* SCE accuses Mitsubishi Heavy of contract violations
* Mitsubishi Heavy says SCE's allegations 'groundless'
* Mitsubishi shares fall 9 pct but quickly pare losses
By Rory Carroll
July 19 (Reuters) - Southern California Edison accused Mitsubishi Heavy Industries of contract violations in failing to properly design or quickly repair defective steam generators it built for the utility's now-closed San Onofre nuclear plant.
Mitsubishi on Friday rejected the charge.
The two Mitsubish-manufactured replacement steam generators came with a 20-year warranty, but after one year of operation, one of the units experienced a small radioactive coolant leak that forced SCE to take the plant offline in early 2012.
In early June, SCE officials announced they would permanently retire the 2,150-megawatt plant, which is located halfway between Los Angeles and San Diego.
On Thursday, SCE, which is owned by Edison International , filed a notice of dispute saying Mitsubishi failed to appropriately test the equipment or design adequate support structures that would have prevented the premature wear found on thousands of tubes inside the four large steam generators.
Mitsubishi has 90 days to respond to the allegations before the parties enter into dispute resolution with arbitrators.
"What we're asking for with this notice is for Mitsubishi to take responsibility for the defective steam generators and the enormous harm those failures caused to California ratepayers, to Southern California Edison, and to the other owners of San Onofre," said Maureen Brown, a spokeswoman for SCE.
"This is about gross negligence. They did not deliver what they promised," she said.
Mitsubishi Heavy on Friday said SCE's allegations and demands were "factually incorrect, legally unsound, and inappropriate."
Shares in the Japanese heavy equipment manufacturer fell as much as 9 percent on Friday to 593 yen but quickly pared losses. In the afternoon they were down 2.9 percent at 632 yen, compared with a 1.6 percent drop in Tokyo's benchmark Nikkei average .
Mitsubishi Heavy said it did not expect the dispute to have an impact on its earnings.
SCE last month said it would record a second-quarter charge of $450 million to $650 million before taxes, or $300 million to $425 million after tax.
The loss of San Onofre, which supplied power to more than 1.4 million homes in Southern California, has put extra pressure on California's electric grid this summer, although the grid's operator has said the state will likely get through the summer without any service disruptions.
SCE has started the long process of decommissioning the plant, in which it owns a 78 percent stake. Sempra Energy's San Diego Gas and Electric (SDG&E) owns 20 percent and the city of Riverside, California, also has a small stake.