While Congress continues its unending debate over repeal of thePublic Utility Holding Company Act (PUHCA), the Securities andExchange Commission (SEC) just about did the deed last week with anorder allowing a subsidiary of the California-based Sempra Energyto have controlling interest in a North Carolina partnership thatwill construct, own and operate a gas utility distribution systemin North Carolina. (Rel. 35-26971)

The order in the case of Sempra Energy, an exempt holdingcompany under Section 3(a)(1) of PUHCA, hangs on a newinterpretation of the word “integrated.” Section 11 of the statutegenerally confines the utility properties of a registered holdingcompany under the act to a “single integrated public-utilitysystem,” either gas or electric. The act also requires that aproposed utility acquisition economically and efficiently serve theintegrated system. In the past an integrated system has meant acontiguous system. That definition was stretched slightly in a 1996decision allowing MCN Corp. to acquire interests in a gas companyin southern Missouri, since the two were in the same region.

The SEC order issued Feb. 1 authorizing Sempra, parent ofSouthern California Gas and San Diego Gas &amp Electric, to acquire90.1% of the outstanding shares of Frontier Energy, LLC, which willbuild the North Carolina utility, extended integration clear acrossthe country.

The SEC noted the many changes in the deregulating natural gasmarket and a 1991 court decision that says “[a]n agency is notrequired to ‘”establish rules of conduct to last forever.”‘ Itaccepted the company’s argument that its Sempra Trading subsidiary,which acquires and trades gas in many locations in the U.S. andwhich has leased space on Transco to deliver to the newdistribution system, will provide economies for the North Carolinaconsumers. Also, another subsidiary, Sempra Ventures, will overseeconstruction and provide administrative services for the new systemwhich will save $1.8 million in start-up costs and $300,000annually.

Regarding the 1935 act’s requirement that the “integrated”system get its gas from a common source of supply, the SEC notedthe company’s argument that Sempra Trading buys a significantamount of gas in the San Juan and Permian Basins which will beshipped to all three distribution companies. “We believe it isappropriate to treat gas systems that purchase gas from a commonsource of supply as being in a ‘single area or region’ when doingso does not undercut the policies of the Act.”

While the Congress may have fallen down on the job, “the UnitedStates Supreme Court has stated that ‘agencies are supposed, withinthe limits of the law and fair and prudent administration, to adapttheir rules and practices to the Nation’s needs in a volatile,changing economy.'”

PUHCA was formulated to avoid ownership of widely dispersedutility properties which do not lend themselves to efficientoperation,” the SEC order said. “We have determined that’substantial economies may be effectuated’ by the operation of thecombined properties as a ‘single coordinated system’.” The SECcited the strong public interest in the project, the backing of theNorth Carolina Commission and the fact the new system will have itsown local management.

“Frontier is expected to realize significant benefits as part ofthe Sempra system, particularly in the areas of gas supply,increased purchasing power, and the ability to utilize theexpertise and resources available from Sempra’s public-utility andother subsidiaries.”

Ellen Beswick

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