Commentary : PUC Needs Juice to Act for Public in Utility Mergers

California is about to play host to the Super Bowl of utility mergers as Southern California Edison seeks to acquire San Diego Gas & Electric in a whopping $2.4-billion deal that will lead to the formation of the nation’s largest electric utility.

There will be a yearlong series of hearings before the California Public Utilities Commission and other government agencies that have the job of refereeing this contest. The stakes are enormous for electric utility customers in Southern California.

The electric utility industry is in the midst of a major transition stimulated by deregulation at the federal and state levels of government. This new regulatory environment may lead to a restructuring of the utility industry through mergers and acquisitions.

We have all read the recent accounts of corporate mega-mergers with RJR Nabisco, Pillsbury and Kraft wheeling and dealing with “junk bonds” and other debt to make instant fortunes for investment bankers and corporate management and shareholders. This takeover frenzy may now overtake investor-owned “public” utilities.

But different rules must apply if we are to protect the interests of captive ratepayers who have no choice but to pay their monthly utility bill.

Earlier this year, the state Senate Committee on Energy and Public Utilities, which I chair, held a hearing in San Diego on “utility-merger mania” and heard numerous complaints about the SCE-SDG&E; proposal from the mayor of San Diego, other local government officials, business leaders and consumer and labor organizations. After considering this testimony and more recent events leading to an agreement between SCE and SDG&E;, I have concluded that, although this proposed merger may be attractive to SDG&E; shareholders, and to those SDG&E; board members and management negotiators who received “golden parachute” job offers, there is no proof that the merger will be in the best interest of ratepayers, utility employees, affected local governments and others with a stake in Southern California utility services.

Although SCE has pledged to lower customer rates by 10% in San Diego’s service territory, the language of the merger agreement between SCE and SDG&E; does not mention anywhere the promise to lower customer rates.

And, earlier this year, SDG&E; scoffed at SCE’s ability to lower customer rates, pointing out that, while SDG&E; rates have decreased 23% since 1985, SCE rates have been rising since 1983, including a recent 11% rate hike for residential customers. Furthermore, the PUC has forecast that SDG&E; rates will be lower than SCE’s in 1989.

Ratepayers cannot simply rely on promises from utilities not to increase rates. I have grave concerns that SCE might raise residential rates higher in the Los Angeles area to subsidize a rate reduction in San Diego. As a legislator from the Los Angeles area, I would strenuously oppose that.

If this merger will generate substantial savings and be as beneficial as SCE and now SDG&E; claim, then both sets of ratepayers should receive rate benefits guaranteed by utility shareholders.

I have no confidence, however, that the PUC will act in the ratepayers’ best interest. The current PUC members have been appointed by Gov. George Deukmejian and share his philosophy with regard to ardent deregulation. More concern has been shown for utility profits than the size of customer utility bills. This is the same PUC that earlier this year approved an SCE request to form a utility “holding company” to diversify into unregulated businesses. This same SCE holding company, in a hostile takeover attempt, then acquired SDG&E; stock without prior PUC approval, arguing that a utility holding company was not subject to PUC rules.

Also, as part of its SCE holding company decision, the PUC allowed an Edison affiliate, Mission Energy Co.--now the biggest, unregulated independent energy producer in the nation--to enter into sweetheart deals selling power to SCE for the benefit of shareholders at great expense to ratepayers. An SCE-SDG&E; merger may extend this risk of self-dealing farther south and lead to SDG&E; customer overcharges.

I am convinced that Southern California ratepayers will be the big losers in this utility merger unless the PUC has the right legal tools to tackle merger problems.

Under existing law, the PUC can approve a utility merger so long as it determines the merger is in the “public interest.” This broad and vague standard gives the deregulators at the PUC enormous discretion to tip the balance of competing interests in favor of utilities.

Therefore, I have introduced legislation that sets forth specific standards for measuring the “public interest” in PUC merger proceedings.

I believe that the public interest regarding utility mergers is more than merely maximizing shareholder benefits. Utility operations significantly affect ratepayers, utility employees, businesses that provide services to the utility company and other citizens in the utility service territory. All of these interests are important and must be considered.

Consequently, my bill would prevent the PUC from approving a utility merger unless it first finds that the merger will provide positive ratepayer benefits in the short term and long term, guaranteed by shareholders. The merger must also maintain or improve the quality of service and financial condition of the company, be fair and reasonable to all affected utility workers. The legislation would also require that the merger be beneficial to the local economies and to the communities served by the utility.

Also, the PUC must find that the merger will not harm competition. Utility mergers raise serious questions regarding unfair competition and I have asked the state attorney general to investigate antitrust issues involving the SCE-SDG&E; proposal. For example, will SDG&E; customers be required to always use and pay for SCE excess capacity, or will they have the option to secure less expensive power transmitted from other sources. It is ironic that, when SDG&E; was considering a merger with Tucson Electric Power, SCE grumbled about antitrust problems. However, SCE is now discounting the antitrust impact of the far larger SCE-SDG&E; merger.

For many reasons, including those set out above, the citizens of the San Diego region, and their locally elected representatives are seriously concerned about an SCE acquisition of SDG&E.;

I share that concern, and my proposed legislation would require the PUC to consider all reasonable alternatives to a merger proposal, which in this instance would include local government efforts in the San Diego region to buy SDG&E; by using the powers of eminent domain. I hope that local officials in the San Diego area will support the bill, which, if passed early this year, will apply to the SCE-SDG&E; proposal.

If we can change the PUC rules of the game in time, we can ensure that the “public interest” rather than private gain will be the winner in this Super Bowl utility merger event.