While condemning the wholesale gas and power volatility thissummer and profit-hungry generator/marketers, San Diego-basedSempra Energy CEO Steve Baum painted a bright picture last Thursdayfor his company and utility consumers, noting that San Diego Gasand Electric Co. customers are now paying on average less for theirelectricity than they did a year ago.

Speaking to financial analysts in reporting Sempra’s thirdquarter earnings, Baum said he thinks generation and energy tradingwill continue on the upswing in the next few years becausethroughout the West supply shortages will continue to bump upagainst accelerating demand.

He said this same supply/demand imbalance was part of theproblem this summer, but market flaws were the major culpritresulting in skyrocketing wholesale power prices, doubling andtripling of SDG&E retail utility customer bills and ultimatelya “public outcry and political pressure” that resulted in a newstate law capping SDG&E retail rates at 6.5 cents/kwretroactive to June 1, 2000 and assuring Sempra’s utility that itcan eventually collect its under-collections of the wholesalecharges.

With two major refunds earlier in the summer andlegislatively-mandated retail price caps, San Diego customers arenow better off than they were before the whole summer debacleunfolded.

“Ironically, customers in the worst summer of California(energy) pricing have lower overall costs than the did in 1999 whenthere was no spike in the prices,” said Baum, noting that someSDG&E customers in October are getting zero-balance electricitybills.

Even with continuing uncertainties surrounding what the FederalEnergy Regulatory Commission will come out with this Wednesday forproposed California market changes and what state regulatorsultimately do, Baum said “it is fair to say that generators aregoing to enjoy a pretty good market — even with structuralchanges — because underlying all of this is essentially ashortage of generating capacity throughout the West against arising demand much of which is ‘stealth’ demand coming frominformation technology changes.

“So over the next several years, the outlook is very good forgeneration, but I don’t think we’ll have the kind of price spikeswe had this summer. Having said that, our trading operation isgrowing organically. We have more products, more traders and moreoffices, so there is inherent growth in that business which we areextremely pleased about.”

Despite this, Baum acknowledged that Sempra and the two othermajor California energy holding companies have depressed stockprices that he lays in the lap of “California’s regulatorysituation.” In response to questions, he said that the company isconsidering its future options in terms of spinning off the growingnonutility business with an IPO.

“We take a disciplined approach to our planning and look at allthe options we can employ to realize shareholder value,” Baum said.”And part of our planning and consideration does include corporatestructural questions. Other than that, I have nothing further tosay on that subject.”

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

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

“We think incentive-based mechanisms are far more effective thanhindsight reviews that tend to be paralytic in some respects,” saidBaum, noting that the California Public Utilities Commissionearlier rejected a SDG&E proposal for incentive electricitybuying mechanisms and that the new state law assuring SDG&E’sright to recover its wholesale cost under-collections requireshindsight review by the CPUC.

Richard Nemec, Los Angeles

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