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Business; Financial Desk Sempra Still Feeling the Heat Energy: The parent firm of 2 Southern California utilities is weathering criticism from all sides, with more flare-ups on the horizon. NANCY RIVERA BROOKS 09/17/2000 Los Angeles Times Home Edition Page C-1 Copyright 2000 / The Times Mirror Company Sempra Energy just can't seem to get out of the hot seat. First there was the controversial 1998 merger between the parents of San Diego Gas & Electric and Southern California Gas, which created the Sempra Energy holding company and gave it more customers--21 million--than any other utility company in the nation. Now, although the calendar says autumn is less than a week away, warm weather still has Sempra sweating through a summer of electricity discontent. And winter doesn't look like much fun either for Sempra or its natural-gas customers, with residential gas bills projected to increase 30% to 35% without fueling anything above a strictly regulated rate of return for Sempra's gas utilities. Hanging over the San Diego-based energy company is a new uncertainty generated by the turmoil in California's restructuring electricity industry. Of particular concern to the investment community is a rapidly swelling debt caused by the difference between the high wholesale cost of electricity and the freshly capped retail power rates for the 1.2 million customers of San Diego Gas & Electric. Who will pay that debt--Sempra Energy's shareholders or SDG&E's electricity customers--and how big it will grow may not be known for years. The answer will hinge in part on an investigation of SDG&E's conduct by the California Public Utilities Commission. In the meantime, Sempra Energy, whose two utilities serve nearly 7 million gas and electricity meters representing about 21 million customers from Central California to the Mexican border, continues to post sparkling earnings largely because of its non-utility businesses. Sempra wants to be much more than its utilities, pushing into energy trading and electricity and natural-gas contracting outside of California. Indeed, Sempra has stressed that recent profit surges came not at the expense of its California utility customers. Consumer advocates are not persuaded, painting Sempra as a profit-hungry company that has not done enough to protect ratepayers. Despite all the tumult, Sempra's previously languid stock price has risen a bit this summer, a fact that appears to amaze even Stephen L. Baum, Sempra's new chairman and chief executive. "Maybe it's all the publicity we've been getting," he recently quipped, ruefully. It's a careful-what-you-wish-for proposition for Sempra Energy, which spent hundreds of thousands of dollars in the last two years to boost its corporate profile by, among other things, becoming a sponsor of Staples Center and rolling out a new logo that looks like a small flaming man. Now the corporation and its San Diego utility are puzzling over how to repair an image so scorched that angry residents in SDG&E's 4,200-square-mile territory covering the San Diego area and southern Orange County have taken to verbally and physically abusing company employees. "This has been an agonizing time for all of us," Baum told the Federal Energy Regulatory Commission at a hearing Tuesday that is part of an investigation into this summer's gyrations in the California wholesale electricity market. "SDG&E takes enormous pride in serving this community with safe and reliable electric service at, what were until recently, just and reasonable prices." Although regulators themselves, not to mention consumer advocates, warned of looming shortages in power supplies, no one predicted this summer of sky-high prices during which wholesale electricity prices jumped fivefold and bills doubled for SDG&E customers, the first in the country to pay free-market power prices. That produced a "Ratepayer Rebillion"--so dubbed by Michael Shames, executive director of the San Diego-based Utility Consumers Action Network, a longtime SDG&E sparring partner. The shock waves quickly reached utility regulators and state lawmakers, the architects of electricity deregulation , who are still scrambling for solutions. "SDG&E has become the corporate equivalent of the gang that couldn't shoot straight," Shames said. "They have the distinction of having the market blow up on them in a very visible way . . . and I'm quite convinced they didn't have a clue how customers were going to respond." This high-voltage atmosphere visited the San Diego area because SDG&E did such a good job selling its power plants, as required under deregulation . The 1996 law that launched the overhaul of California's electricity world broke the industry into three separate businesses: companies that make electricity, companies that distribute electricity and companies that sell electricity directly to consumers and businesses. SDG&E and the state's other big investor-owned utilities--Edison International unit Southern California Edison and PG&E Corp.'s Pacific Gas & Electric--lost their secure monopoly status. They were deemed to be electricity distribution companies only--though still monopolies in that segment of the business. The utilities handed over their long-distance transmission systems to a new nonprofit, the California Independent System Operator, and were required to buy their electricity from another new nonprofit, the California Power Exchange. The utilities remained the default provider for customers who didn't pick a new electricity retailer, but they were required to pass along the cost of electricity with no markup. Electricity rates for consumers and small businesses were frozen until the utilities