DALLAS — San Antonio will play a dramatically smaller role in financing the $13 billion expansion of the South Texas Project nuclear plant under a settlement submitted for approval to the city’s utility board yesterday.

The proposed settlement, announced last week, would resolve a $32 billion lawsuit filed by San Antonio’s utility, CPS Energy, against its private partners in the project, NRG Energy and Toshiba Corp., which operate as Nuclear Innovation NA, or NINA.

Under the out-of-court settlement, San Antonio’s interest in the project will shrink to less than 8% from 40%. NINA will provide $10 million to San Antonio’s Residential Energy Assistance Partnership, which helps low-income customers pay their bills, and take complete operational control of the nuclear project. The city will also cease paying for the development costs of the project.

The legal battle threatened to derail plans to add two reactors to the existing nuclear power plant on the Gulf Coast, south of Houston. CPS and NRG filed a letter of intent with the federal Nuclear Regulatory Commission to build the reactors in Matagorda County on June 19, 2006. Subsequently, on Sept. 4, 2007, NRG filed a full application to build two Toshiba advanced boiling water reactors, the first applications submitted to the NRC since 1979.

Since then, Austin, one of the original partners in the South Texas Project, has declined participation in the STP expansion. That left CPS with a 40% stake in the project with NRG and Toshiba in 2008. Since then, CPS has claimed that NINA fraudulently withheld information concerning costs of the project.

CPS’ former general manager, Steve Bartley, was replaced last year amid an investigation into why the higher costs were not reported to the municipal ­utility’s board.

Texas Public Utility Commission chairman Barry Smitherman played a key role in settling the dispute, according to all parties. Smitherman — who told The Bond Buyer’s Texas Public Finance Conference at the beginning of the month that he was concerned about the future of the nuclear project — called a meeting of the partners Feb. 12 that resulted in the proposed agreement, which was publicly announced five days later.

San Antonio Mayor Julian Castro called the settlement “a strong business solution that protects ratepayers and ­respects the value of our previous ­investments.”

The settlement stipulates that CPS would continue to support NINA’s application for federal nuclear loan guarantees, a critical factor in plans to build the reactors. CPS expects to gain 200 megawatts more of electricity than it currently receives from the finished project, representing about a third of its future needs by 2020.

“This agreement extracts the maximum value for our community at this stage of the project’s development,” CPS Energy acting general manager Jelynne ­LeBlanc Burley said in a statement after the agreement was announced last week. “It accounts for our investment to date and the value of the site with land and water rights.”

The NINA parties said the settlement will keep the project on track, despite San Antonio’s reduced role in the project.

“This agreement is of tremendous importance for Texas, NINA, and for the American nuclear renaissance,” said Steve Winn, chief executive officer of NINA.

“With this agreement, we can continue developing one of the leading nuclear power projects in the country. The strengths of the STP 3 and 4 project — certified technology, turnkey contract with a proven contractor, exceptional site, and strong state support — will once again put us in contention for a Department of Energy loan guarantee and ensure we have no conflicts preventing new partners from joining the project.”

The deal came a day after President Obama’s budget request last week that federal loan guarantees for nuclear projects be expanded. STP 3 and 4 were identified by the DOE in May 2009 as likely candidates to receive loan guarantees.

With the STP in legal limbo, Obama traveled to Burke, Ga., to tout the two proposed nuclear reactors at the Alvin W. Vogtle Electric Generating Plant. That project could break ground before Texas project.

At the event in Georgia, Obama talked about the need to incentivize nuclear and other clean-energy sources through penalties on carbon pollution generated by traditional power plants. He also outlined his request for $8.33 billion in loan guarantees for the construction and operation of the Georgia plant.

“This is a significant step by the Obama administration to restart our domestic nuclear industry, helping to create valuable long-term jobs and reduce our greenhouse gas emissions,” said Energy Secretary Steven Chu.

Sponsors of the Georgia nuclear plant include Georgia Power Co., Oglethorpe Power Corp., the Municipal Electric Authority of Georgia, and the city of Dalton.

The Energy Policy Act of 2005 authorized the DOE to issue loan guarantees for projects that reduce air pollutants or emissions of greenhouse gases and employ new or significantly improved ­technologies.

The Georgia loan guarantees are the first to be offered by the department for a nuclear power facility since enactment of the 2005 law. The DOE’s loan programs office administers the guarantee program.

At the existing STP, the first nuclear power plant in Texas, NRG owns a 44% share, with San Antonio’s CPS Energy holding 40% and Austin Energy owning 16%. Both CPS and Austin Energy are city-owned utilities.

Operation of the nuclear reactors did not commence until 1988, nearly 13 years after construction began and 15 years after Austin voters narrowly agreed to participate in the project. Over the years, Austin has tried to sell its stake in the plant but could find no buyers.

San Antonio’s utility revenue bonds issued on behalf of CPS have ratings of AA from Standard & Poor’s, AA-plus from Fitch Ratings, and Aa1 from Moody’s Investors Service. Austin’s electric system revenue bonds are rated A-plus by Standard & Poor’s, A1 by Moody’s, and AA-minus by Fitch.

The U.S. Energy Policy Act of 2005 is designed to streamline the process that has played such a large role in precluding any new nuclear power projects over the last three decades.

Under the 2005 legislation, the first six reactors to receive licenses are eligible for as much as $2 billion of insurance against regulatory delays or legal challenges.

Production tax credits and loan guarantees are also provided, and the 2005 act reauthorizes an older law limiting the liability of a plant operator to $10 billion in the event of an accident.

Under a 2007 Texas law, school districts can grant property-tax abatements to nuclear plants. More than half of the value of the STP is already exempt from state and local taxes.

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