Sempra CEO: Expansions and Political Reality Needed in CA

While voicing continuing support for the state's electricity recovery plan and the specific deal to sell San Diego's utility transmission assets, Sempra Energy's CEO last Thursday advocated more political reality and attention to expanding U.S. natural gas infrastructure in outlining his current views on California's electricity crisis to business leaders attending a joint forecast of the economic impact from the power woes by UCLA's Anderson School of Business and Cambridge Energy Research Associates (CERA).

The UCLA-CERA theoretical economic analyses and pure market options "fail to meet the political reality" of California's predicament, said Baum, while underscoring the need for the private energy sector to build 38,000 miles of new transmission pipelines and another 263,000 miles of new distribution pipelines nationally to meet the rush to build new gas-fired electric generation plants. He noted that all of the 50 new plants on the books in the Southwest are natural gas-fired.

Baum said that Sempra Energy's two utility companies and its nonutility energy subsidiaries are committed to expanding the natural gas pipeline and storage infrastructure in and around California. On the same day he spoke, California regulators approved expansion of two Southern California Gas Co. underground storage fields and other work already underway will add 11 percent to the SoCal intra-state transmission pipeline system, including a 200 MMcf/d boost from a new 32-mile pipeline link to the Kern-Mojave interstate pipeline, an added 70 MMcf/d through Riverside County into sister utility San Diego Gas and Electric Co.'s gas system; and other boosts that will add 100-plus MMcf/d to the SoCal transmission system.

Baum said the soon-to-be-built 215-mile joint Sempra-PG&E National Energy Group interstate transmission pipeline from the Arizona border through eastern California and North Baja in Mexico is "fully subscribed."

"We have other projects in both Mexico and Canada that we are excited about, and I tell you this--California's long-term energy needs will be met and managed not only through a coordinated national energy policy, but through a North American energy policy," Baum told the UCLA-CERA audience.

"Over the life of a typical combined-cycle power plant, 80 percent of the cost is for fuel. So, getting the fuel cheaply to the power plant is more important than whether you did a good job raising capital. Therefore, (gas) pipeline infrastructure figures very heavily for efficiency in the delivery of energy."

On the electric side, Baum said there is "good reason to be concerned about the state's transmission grid," given what he considers inadequate financial incentives for private sector operation. That's why, he said, the state should buy and operate the grid, and if it gets the San Diego and Southern California Edison Co. assets, the creditors' committee is sure to quickly urge the federal bankruptcy judge to order Pacific Gas and Electric Co. to sell its part of the grid to the state.

In his opening, Baum admitted that Sempra Energy has "seen both sides of the energy issue--we have distribution utilities that have seen what happens when you have retail prices caps and wholesale price spikes, and we have trading and generation companies that are part of the group that have been accused of many, many things."

In response to a question about the option of new nuclear energy plants, Baum said he thinks some of the proposed new liquefied natural gas (LNG) projects tied to very efficient (7,000 heat rate) combined-cycle power plants, will come in at about $4/MMBtus, meaning they can economically beat any new nuke by providing power at about $28/MWh.

On the other hand, he likes the economics of the state buying and operating SDG&E electric transmission system by paying 2.3 times its book value or about $1 billion because the annual cost of running the system under an investor-owned utility is only $83 million, and it would be considerably less than that for the state since it would not have to collect revenues to pay a rate of return to shareholders.

In response to another question of whether he would be willing to sell the state Sempra's utility natural gas pipeline system, Baum said emphatically, "No," noting that it is entirely different than the electric grid.

State long-term power contracts, which drew criticism from several other speakers at the UCLA-CERA forum, have to be "judged over the long-term lives of those contracts, not just the short run," said Baum, noting that most of the much-maligned deals haven't even kicked in yet.

He said the contracts have two positive factors--stimulating power plant development by providing generators assured revenue streams, and stabilizing forward price curves, making prices more predictable.

Baum cautioned that deregulation has not been "a total failure" in the state, and with half of the power plants being 30 years or older, California needs the continuous injection of private investment to build the equivalent of at least 1,000 MW of new capacity each year for a number of years into the future.

He advocated toning down "political rhetoric," some of which he has personally engaged in at times, in "demonizing" the generators as "gougers." The state needs future investment from these power plant developer/operators, Baum said.

"It is not just unhelpful, but downright counterproductive, for public officials to threaten business people with confiscatory windfall profits taxes, felony charges and potential jail sentences," he said.

©Copyright 2001 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.