paid off their "stranded assets"--investments in nuclear power and renewable energy contracts that became unprofitable under deregulation --or until March 2002. Rates are still frozen for SCE and PG&E customers, but SDG&E customers lost that protection in July 1999, after the San Diego utility sold its power plants to eager buyers who were willing to pay much more than book value. The rapid payoff surprised even regulators, who had developed no post-freeze rules. The California Public Utilities Commission allowed SDG&E to maintain a 12% ceiling on prices for the summer of 1999 and recoup any excess electricity costs later. Thanks to a cool summer and a smoothly functioning wholesale market, the ceiling was little employed. This summer, however, no ceiling was allowed by the PUC as part of its original post-freeze order, SDG&E executives said. And prices on the California Power Exchange began behaving strangely, spiking higher and higher even in the middle of the night when demand was low. San Diego-area electricity users began seeing "true market prices from a market that's dysfunctional," Baum said. "Of course I wish we had foreseen this market spike. We didn't." Consumer fury has been calmed somewhat by a new law that caps electricity prices for SDG&E residential and small-business customers at 6.5 cents a kilowatt-hour, compared with the 21.5-cent peak this summer. Who will eventually pay the electricity costs above the cap, currently collecting in a balancing account, is left unclear by the legislation. It could mean a big balloon payment for customers, or some of the costs could be shared by SDG&E if a PUC investigation finds that the utility didn't act in the best interests of its customers in buying electricity. A companion bill that would use $150 million in taxpayer funds to defray some of the costs passed the Legislature but has not been signed by Gov. Gray Davis. "I don't think that we did anything wrong," Baum said. "This is a bum rap that has been hung on us, on SDG&E, that we somehow mismanaged the power supply for our customers." PUC officials and consumer advocates have criticized SDG&E for not "hedging" more by buying ahead of time when prices are relatively low, for example. SDG&E said that it asked the commission for such authority but didn't get it. What's more, Baum said, SDG&E found better prices for its customers than did SCE or PG&E, even though they have broader hedging ability. SDG&E will have to borrow money to pay for the electricity, since ratepayers aren't paying the full cost. SDG&E says the under-collection of electricity costs could eventually top $800 million, whereas sponsors of the rate-cap bill put the total closer to $150 million. The future debt and the unsettled state of the deregulation process in California were the reasons given when Moody's Investors Service recently changed the credit outlook for Sempra and SDG&E to "negative." Shareholders can't be happy with Sempra's stock price, which fell from a high of about $28 a share right after the 1998 merger between Enova and Pacific Enterprises, which was loudly opposed by consumer advocates because of the market clout a merged company would wield, to a low of $16.63 in April. Sempra bought back 36.1 million shares at $20 each in February and lowered the stock dividend to $1 a share from $1.56 a share. The stock closed Friday up 14 cents at $20.14 on the New York Stock Exchange. Baum acknowledged that the company has lagged in return to shareholders, blaming that partly on a turning away by investors from utilities and other old-economy companies to Internet and other new-economy stocks. Sempra wants to be much more than its utilities and has made some promising inroads into unregulated areas, such as energy commodity trading, telecommunications, power-plant building and the sale of electricity and natural-gas to consumers and businesses in other states, Mexico, South America and Canada, analysts said. In fact, Sempra Energy Trading, which buys and sells electricity, natural gas, oil and coal, earned more money in the first quarter--$3 million--than in all of 1999. That subsidiary's $40 million in second-quarter earnings was primarily responsible for Sempra's better-than-expected income for the period of $110 million, or 55 cents a diluted share, up 34% from the second quarter of last year. Analyst Paul Fremont of Jefferies & Co., who has a "buy" rating on Sempra, notes that the trading company income will be volatile and that the other subsidiaries remain unknown quantities. "They've really got to have sustained growth in that [unregulated] part of the business because there's not a lot of growth in the utility part" in California, Fremont said. Sempra's earnings growth during this electricity furor has consumer advocates fuming even though company executives emphasized that electricity trading gains came from the East, not California. "Consumers don't need to feel sorry for this company," said Mindy Spatt, spokeswoman for the Utility Reform Network, also known as TURN, a San Francisco-based consumer group. Spatt noted that Sempra's new El Dorado power plant near Las Vegas "did very well" selling electricity in Nevada and California during most of the second quarter. "We don't think consumers should be responsible for the failures of deregulation , and we think that Sempra is in a much better position to pay for some of these costs than the average San Diegan," Spatt said. Sempra has had some problems in reaching beyond its California utility origins. One subsidiary, Energy America, which sells electricity and natural gas door to door in six Eastern states, has run afoul of regulators in two states because of aggressive sales tactics that prompted