PUC Restrictions May Quell SDG&E;’s Plans for Holding Company

Although the state Public Utilities Commission on Friday unanimously approved San Diego Gas & Electric’s plan to create a holding company, a lengthy list of accompanying restrictions might force the utility to modify its planned expansion into non-utility businesses.

The commission attached 20 restrictions to its unanimous vote, including a handful that SDG&E; had previously described as being unacceptable. The restrictions were designed to “mitigate the risks and enhance the benefits ratepayers can expect due to diversification,” according to the commission.

SDG&E;’s board of directors now has 30 days to determine if the utility should create the holding company or, because of the restrictions, find another way to expand its non-utility businesses.

Friday’s decision was important because it could set a pattern for how other utilities will move to diversify, both in California and around the country.

“We did hear conditions discussed at (Friday) morning’s (PUC) hearing that would be of some concern to us,” said Stephen Edwards, SDG&E;’s manager of special projects.

Utility managers have argued that a holding company would ease SDG&E;’s planned expansion into non-utility businesses, an expansion that is being driven by shareholder demands for a better return on their investments. The company has indicated that it wants to expand its gas and electric base to include non-regulated real estate, consulting and instrumentation businesses.

Although commissioners acknowledged that they did not want to restrain utilities such as SDG&E; from diversifying, four of the commission’s five members said that the 20 restrictions will “insulate” SDG&E;’s customers from any “adverse” consequences of SDG&E;’s non-utility ventures.

“The restrictions are the next best thing to denying” SDG&E;’s proposed holding company, according to William Ahearn, director of the PUC division that represents customers in utility matters. “We didn’t want utility company management subordinated to a holding company in the first place, and it seems the commissioners bent over backward to try and protect the general public.”

The holding company restrictions also addressed many of the concerns that were included in bills introduced in the Assembly during recent months, Ahearn said.

The restrictions were designed to insure that holding company managers do not divert utility earnings into non-utility affiliates, keep key utility personnel from being transferred to non-utility ventures and keep the holding company from developing an unfair advantage over small power producers.

Commissioner Bill Bagley, however, said some of the restrictions are “deal killers,” which could force SDG&E; to abandon its holding company plan and manage its diversification in some other fashion.

Although SDG&E; managers previously have described most of the restrictions as acceptable, several could prove to be especially burdensome.

Under a newly developed concept which has been referred to as imputed royalties, the holding company would be forced to make royalty payments to utility customers that would compensate them for “intangible benefits and non-quantifiable costs potentially imposed upon those customers.”

Holding company managers would have to supply a “confidential notice” 45 days before selling, transferring or divesting any of its subsidiary operations.

The holding company would not be allowed to invest more than 15% of its total capital assets in non-utility subsidiaries without prior notice to the PUC.

Commissioners want the holding company to open its books and records--of the parent company, its affiliates, subsidiaries and joint ventures--to the PUC.

Interestingly, none of the restrictions that SDG&E; has previously described as being unacceptable were included in a proposal returned in early January by an administrative law judge. The 20 restrictions were added during more than 45 days of intense scrutiny by commissioners, who four times delayed a vote on SDG&E;’s request because they had not yet agreed upon which restrictions to include.

The restrictions “seem to indicate that the commission is serious about controlling divestiture,” suggested Michael Shames, executive director of San Diego-based Utility Consumers Action Network, one of two groups which opposed the creation of a holding company. “I especially like the fact that they’ve accepted the imputed royalties concept.”

Edwards said SDG&E; might not make a decision prior to the utility’s regularly scheduled annual meeting on April 22. The utility, which already has shareholder and federal regulatory approval to create the holding company, had hoped to unveil the new holding company name and logo at that meeting.