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Sempra CEO Sees Trading, Generation Boom

Sempra CEO Sees Trading, Generation Boom

While condemning the wholesale gas and power volatility this summer and profit-hungry generator/marketers, San Diego-based Sempra Energy CEO Steve Baum painted a bright picture last Thursday for his company and utility consumers, noting that San Diego Gas and Electric Co. customers are now paying on average less for their electricity than they did a year ago.

Speaking to financial analysts in reporting Sempra's third quarter earnings, Baum said he thinks generation and energy trading will continue on the upswing in the next few years because throughout the West supply shortages will continue to bump up against accelerating demand.

He said this same supply/demand imbalance was part of the problem this summer, but market flaws were the major culprit resulting in skyrocketing wholesale power prices, doubling and tripling of SDG&E retail utility customer bills and ultimately a "public outcry and political pressure" that resulted in a new state law capping SDG&E retail rates at 6.5 cents/kw retroactive to June 1, 2000 and assuring Sempra's utility that it can eventually collect its under-collections of the wholesale charges.

With two major refunds earlier in the summer and legislatively-mandated retail price caps, San Diego customers are now better off than they were before the whole summer debacle unfolded.

"Ironically, customers in the worst summer of California (energy) pricing have lower overall costs than the did in 1999 when there was no spike in the prices," said Baum, noting that some SDG&E customers in October are getting zero-balance electricity bills.

Even with continuing uncertainties surrounding what the Federal Energy Regulatory Commission will come out with this Wednesday for proposed California market changes and what state regulators ultimately do, Baum said "it is fair to say that generators are going to enjoy a pretty good market --- even with structural changes --- because underlying all of this is essentially a shortage of generating capacity throughout the West against a rising demand much of which is 'stealth' demand coming from information technology changes.

"So over the next several years, the outlook is very good for generation, but I don't think we'll have the kind of price spikes we had this summer. Having said that, our trading operation is growing organically. We have more products, more traders and more offices, so there is inherent growth in that business which we are extremely pleased about."

Despite this, Baum acknowledged that Sempra and the two other major California energy holding companies have depressed stock prices that he lays in the lap of "California's regulatory situation." In response to questions, he said that the company is considering its future options in terms of spinning off the growing nonutility business with an IPO.

"We take a disciplined approach to our planning and look at all the options we can employ to realize shareholder value," Baum said. "And part of our planning and consideration does include corporate structural questions. Other than that, I have nothing further to say on that subject."

Baum clearly tried to differentiate SDG&E's situation from the other two major California utilities when it comes to the under-collections issue, but he agreed with the others regarding the need to move power purchases away from the wholesale spot market into more forward contracting. He said generators and utilities alike will be doing more longer-term deals.

The Sempra CEO also said he thinks California regulators should do for power buying what they have already done on the natural gas buying side, namely, provide incentive ratemaking schemes.

"We think incentive-based mechanisms are far more effective than hindsight reviews that tend to be paralytic in some respects," said Baum, noting that the California Public Utilities Commission earlier rejected a SDG&E proposal for incentive electricity buying mechanisms and that the new state law assuring SDG&E's right to recover its wholesale cost under-collections requires hindsight review by the CPUC.

Richard Nemec, Los Angeles

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