California Agrees to Buy SDG&E's Wires

Conceding that federal regulators belatedly have taken steps to offer wholesale power price relief, California Gov. Gray Davis last week announced an agreement with Sempra Energy's San Diego Gas and Electric Co. that wipes out a $740 million debt the utility was facing for uncovered wholesale electricity costs. The state will buy SDG&E's transmission lines for just under $1 billion, or 2.3 times book value, and commit to provide all of its native generation to the state on a cost-based, below-market basis.

Paying off the uncovered wholesale costs involves a complicated series of regulatory and accounting changes, and would not require legislative action, unlike the earlier memorandum of understanding (MOU) with Southern California Edison Co. California now has a second MOU with SDG&E, without as much dependence on the state legislative action.

Sempra CEO Steve Baum called the agreement a "winning situation" for everyone in California. "Sempra all along wanted to support the governor's initiative, restabilize the utility and wipe out the uncertainty of the uncollected wholesale costs."

Davis last week also appeared to favor the Federal Energy Regulatory Commission's action to extend price mitigation to California and the rest of the West, noting the federal regulators had "finally take a step in the right direction," after failing to act for the past nine months. He added that it did nothing to get refunds of $7 billion in excessive past wholesale charges, and may have some "loopholes that need to be closed real quick."

Baum reiterated his past support for the state owning the private sector utilities' transmission assets, because it will allow it to get control of the wholesale power market in the state and add some cost and operating efficiency to the transmission grid.

While having similarities to the Edison MOU, SDG&E deal is different in one key point --- it came into the negotiations with an asset, special state legislation passed last summer to allow the utility to cover all of its wholesale power costs, subject to California Public Utilities Commission review, and not carrying billions of dollars of past-due debt as Edison has.

Following four months of negotiations, the governor's team developed a deal that does the following:

  • Reduces SDG&E's unpaid wholesale bills to zero, independent of the transmission purchase, using several different proceedings before the California Public Utilities Commission (CPUC), one that would include a $100 million write-off by SDG&E and another in which SDG&E will give back $219 million in wholesale bulk power profits that would be credited to retail utility ratepayers.
  • SDG&E agrees to sell all of its power at cost-based rates to the state for 10 years.
  • Sells its transmission assets and any pending upgrades in the system to the state.
  • Dedicates almost 1,600 acres of conservation land along the Colorado River to the state.
  • Continues to work to recoup past over-charges through various regulatory and civil court actions.
  • Sempra and SDG&E committed to $3 billion in investment in SDG&E's utility infrastructure.

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