complaints from consumers. The company has been variously fined and ordered to retrain salespeople. Sempra is on track to reach its goal of reaping one-third of its earnings from its non-California businesses by the end of 2003 and to increase overall earnings by 8% to 10% compounded annually in the next four years, Baum said. That success is whipping up customer ire. "People tend to look at Sempra-SDG&E as a monolith. . . . People are saying, 'They're making a ton of money here. That company is doing very well. We're getting screwed, and we don't like it, and why should we have to pay for it?' " Baum said. "It's a very natural reaction. People don't understand, and they don't care to understand." One of SDG&E's immediate concerns is fixing relations with its customers. Baum said the utility recently polled customers and found that 9% considered it credible, down from 35% ("which is not much to brag about, but it's not bad in the utility business") before the electricity crisis. "I don't know that a corporation can do very well with a credibility rating of 9% on a sustained basis. That is something I worry about," Baum said. SDG&E President Debra L. Reed said most customers don't understand that the investor-owned utilities are now only distribution companies, despite a $90-million education campaign by the Public Utilities Commission. "They see our name on the bill and they think we're making money on the commodity," Reed said. "We have a lot of education to do with our customers. But we realize that it is probably not the best time to educate them in the middle of what they see as a crisis. . . . What we're trying to do is help them through this." (BEGIN TEXT OF INFOBOX / INFOGRAPHIC) Metering Sempra Energy Earnings are up at Sempra Energy, but the San Diego company is spiking on the controversy meter because of soaring bills for customers of its utilities, San Diego Gas & Electric and Southern California Gas. Sempra's name is not well-known, but its utilities serve 21 million people from the Central Valley to the Mexican border. (BEGIN TEXT OF INFOBOX / INFOGRAPHIC) Branching Out Sempra Energy also is pushing into other businesses, primarily outside of California: Sempra Energy Trading: Trades energy commodities Sempra Energy International: Develops and operates energy projects such as power plants and natural gas lines in international markets Sempra Energy Solutions: Markets electricity, natural gas and energy services to large electricity users Sempra Energy Resources: Develops or buys power plants and natural gas facilities in the United States Sempra Communications: Invests in telecommunications Sempra Energy Financial: Invests in affordable housing partnerships Source: Company reports PHOTO: Sempra's San Diego headquarters; ; GRAPHIC: Metering Sempra Energy, Los Angeles Times; Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved. Financial Is Another Energy Crisis Ahead?; Winter Fuel Costs Will Rise; After That, Nothing Is Certain Kenneth Bredemeier 09/17/2000 The Washington Post FINAL Page H01 Copyright 2000, The Washington Post Co. All Rights Reserved This winter the mailman will be delivering markedly higher heating bills throughout much of the country, including the Washington area. Those who use natural gas--the dominant heating fuel in the Washington area and throughout the United States--face a 27 percent increase. Heating oil customers, particularly in the Northeast where 35 percent of homeowners use the fuel to warm their houses, may have to pay more than $2 a gallon--twice the current price--as the days grow shorter and temperatures plunge. Motorists get hit in the wallet every time they pull into a service station: They now typically pay more than $1.60 a gallon for gas, and the days of 90-cent-a-gallon gas--yes, it was just last year--are but a distant memory. At least that's better than in England, France and Belgium where motorists are waiting in long lines to buy $4-a-gallon gas, only to find that some stations have run out. Is this the start of an energy crisis? Many energy analysts and government economists say not, that supplies of various forms of energy will prove sufficient over the next few months, but that the costs will continue to follow the law of supply and demand. When there's not an excess of a fuel available--and numerous types of fuel reserves are quite low--consumers will likely think the product costs too much, at least compared with the prices they've been accustomed to paying. But as winter approaches, several loosely connected events that spanned the globe over the past couple of years have heightened awareness of energy in our lives and reminded us of a lesson learned in the 1970s: Energy prices can be volatile, unpredictable and can reverberate throughout the economy. As Philip Verleger Jr., a partner with the Brattle Group, a Cambridge, Mass., economic consulting firm, concluded, "Consumers will have to spend more on energy. They will have less to spend on other things." On top of the triple-whammy of higher natural gas, heating oil and gasoline prices, consumers are also vulnerable to the vagaries of the electricity market because the industry has been in the midst of deregulation . While California and other states have struggled with power prices during the adjustment to the new competitive environment, electric utilities locally have maintained stability. Potomac Electric Power Co. says its 621,000 residential customers in the District and suburban Maryland--about 15 percent to 20 percent of whom heat their homes with electricity--will find their bills about 5.5 percent lower this winter, assuming they use the same amount of electricity as last year. Across the Potomac River,Dominion