Sempra’s Units Could Face State PUC Probe

State utility regulators are poised to launch an investigation today into whether Southern California Gas Co. and San Diego Gas & Electric sought to maximize the profit of their parent company, Sempra Energy, at the expense of customers.

The California Public Utilities Commission is scheduled to vote on a controversial measure authorizing its staff to examine whether Sempra’s energy-related business practices in Southern California have adhered to PUC rules designed to protect ratepayers and avoid conflicts of interest.

Sempra officials dismiss the proposed PUC investigation as a politically motivated attempt to pressure the company to renegotiate $6.6 billion in long-term electricity contracts signed with California during the energy crisis.

But PUC officials say they primarily want to examine issues raised by consumer groups and other utilities regarding wholesale gas and electricity trading, construction of electricity transmission lines, and the development of power generation facilities by Sempra companies. They also want to determine whether the utilities that the PUC regulates engaged in activities that conflicted with their obligation to serve residents and businesses that rely on them for energy.

Sempra is fighting hard to quash the investigation. The stakes for the company are high -- not so much from potential state penalties, but from shareholder lawsuits and the damage those could do to the company’s stock price, said utility analyst Jon Kyle Cartwright.

“Anytime there is an investigation like this, there is a substantial litigation risk,� said Cartwright, who is with brokerage firm Raymond James & Associates. “So far they have been pretty lucky and have skated through most of the damage from the energy crisis.�

The proposed order would:

* Expand an existing commission investigation into whether the trading practices of the Gas Co. inflated natural gas prices at key delivery points along the California border during 2000 and 2001.

* Explore SDG&E;’s acknowledgment that it had signed some power supply contracts with an eye toward providing more profit for shareholders rather than lower prices for its ratepayers.

* Examine concerns raised by homeowners that SDG&E; customers would pay for an electricity transmission line in Riverside County’s Temecula Valley that would benefit Sempra affiliates that generate power in the Southwest and Mexico.

The push for an investigation comes as the parents and corporate siblings of regulated utilities forge into lucrative new lines of business that potentially could conflict with the utilities’ traditional role of distributing energy to millions of homes and businesses.

In the 1980s and 1990s, when the PUC granted the state’s major electric utilities permission to form holding companies, the commission recognized the potential for abuse and set up rules designed to prevent conflicts of interest.

Potential conflicts can arise when the unregulated affiliates operate in the same territories as the regulated utilities. Sempra, for example, is building a large power plant in Baja California that would sell electricity to California markets. A high price for that power would benefit Sempra shareholders -- at the expense of ratepayers.

“There is a potential conflict on the face of it when a parent company chooses to do business in the service territory of its affiliate,� said PUC member Loretta M. Lynch.

But Sempra executives deny that the San Diego-based energy company has done anything wrong in the way that its subsidiaries conduct business with one another.

The subsidiaries are scrupulous in maintaining divisions, even going so far as to physically separate their operations, said Frederick John, Sempra senior vice president of external affairs and communications. Independent auditors, hired by Sempra, have verified several times that the company’s various units are in compliance with the PUC’s strict rules, John said.

“It’s almost like a fishing expedition where they’re looking for issues,� John said. “We seem to be singled out because of the dispute we’re having with the state over the long-term energy supply contract.�

PUC President Michael Peevey discounted Sempra’s allegation of political gamesmanship, saying no one from the governor’s office or the Legislature has talked with him about the proposed investigation.

It’s unclear how the five PUC members will vote, though it appeared likely that Lynch would back the proposed order. Meanwhile, for his part, Peevey suggested that he has misgivings about probing the affiliate transactions. “I have to ask honestly, ‘Where is the beef?’ � he said.

At the same time, Peevey indicated that he sees as a legitimate matter for inquiry the ongoing examination of natural gas price spikes along the California border that helped cause electricity prices to soar during the energy crisis.

The PUC in November targeted Sempra Energy, the Gas Co. and SDG&E; in launching the first phase of an investigation into whether market manipulation contributed to gas price increases.

Southern California Edison, a unit of Rosemead-based Edison International, has questioned whether the Gas Co. perverted a commission program that allows utility ratepayers and company stockholders to share the savings whenever gas is purchased below market rates. Edison maintained in PUC filings that the Gas Co. parlayed its prominent market position into many millions of dollars in such windfalls during the energy crisis.

John said that the Gas Co.’s purchasing expertise allowed it to acquire natural gas for its customers at rates lower than other utilities.

The state and Sempra are currently in a legal fight over a $6.6-billion long-term energy contract the company signed with the state Department of Water Resources during the electricity crisis. State officials are seeking to void the accord, alleging that Sempra lied to them and profited unfairly by obtaining energy on the open market, rather than by building a new power plant.

The company has maintained that the contract allowed it to provide power from any source.

Bob Finkelstein, supervising attorney at the Utility Reform Network, a consumer advocacy group, said the renegotiations over that contract pose another potential conflict for Sempra. “It is a no-brainer for upper management of Sempra� to maximize profits from the state contracts, he said, “even if that means their customers, who have to pay a portion of those contracts, end up worse off.�

Sempra executives say they have been negotiating in good faith and that the contracts helped get the state out of the crisis and have proven to be a good deal for ratepayers.

Consumer advocates also have accused SDG&E; of trying to maximize profit for Sempra shareholders in the signing of low-priced power contracts in 1996 and 1997. When electricity costs skyrocketed in 2000 and 2001, SDG&E; argued that the profit belonged to shareholders who had assumed the risk. A settlement between SDG&E; and the PUC in December split the profit between the two groups.

Another area of controversy has been the Valley-Rainbow project, an electricity transmission line proposed by SDG&E; to link its system with that of Southern California Edison.

Opponents say the line was proposed only for the benefit of Sempra’s power plants. However, the PUC’s Office of Ratepayer Advocates could find no evidence that the line would help improve the competitiveness of Sempra’s plants in Mexico.