SDG&E; Looks to PUC for a Change in Views

Two ongoing state Public Utilities Commission hearings are expected to generate precedents that could affect San Diego Gas & Electric if the San Diego-based utility once again asks commissioners for approval to form a holding company.

The hearings, involving Pacific Bell and Southern California Edison, focus on some of the same questions that arose in 1985 when SDG&E; asked commissioners for permission to restructure itself in a holding company format that would house SDG&E;’s gas and electric utility business as well as its growing stable of nonregulated businesses.

Commissioners in 1985 approved SDG&E;’s holding company bid, but the utility subsequently withdrew its application, complaining that many of the 20 conditions accompanying the commission’s approval were “unacceptable” from a business standpoint.

However, the utilities anticipate that three new commission members who since have joined the PUC might not feel bound to follow the precedent set with the 1985 SDG&E; request.

May Await Results

Utility industry observers have suggested that SDG&E; will not resubmit its holding company proposal until after the PUC concludes its Pacific Bell and Southern California Edison hearings. Those hearings are expected to be completed by the end of this year.

SDG&E; remains interested in “alternatives for corporate structure, including approaching the commission on the formation of a holding company,” according to SDG&E;’s recently updated strategic plan. SDG&E; anticipates that nonregulated businesses will generate 10% of corporate earnings by 1991 and 25% of earnings by 1996.

Many of the 20 conditions that were attached to SDG&E;’s holding company approval have resurfaced in the Southern California Edison and Pacific Bell hearings.

The PUC’s Public Staff Division initially recommended that SDG&E; be subject to the 20 conditions in order to ensure that SDG&E; ratepayers were not hurt by the utility’s proposed reorganization.

The public staff earlier this year recommended that many of those 20 restrictions be attached to Southern California Edison, which wants to form a holding company.

The conditions would have imposed various reporting requirements on SDG&E.; For example, the PUC wanted guaranteed access to the books and records of SDG&E;’s nonregulated subsidiaries. The commission also ordered SDG&E; to limit the transfer of utility personnel to non-utility subsidiaries should the holding company be formed.

SDG&E;’s management was especially irritated by a condition that required a unique “royalty” payment from the utility’s unregulated subsidiaries.

The so-called “affiliate” payments were created to ensure that SDG&E;’s unregulated utility subsidiaries were properly assessed for “intangible” benefits accrued by being associated with the utility.

Payment for ‘Intangibles’

The public staff was concerned that utility affiliates would enjoy special access to decision-makers at the utility, or would benefit from the name, reputation and heritage of the parent company. The royalty payment was viewed as one way to ensure that shareholders were paid for those supposed “intangible” benefits.

The royalty question surfaced again this year during the Pacific Bell and Southern California Edison hearings in San Francisco. SDG&E; recently testified against the royalty payments during a Pacific Bell hearing.

That testimony evolved because SDG&E; “never really had a chance to argue the royalty issue because it came up in (closing briefs) and there was no earlier indication that royalties were being considered,” said Earl Ligon, SDG&E;’s senior council.

The ongoing hearings “represent the first time that the commission is seeing testimony from all the parties,” Ligon said. “It’s the first time they’re seeing anything other than (the public staff’s) theoretical discussion of the (affiliate) royalties.”

The public staff wants Pacific Bell’s nonregulated businesses to pay the parent company a royalty equal to 5% of their gross revenue, to reimburse shareholders for “intangible” benefits generated by their association with Pacific Bell. The public staff wants Southern California Edison’s nonregulated businesses to pay their parent company a royalty equal to 5% of gross income.

“We’re arguing that there’s just no logic behind their plan to assess . . . a royalty for benefits that just don’t exist,” said Charles McCreight, Pacific Bell’s staff director for the company’s state regulatory issues.