Virginia Power's customers in Northern Virginia are likely to see their bills stay about the same. Much of the current energy pricing is out of consumers' hands, analysts say, because the United States has chosen, to a large degree, to remain dependent on oil pumped out of distant lands controlled by OPEC nations. The 11-member Organization of Petroleum Exporting Countries agreed last weekend to increase its oil production by 800,000 barrels a day in hopes of pushing the price down to $28 or so. Even so, oil prices hit a new 10-year high on Friday, closing at $35.92 a barrel amid worries about tensions between Iraq and Kuwait. These are prices not seen since the days of the military buildup before the Persian Gulf War in November 1990. Analysts say that 21 months ago, when oil was below $10 a barrel and natural gas was at $2 per 1,000 cubic feet, drilling companies, many of which produce both fuels, began to curtail their exploration as a result of dwindling revenue. The OPEC nations cut their production at the time to force prices upward--and now they have more than tripled. Private exploration for more natural gas in the United States, chiefly in the Gulf of Mexico and several southern and southwestern states, only grew after drillers concluded that the demand was significant enough and they had sufficient capital to look for more. Peggy Laramie, spokeswoman for the American Gas Association, the natural-gas utilities' trade group, said the low price of gas at the time contributed to a feeling by producers that there was plenty of supply, so they cut back on drilling for about nine months, from August 1998 to April 1999. Fewer than 400 rigs were drilling at the time, although now that figure has topped 800. With little new natural gas exploration, the flow through the supply chain slowed, of course, even as demand increased in the United States, Europe and Asia. The result was predictable: Higher natural-gas prices at the wellhead and, over time, bigger bills for consumers. The $2 wellhead price has now risen to $5. Laramie said the last time wellhead prices were this high was in 1985. As Verleger said, "Demand was growing. We didn't pick up the supply and--whoops, there's a problem." In the Washington area, where perhaps 70 percent of all homeowners heat with natural gas, Washington Gas Light Co. estimates that its residential customers will see the typical monthly bill jump $26, to $112.50, in the November-to-April period, a 27 percent increase over last winter. Laramie said the gas utilities' trade group believes that with the renewed exploration, natural gas prices "will be moderating by spring, but we don't want to over-promise." The price of oil and its derivative products is expected to remain volatile, depending on a host of factors, including demand by consuming nations, the severity of the upcoming winter months after a string of three relatively mild winters, and how much more oil OPEC nations might decide to produce if prices stay high. This mix of factors leaves the analysts, OPEC and government economists using a lot of "ifs" and "buts" and "possibilities," but mentioning few certainties. OPEC President Ali Rodriguez predicted this past week that oil prices could reach $40 a barrel this winter, even if only for a relatively short time. "Crude oil prices are very high and will remain very high throughout the rest of the year," said John Lichtblau, chairman of the Petroleum Industry Research Foundation, which is funded by oil companies. In terms of gasoline, a shortage is unlikely, "but prices will be high," he said. "It can go back to $1.40 a gallon because of more production and lower crude prices. It won't start right now, maybe later this year or early next year." But with heating oil, he said, an unusually cold winter in the Northeast could bring about problems, given low inventories. "I don't see a shortage, but prices will be very high." Verleger was less certain. "We do have a problem," he said. "I think we're going to see high prices this winter for heating oil and natural gas. But I'm not certain about it. I'm not willing to go out and say it's going to be awful." With oil prices at record levels, President Clinton last week came under increasing pressure to tap the nation's Strategic Petroleum Reserve, nearly 570 million barrels of crude oil stashed at four sites in Louisiana and Texas. The reserve is intended for use in cases where the president determines there is a national supply emergency. High prices alone do not qualify. The White House says all options to combat the current low reserves of various fuels and high prices are under consideration. In the past, however, the oil reserve has been tapped to combat mechanical breakdowns in the oil industry's pipeline system or to trade lower-quality oil for a better grade. "If the Strategic Petroleum Reserve is released, that would knock $15 a barrel off the price," Verleger said. "One piece of news like that and this [crude oil price] will drop like a rock." At least for the winter months, electric utilities generally have found a way around the high price of oil and natural gas that some of them must use during peak-demand periods in the summer to generate electricity. They're able to focus their winter generation on cheaper fuels--coal, nuclear and hydroelectric power. "That's cheaper fuel and fuel that's less subject to the volatility of the world oil and world natural-gas markets," said Chuck Linderman, director of energy generation and supply policy for the Edison trade group. "Generally we're in good shape on supply." Contact: http://www.washingtonpost.com Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved.
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