San Diego-based Sempra Energy last week outlined its plans toconsolidate, but not legally merge, operations of its distributionutilities, which combined form the largest utility in terms ofmeters (6.1 million) in the nation. Southern California Gas Co. andSan Diego Gas and Electric Co. will continue to exist, according toSempra spokesman Doug Kline.

The move is part of a corporate-wide reorganization into sixmajor business units, said Kline, identifying the six as: deliveryservices (utilities), retail energy services, energy trading,international, competitive generation and technology ventures. Thelatter will have some new businesses announced in the near future,he indicated.

“All of the business units are undergoing the same process ofreviewing their current organizational models and seeing how theycan be reconfigured to support the new strategy,” Kline said. “Forexample, in Sempra Energy Solutions (retail) we are redesigning theorganization to consolidate several sub-operating units into oneorganization moving forward with one set of goals. The goalobviously is to eliminate any duplication of functions beingperformed by each of the organizations.”

Kline indicated the consolidation of the utilities is in a”very, very preliminary stage.” Planning efforts are justbeginning, and both utilities are facing regulatory filings for newincentive rate mechanisms (PBRs, Performance-Based Ratemaking) tobe effective in January 2003, so the planning has to begin now forthose filings.

Some of the regulatory and other utility operations may becombined, but “at this time we are not pursuing a legal merger ofthe utilities through the PUC,” Kline said. “Basically, we havethree utility organizations (SDG&E, SoCalGas DistributionServices and SoCalGas Transmission Services) and we are trying todevelop one delivery services organization among six business lineswe’re pursuing.

“The blueprint for the future recognizes the way the regulatorsare looking at them (SDG&E and SoCalGas) now is to align theirregulatory filings. At this point, I am not sure whether there willbe joint or separate regulatory filings.”

Sempra currently is rolling out a new corporate strategy to itsemployees that will put a lot of emphasis on growing its nonutilityholdings nationally and internationally in an attempt to boost itsanemic stock price that has remained mired under $20 a share.Leading the transformation effort is Steve Baum, the current No. 2executive who will assume the chairman/CEO role this summer whencurrent CEO Dick Farman retires as was planned when the merger wasnegotiated in 1996.

Sempra Energy is the result of the SDG&E and SoCalGasholding companies merging. Baum was a top executive with EnovaCorp., SDG&E’s parent. Farman was at the top of PacificEnterprises, the SoCalGas parent. Combined, the utilities earned$393 million in net income last year, all but a million dollars ofthe total Sempra net, although SDG&E’s earning were down $28million from 1998.

Other parts of Sempra Energy have also been buying or startingsmall distribution utilities in North Carolina, Maine, Nova Scotiaand Mexico, however, Kline said Sempra has decided to not to pursueanymore greenfield utility developments in the U.S. That does notapply to Nova Scotia or Mexico, though. The company reportedly willde-emphasize these efforts in the future because of the thinmargins and long time periods before the new ventures canostensibly become profitable.

“We have an identity transition effort underway and SempraEnergy will eventually be the dominate name on all of ourcompanies,” said Kline, noting that at this time there are no plansfor creation of a “Sempra Gas and Electric Co.” to replace theseparate California distribution/transmission utilities.

In the future, Sempra plans to grow its trading and energyservices businesses in hopes of making itself more of a growthstock, rather than one tied closely to the utility operations.Combined, Sempra’s California utility revenues in 1999 exceeded$4.7 billion, with natural gas representing nearly $3 billion.

Richard Nemec, Los Angeles

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