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		 Subject: Utilities, Electric: Deregulation: Consumer Outrage in California


 
Consumer Outrage in California 
Al Senia 
? 
09/30/2000 
Utility Business 
Copyright 2000 by Intertec Publishing Corporation, a PRIMEDIA Company. All 
rights reserved. 

Sempra sits on the hot seat as California rides out the effects of its 
efforts at deregulation.

Wild fires have swept the western United States this year, but they are 
nothing like the fire storm over energy deregulation that has engulfed San 
Diego's Sempra Energy. By a quirk of business fate, the 1.2 million customers 
of Sempra's San Diego Gas&Electric division in July became the first to 
experience fully deregulated electricity rates in California. Electricity 
bills instantly doubled and tripled. The expectation was that deregulation 
would cause prices to drop, not spike. The resultant outcry threatens to 
derail the state's fledgling deregulation program and shape the future of 
deregulation nationally. It also situates Sempra squarely on the hot seat at 
a time when its profits are on the rise. 

Does Sempra deserve to be in this position? Like many other deregulated 
utilities around the nation, Sempra is in the midst of transforming itself 
from a regulated utility business (SDG&E) to a broad-based energy company 
that offers a variety of value-added services. Under the direction of Sempra 
President and Chief Executive Officer Stephen L. Baum, that process has been 
especially robust. The company has launched a number of domestic and 
international strategic initiatives designed to accelerate earnings growth by 
an average of 8 percent to 10 percent annually and generate at least 
one-third of the earnings from unregulated businesses by 2003.

Baum, who became chairman this month, intends to change the focus of Sempra's 
overall business to cope with deregulation. He wants to further diversify the 
company, create a strong retail energy business, pursue selective 
international investments and capitalize on emerging technologies. "I want 
the company...to have a large and diverse customer base nationwide and 
worldwide in which we're moving from an asset-intensive business to a 
customer- and products- and risk-management-intensive business," says Baum.

So far, the strategy seems to be working - maybe a little too well. Profits 
soared 34 percent in the second quarter from $82 million last year to $110 
million this year. One big contributor was the Sempra Energy trading 
subsidiary, which deals in electricity, natural gas and oil. Its profit 
soared in the second quarter this year to $40 million from $3 million in 
1999. So far, so good, but the rosy revenues and profit propelled Sempra's 
San Diego Gas&Electric to become the first utility in the state to pay off 
all its bonds floated to pay for "stranded costs." These are expenses (such 
as past massive nuclear power plant investments) incurred in the previously 
regulated market that may not be fully recoverable in a competitive market. 
Those bond payoffs triggered the full force of the free market, since the 
artificial price caps on electricity prices, which were put into place as a 
transitional arrangement by the state legislature to make deregulation 
politically palatable, automatically expired with the bonds. Since 
California's deregulation law required the state's utilities to sell off 
their generation businesses and stick to delivering energy, SDGOnow buys its 
power in an open market through the California Power Exchange. That 
arrangement tends to favor large businesses that can more easily shop for 
their electricity supplies. With the bonds paid off, the Sempra division now 
passes the full cost of that power to its customers (California's other 
utilities are not expected to reach this point until 2002). And with the 
demand for power rising in the state while supplies fall short, the cost for 
Sempra customers is up. Way up. SDGOis paying as much as 10 times the regular 
cost for electricity every time a summer heat wave hits.

Through its success, Sempra pushed the door open into a pure, deregulated 
market nearly two years before anyone in California expected it. What 
industry executives, politicians, consumer advocates and ratepayers quickly 
discovered is that energy demand is rising, there aren't enough power plants 
to meet demand and prices are skyrocketing. Even with the higher prices, 
there may not be enough electricity to go around. So during hot spells, 
rolling one-hour energy blackouts throughout the state became a possibility 
for the first time since World War II. Sempra claims it's merely following 
the state's deregulation orders, but consumer advocates are outraged that the 
parent company (through its trading subsidiary) benefits from energy price 
volatility. They want some of the company profits to go back to SDGOto lower 
customer utility bills.

That isn't Sempra's (and the other state utility holding companies') only 
problem. Bill-burning protests are being organized in downtown San Diego. San 
Diego Mayor Susan Goldberg wants the state attorney general to probe whether 
there has been "collusion, price fixing or any other inappropriate behavior 
in the market price of electricity." The state legislature is being asked to 
consider reversing or postponing the deregulation effort. Some legislators 
have launched an effort to roll back utility rates. The architect of the 
deregulation law is under fire for alleged close ties to the utility 
companies. State Public Utility Commission member Carl Wood calls 
deregulation a mistake and accuses unnamed power players of profiteering at 
the consumer's expense.

