The U.S. Environmental Protection Agency has found major flaws with a plan to build a hydroelectric power plant in the Inland region that would flood one of two canyons in the Cleveland National Forest.

Long opposed by environmental activists, the $1.3 billion plan for a peaker plant drew concerns from federal environmental officials for, among other things, possible flooding of Morrell Canyon above Lake Elsinore to build the needed reservoir. According to the report, the canyon hosts a network of perennial springs called Lion Spring, a rare habitat known as sloping wetlands.

"We consider Lion Spring . . . to be an important and irreplaceable aquatic resource, the loss of which is likely to contribute to significant degradation of waters of the United States," according to the EPA report obtained Tuesday.

"Slope wetlands are important in maintaining overall landscape biodiversity because they serve as islands of perennial moisture in an otherwise dry landscape," the report said.

Chris Wysocki, a spokesman for Vista-based Nevada Hydro Co., which is proposing the project with Elsinore Valley Municipal Water District, said the company is working to address concerns by the federal agency. He said the adjacent Decker Canyon is also an option to build the project's reservoir.

"There was nothing surprising in it," he said about the EPA letter. "We've always known that Morrell Canyon had more environmental sensitivity than Decker Canyon."

The project would pump water from Lake Elsinore uphill at night to a reservoir built in either canyon, so the water could be released back downhill to power turbines that generate electricity during peak daylight demand.

Electricity would be transmitted along 30 miles of new power lines that would connect with other lines in the Temescal Valley and near Camp Pendleton, generating enough power for 350,000 homes, Wysocki said.

Gene Frick, with the Sierra Club, said he was glad the EPA voiced some of the same concerns he and other environmentalists have had for years. The groups sought a wilderness designation from the Cleveland National Forest for Morrell Canyon that would have banned such a project. But federal lawmakers from the area, including Rep. Darrell Issa, R-Vista, successfully lobbied against that, saying the need for clean, reliable energy was more important.

"It lends a lot of clout to what is going on," Frick, of Riverside, said of the EPA review.

The EPA typically reviews draft reports of sizeable projects involving a federal agency, which in this case is the Federal Energy Regulatory Commission, said Jeanne Geselbracht, an EPA environmental scientist who reviewed the hydro project. Project proponents must address the EPA's concerns in their final report.

In its review, the EPA also said the report failed to address how dust generated from the four-year construction project would be controlled in a region already hard-hit by air pollution.

The EPA also was concerned about using "low-quality water" from Lake Elsinore to fill the reservoir, saying the long-term effectiveness of a liner remains uncertain and that leaks could affect creeks and other nearby water sources.

Greg Morrison, a spokesman for Elsinore Valley Municipal Water District, said the liner will incorporate the latest technology.

"You're not going to see any seepage in the canyon," he said.