San Diego Business Journal Critics Say Utility Will Profit at Ratepayers' Expense

Already controversial agreements between the state and San Diego Gas & Electric Co. to buy the utility's transmission network and reduce future ratepayer payments are becoming even more controversial with revelations SDG & E; stands to make additional profits from the deals.

For the past month, both SDG & E; and the office of Gov. Gray Davis have touted an agreement they say will save local ratepayers from having to shell out $747 million in future surcharges.

"The agreement appears to be a regulatory shell game in which ratepayer monies are shifted from one account to another, payments are deferred and where (legal) decisions adverse to SDG & E; are either circumvented or eased. There would appear to be little benefit from consumers from the deal," said Michael Shames, executive director of the Utility Consumers' Action Network.

SDG & E; could make more money under this deal than if there were no agreement at all, Shames said.

At issue is a June 18 memorandum of understanding to eliminate a "balancing account" San Diego ratepayers would have faced in January 2003.

The account stems from the difference between what SDG & E; paid for electricity, and what it was allowed to charge customers under a state-imposed retail price cap.

The state-SDG & E; deal eliminates the need for SDG & E; customers to pay off the balancing account, which could have resulted in a balloon payment as high as $400 each for residential customers, $1,400 for small businesses and $12,000 for large commercial customers, said Ed Van Herik, spokesman for SDG & E.;

"(This is) a significant step toward reducing the impact of the state's energy crisis on San Diego Gas & Electric customers," he said.

However, Shames said the agreement is heavily weighted to benefit SDG & E;, not ratepayers.

He cited as an example the issue of disputed power contracts. SDG & E; will reduce the balancing account by $219 million by applying profits from these contracts to the balancing account.

Originally, SDG & E; said that money was to have gone to its shareholders. But prior to the June 18 agreement, the California Public Utilities Commission ruled the profits of these contracts had to be returned to SDG & E; customers, not its shareholders, Shames said.

"The bottom line is these contracts were not shareholder contracts. The CPUC ruled against SDG & E; twice on this assertion," he said. "They lost but refused to admit it, so they cut a deal with the governor to preempt the CPUC. But that doesn't make them right."

$120 Million In Profits

Recent filings with the Securities and Exchange Commission show SDG & E; gets to keep an additional $120 million in profits from the contracts. The new money comes from the sale of electricity under those contracts to the state's Department of Water Resources between now and the end of the year, Shames said.

"We're essentially paying $120 million for six months of power , but we don't know how much, because that hasn't been made public. So I don't know if it's reasonable, but on the face of it, it seems not," he said.

Shames also noted the deal will end the "reasonableness review," under which the CPUC was examining whether high costs SDG & E; faced in purchasing power were prudently acquired. Only prudently acquired costs would apply toward the balancing account, he said.

In return for discontinuing the reasonableness review, the utility would reduce the balancing account by $100 million. But that greatly underestimates the actual amount, Shames said.

SDG & E; had failed to enter into forward contracts during the height of the energy crisis, which pushed the cost of electricity up by a much greater amount for San Diego ratepayers, Shames said. Since these were not prudent power purchases, San Diegans are entitled to a much larger refund, he argued.

Shames cited figures from the state's Office of Ratepayer Advocates, comparing SDG & E;'s rates with figures from Pacific Gas & Electric and Southern California Edison, which relied on long-term contracts. The figures showed local ratepayers paid about $98 million in overcharges last summer alone.

"SDG & E;'s failure to purchase any future contracts for the period of June 2000 through February 2001 caused SDG & E; customers to pay more than they otherwise would have," Shames said. "(The figure of) $100 million is likely well below what the CPUC would have likely penalized SDG & E; for its failure to contract in the futures market , as was done by PG & E; and SCE."

Transmission Network Deal

In yet another part of the deal, SDG & E; will sell its transmission network to the state for $1 billion. At the same time, the state would also pay off a $180 million industrial bond on SDG & E;'s behalf.

"The $1.18 billion price is roughly 2 & #733; times the book value of the transmission system, which makes it even higher than the deal for Edison's system," Shames said. "To add insult to injury, the settlement expressly states that the full gain from the sale of this asset would inure fully to Sempra shareholders."

That means that ratepayers would get no financial benefit from SDG & E;'s windfall from the sale of this asset. But shareholders would, he said.

Regina Birdsell, director of the Office of Ratepayer Advocates, agreed.

"The state's purchase of SDG & E;'s transmission assets gives ORA the most heartburn," she said in a statement released July 17. "The price of 2.3 times net book value, coupled with management and billing fees as set forth in the agreement, could result in the evaporation of most, if not all, of the benefit that ratepayers would realize from tax-free financing."

That's not the only problem Birdsell has with the purchase. If the state decided to sell the transmission asset at a later date, it would take a loss of $565 million, she said.

Still, Birdsell expressed some degree of support for the deal, even though the dollar figures need more scrutiny.

"The MOU covers several areas of considerable interest to both SDG & E;'s ratepayers and California taxpayers at large," she said. "Some of the provisions in the MOU have some merit and need to be explored further."