Even California Gov. Gray Davis has gotten critical. "Californians are 
willing to pay their fair share of the cost for a reliable supply of 
electricity, but I believe the current situation is unjust and totally 
unacceptable," Davis says. He successfully pushed the Federal Energy 
Regulatory Commission to investigate wholesale energy prices in the western 
United States, believing it would lead to short-term federal price controls. 
The governor also proposed a plan in mid-August to the Public Utility 
Commission that would average consumers' bills over a 12-month period to make 
monthly statements predictable. He says deregulation can work, but not until 
supply and demand come into balance and "until electricity generators act 
responsibly." It's no wonder Davis wants the feds involved - the state 
doesn't have much power over power anymore now that deregulation has become 
state law.

Despite Davis' hopes, a supply balance isn't likely to return to California 
anytime soon. The state's last major power plant, a nuclear facility at 
Diablo Canyon, went online 15 years ago. Since then, the state's population 
has grown by 8 million, and 3.5 million new jobs have been created. Four new 
plants are under construction, but that isn't enough to meet escalating 
demand, and the first plant won't come online for a year. Meanwhile, market 
uncertainty - and increasing calls for reregulation - aren't doing much to 
attract new power plant investment. Reliant Energy Inc., for example, has 
backed off a plan to build a plant in Barstow, Calif. Calpine Corp. wants to 
build a power plant in San Jose, the center of Silicon Valley, but the effort 
is strongly opposed by local businesses and residents. A 700-megawatt plant 
proposed for a desert area is mired down in a regulatory morass. However, 
Duke Energy North America, which purchased several state power plants in 
1998, expects to invest more than $1 billion to build and expand power plants 
in California over the next four years.

Sempra's Plans Sempra has its own view of the escalating imbroglio. Baum 
wants the Federal Energy Regulatory Commission to determine if the power 
market is being manipulated and then step in if necessary and set wholesale 
energy prices. He also believes utilities, with Public Utility Commission 
approval, should install time-of-use meters throughout the state so customers 
could control their own power load. Baum also suggests that the Public 
Utility Commission allow SDGOto purchase futures contracts for its customers. 
Baum wants the authority to aggregate SDGOcustomers (if they choose) into one 
"market" to get a better price. Meanwhile, he's hoping the controversy won't 
derail Sempra's business plans.

These plans include six strategic directions: expanding the retail energy 
services business; exporting its traditional utility experience overseas; 
boosting the energy trading business; selectively developing supporting 
generation; capitalizing on emerging technologies like the Internet and the 
applications services business; and focusing the core utility company on 
energy delivery.

Baum intends to spend $4 billion in capital investment during the next four 
years with delivery services getting half that amount and the international 
and retail operations equally splitting another $1.5 billion. Baum estimates 
Sempra's energy trading business will bring in $40 million to $55 million in 
profit by 2003. It's already well ahead of that pace for this year, but the 
business is highly volatile. International operations will generate another 
$40 million to $60 million in annual profit in four years. Sempra's retail 
energy business, operated as Sempra Energy Solutions, will generate between 
$30 million and $70 million, he estimates. "Ultimately, I think the big 
opportunity in the utility business we are in lies with this industrial, 
commercial residential mass market and the products and services 
business,"Baum says.

International operations look to be another key strategic area for Sempra, in 
part due to the company's location near the Mexico border. It has made 
significant natural gas investments in northern Mexico. The division 
develops, owns and operates energy projects and provides natural gas and 
electricity energy services for 2.5 million customers in Argentina, Canada, 
Chile, Mexico, Peru and Uruguay. Baum says it is pursuing new opportunities 
in Latin America. "International is a much more traditional utility business 
(than other new businesses Sempra is getting into)," Baum says. "We look to 
(invest in) areas with a high rate of growth, 6 percent or more, in stable 
economies. We think those are good investments. We have more than $1 billion 
invested internationally, usually in partnerships."

Some analysts view the international business as inherently risky given the 
possibility of political and economic change. Baum disagrees. "We think on a 
risk-adjusted basis this is a good, solid, growing business," he says. "All 
our (international) businesses are making money. We are not in a loss 
condition in any of our international operations. They make their expected 
returns and their cash flow. It's the kind of business we have done for 
years."

Baum is optimistic that the new Sempra can deliver strong performance as it 
refocuses on a deregulated world.  Analysts seem pleased. "They have a 
well-developed, well thought-out strategy," says David Maccarone, vice 
president of New York-based Goldman Sachs&Co. "The latest financial 
performance is impressive." Maccarone adds that the trading business is 
benefiting from "highly favorable market conditions that are not 
sustainable." Overall, the international business is doing well. The only 
dark cloud? The aftermath of California deregulation. "There's an uncertain 
regulatory climate in California," he says. "It's never been regarded as a 
favorable state to do business in from a utility perspective. Still, I'm 
optimistic there won't be a substantial negative impact."

Meanwhile, the controversy is bringing back bad memories. In the 1970s, 
before Sempra existed, SDGOwas notorious for high rates. The utility was so 
unpopular that officials painted over the company logo on its truck fleet. 
Baum is trying to stop that from happening again. Maccarone believes Sempra 
is a victim of its own success. "They recovered their liability faster than 
other California utilities," he says. "Now they are getting branded for it." 

Folder Name: Utilities, Electric: Deregulation 
Relevance Score on Scale of 100: 98

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