San Diego Business Journal

SDG & E; And State Weigh Options

BY LEE ZION
Staff Writer

San Diego Gas & Electric Co. and state regulators are both reviewing their options as they prepare to go to court over SDG & E;'s potentially illegal profits.

The California Public Utilities Commission announced Jan. 25 that it rejected a proposed settlement with SDG & E; on splitting the profits from power sales. The case will now go before the U.S. Court of Appeals, Fourth District, said Sheri Inouye, spokeswoman for the CPUC.

No court date has been set. The CPUC wrote to the court Jan. 25 to schedule a hearing, and plans to submit a brief, she said.

Inouye declined to speculate on how the appeal would turn out. But Ed Van Herik, a spokesman for SDG & E;, said the utility has a very strong case.

Under the proposal rejected Jan. 25, SDG & E; would have refunded $219 million in profits to ratepayers. That money would have gone toward a "balancing account" debt ratepayers owe the utility.

However, CPUC officials estimate SDG & E; made at least $363 million from the disputed contracts. If the appeal goes forward and the CPUC prevails, then the balancing account would be reduced by an additional $144 million, Inouye said.

That debt currently stands at a $392 million , or about $215 for each household, $690 for each small business, and $6,000 for each large business, Van Herik said.

At the center of the dispute are the profits from SDG & E;'s power sales. Last year, the CPUC ruled that profits from the disputed contracts belong to ratepayers, not shareholders, Inouye said.

Compromise Offered

SDG & E; appealed the decision, but later said it would drop the matter if the CPUC consented to a deal brokered by Gov. Gray Davis. Under the deal, SDG & E; would pay $219 million toward the balancing account if the CPUC allowed the utility to keep the remaining profits, she said.

However, the difference in the amount SDG & E; was offering and the value of the contracts was so great that "it would not be in the public interest" to settle, Inouye said.

Steve Linsey, supervisor with the CPUC's Office of Ratepayer Advocates, supported the CPUC's decision not to settle, saying SDG & E;'s offer was "too cheap."

However, Linsey added that SDG & E;'s profits from the contracts may be illegal.

"San Diego (Gas & Electric) can lawfully make profits under certain conditions, but what's at issue here is whether those conditions have been met. So it's our contention, and apparently the commission's, as well, that the profits which San Diego is directing for their shareholders are not lawfully their profits," he said.

Previous CPUC Ruling

Van Herik disagreed. The CPUC had previously ruled that the profits, from contracts SDG & E; signed with power providers before the start of the energy crisis, belonged to shareholders, he said.

"Initially, when we bought those contracts and talked to (the CPUC) there was some question about whether that was a good deal or not. So what they said was we could not use ratepayer money to purchase those contracts, and if those contracts proved to be non-profitable, it would have to be shareholders who would have to bear the risks and the costs," Van Herik said.

But as energy costs soared in 2000, the contracts proved to be very profitable. At this point the CPUC suddenly contradicted itself and declared the profits to be ratepayer assets, he said.

"We believe if our shareholders were at risk if those contracts proved unprofitable in the beginning, they could also be entitled to the benefits when the contracts delivered," Van Herik said.

Van Herik added that if the CPUC had accepted the settlement, this would have been "the capstone" in eliminating the balancing account debt , the result of San Diegans paying capped rates for power as wholesale prices climbed during the energy crisis.

Balancing Account At $750 Million

By February 2000, the balancing account had climbed to $750 million. However, under a series of other deals hammered out with the governor, that debt has now fallen to $392 million, he said.

Accepting the $219 million settlement would have reduced that figure still further, Van Herik said.

"What disappointing news for SDG & E; customers and the company. We believe the CPUC was wrong in its decision and it's a decision that will ultimately hurt our customers," he said.

Jodi Beebe, a spokeswoman for the Utility Consumers' Action Network, supported the CPUC decision not to settle.

SDG & E; had, in effect, played a "shell game" in shifting its profits from one subsidiary to another, Beebe said.

"They (CPUC) are ruling that some of that money, if not all of it, should go back to ratepayers at some point," she said. "It's a good decision. Without really knowing the full scope of the contracts, it could be that maybe consumers were due even more (than $219 million)."