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The $350 million settlement of class action litigation Wednesday by Sempra Energy is a major step toward fulfilling a promise made last fall by CEO Stephen Baum to put an end to litigation against the company (see Daily GPI, Jan. 5). However, Sempra still faces four outstanding legal actions by the California Attorney General's Office -- three in the courts and one at FERC.
The AG's spokesperson said Thursday the state law enforcement office plans to fully pursue all of the cases, alleging that California consumers are still due restitution for being "ripped off" during the 2000-2001 energy crisis by Sempra and some of its companies. Industry observers and regulators don't think these outstanding lawsuits lessen the significant financial value of the settlement.
"If this settlement is ultimately accepted by the relevant [state] courts, we believe that the company has indeed succeeded in affordably resolving the vast majority of its California crisis legacy litigation risk," said Christine Tezak in a Stanford Washington Research Group electricity policy bulletin issued Thursday.
Tezak has said that the California AG's pending lawsuits "are very weak on the merits," and they have a "high probability of failure."
Baum said the two most recent AG legal actions will be dismissed by the courts.
California's AG filed in a state Superior Court last November, alleging that Sempra Energy's trading unit violated state laws in its practices in the wholesale electricity markets in 2000-2001, and in a second, more recently filed case (Nov. 21), the state AG alleged that Sempra's utilities misled the CPUC on their ability to sell gas to power plants in North Baja in Mexico and meet their domestic needs during a time of high demand among their largest customers in San Diego.
The AG also is continuing to seek refunds from Sempra as part of the overall energy crisis refund case at the Federal Energy Regulatory Commission and is litigating issues surrounding the long-term power supply contract between a Sempra merchant power unit and the California Department of Water Resources (DWR).
Calling Wednesday's announced settlement a "down payment," AG spokesperson Tom Dresslar said the state would continue "to pursue [the pending] litigation to get back the rest of the money that Sempra ripped off," according to a report in the Los Angeles Times.
Nevertheless, Sempra and industry observers are attaching substantial value to both the company and California energy consumers from the $350 million settlement agreement, which resolves claims in several class action lawsuits tied to the energy crisis, including the Continental Forge, Nevada and some natural gas price reporting cases. The agreement is subject to the approvals of the San Diego Superior Court, where a jury trial is now ongoing, the Nevada District Court for Clark County, City of Los Angeles and the City of Long Beach, CA.
Sempra expects the approval process to take up to six months, according to Baum, who retires the end of this month. He stressed that Sempra and the utilities "vigorously deny any wrongdoing."
The comprehensive agreement includes payments by Sempra over the next eight years through 2013, with incentives for early payments providing a 7% discount. The deal will have no impact on Sempra's future earning from 2006 onward, said Baum, adding that Sempra was increasing its earnings guidance for all of 2005 to $3.60/share from a previous range of $3.40-$3.60/share. After-tax cost of the settlement is approximately $350 million, including a $100 million after-tax charge Sempra recorded in the fourth quarter of 2005.
A Sempra attorney who helped negotiate the settlement placed its total value at $1.9 billion, attributing about $1.55 billion of noncash benefits, including some $860 million in savings that would come from the proposed merging of certain Sempra utility natural gas operations, $300 million from reducing the charges for the long-term DWR contract, and another $270 million in savings to the state from Sempra voluntarily changing its flexible delivery points used in the contract.
"This agreement will put the major pieces of energy-crisis litigation behind us," Baum said. "Above and beyond the costs to our company, this settlement will provide substantial benefits to millions of energy consumers in California and Nevada." In response to a question during a conference call with financial analysts, Baum said an adverse jury decision on appeal of the ongoing class action jury trial in San Diego would have been "fatal to the company, and we're not in the business of betting the company."
Although the CPUC was not part of the settlement, CPUC President Michael Peevey lauded the deal as a significant step in the right direction. "This settlement will provide significant economic benefits to electric and natural gas consumers in California, both in lower electricity and gas costs and in the structural changes in the natural gas operations of [Southern California Gas and San Diego Gas & Electric], which the CPUC will carefully review," said Peevey. "I hope all the parties not part of this settlement, including the state AG and the DWR, can resolve their outstanding issues with Sempra quickly."
The settlement requires that Sempra's companies voluntarily agree to structural and reporting changes for utility natural gas transmission, storage and procurement activities. Sempra said that assuming CPUC approval, the changes "will increase regulatory oversight of natural gas operations, enhance transparency of utility operations to market participants and provide large customers more choices as to how they can gain access to, and operate on, the utility systems."
In addition, Sempra voluntarily committed to sell to its California utility subsidiaries up to 500 MMcf/d of regasified LNG from its North Baja LNG terminal at a 2-cent discount to the California Border index price. The liquefied natural gas import terminal is currently under construction south of the border.
Sempra also will voluntarily modify the terms of its long-term power supply contract with the state DWR, even though some aspects of the deal continue to be in dispute between both sides.
Effective Jan. 1, 2006, and continuing for the remaining six years of the contract -- what Sempra calls a $300 million savings for the state -- Sempra agreed to lower by $4.15/MWh the price of the power it sells to the DWR (off-peak now is $26/MWh and $31/MWh for on-peak).
"The impact will be recorded in 2005, and future Sempra Energy financial results will not be impacted by the discount," said Baum, clarifying that Sempra Generation Co., which has the DWR contract, has the option to pre-pay these savings, realizing a 7% discount.
In what has been an ongoing point of contention between the company and DWR, Baum said that Sempra Generation will unilaterally "limit the exercise of its delivery-point flexibility" for the supplies going to DWR. "This unilateral concession may ultimately save consumers hundreds of millions of dollars in avoided costs while not materially impacting the financial results of Sempra Generation," he said.
Finally, in making the cash payment part of the settlement, Sempra agreed to pay $377 million to the claimants, of which $211 million will be payable to eight annual installments and $166 million will be payable in two annual installments. Those claimants in the class action include representatives of retail natural gas and electric utility customers, the cities of Los Angeles and Long Beach, CA, and the Nevada Attorney General.
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