elected earlier this year, has raised additional questions about the project and the city-owned utility's level of investment.

On Monday, the CPS board, which includes the mayor, will vote on whether to pursue the STP expansion and decide how big a stake the utility should own.

Castro said he is concerned about the project's cost -- estimated at $10 billion to $13 billion -- and whether the utility should stick to its primary role of supplying power to customers in Texas' second-largest city. San Antonio is the seventh-biggest U.S. city.

Adherence to the fundamental mission (of the utility) is more important, particularly given the risk of the development phase and the capital risk of a nuclear project, Castro said in a telephone interview with Reuters.

NRG, based in Princeton, New Jersey, already Texas' No. 2 power producer, expects to name a third partner to own 20 percent of the STP expansion by year end. That would leave the NRG/Toshiba joint venture and CPS with 40-percent each.

CPS currently gets one-third of its power from the existing STP units in which it holds a 40-percent stake and the CPS staff favors the additional investment, calling it the least-cost option for baseload power San Antonio will need by 2020, said CPS spokesman Bob McCullough.

But CPS won't need all the new power when the reactors are expected to come online in 2016 and 2017. CPS has said it would sell any excess power into the wholesale market.

Castro has suggested that CPS limit its stake to 20 percent, more in line with its future power forecast.

San Antonio's appetite for electricity continues to grow despite the recession, McCullough said. CPS is building a new coal plant and investing in energy efficiency programs and renewable power, but wants to retire some inefficient natural gas-fired power plants.

Around 2020, we will need new baseload generation, McCullough said.

Monday's vote by the CPS board caps three months of public debate. We heard quite a diversity of opinion, Castro said, ranging from support, to those vehemently opposed to it and others who are comfortable with nuclear, but cautious.

Meanwhile, NRG is watching from the sideline.

We very much value CPS as a partner, said NRG spokesman David Knox. We want them be a partner, but the level of ownership is something that needs to be decided by San Antonio,

CPS has spent about $276 million on the project which is a finalist for an Energy Department loan guarantee and other incentives designed to revive U.S. nuclear construction.
If the CPS board votes to go forward, it will ask the city council for the ability to issue $400 million in revenue bonds later in the month to advance the project.

(Editing by Marguerita Choy)

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