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
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
"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
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