Surprise Bid for Sacramento Utility : Deal Would Give PG&E; a Big Boost in Growing Area
Pacific Gas & Electric’s surprise offer to take over the struggling Sacramento Municipal Utility District--white-elephant nuclear generating plant and all--would extend PG&E;’s dominance in Northern California into one of the state’s fastest growing metropolitan areas.
The bid, made late Thursday, would return to PG&E; the electricity customers it lost on Dec. 31, 1946, when SMUD became operational as a low-cost provider of electricity. PG&E; continued to provide gas service in SMUD’s service area throughout San Diego County, however. The utility today provides gas or electricity, and often both, to communities ranging from Eureka in the northeast corner of the state to San Luis Obispo and Paso Robles in the center.
Being tax-exempt and customer-owned, SMUD offered electricity rates far below than those charged by investor-owned PG&E.; But the nuclear age has proved especially costly for SMUD. Its 400,000 electricity customers make it the nation’s third-largest municipally owned utility, but it is of relatively modest size when it comes to its ability to finance a major nuclear generating station--let alone one with the troubled history written by Rancho Seco.
Long Period of Problems
Before the most recent shutdown on the day after Christmas, 1985, after an over-cooling incident, the plant had experienced more than 100 unscheduled shutdowns. In its 12 years, it has been closed more days than it has operated.
PG&E;, which once had expected to buy electricity from Rancho Seco, now furnishes about half SMUD’s power--the amount that the district depended on its nuclear plant to provide. The offer came as SMUD prepared to issue $200 million in bonds later this month to pay for restarting Rancho Seco, which it hopes to accomplish by the end of the year, with full power restored next June.
PG&E; said it would, instead, pay the unspecified and probably unknown costs of closing and dismantling the plant. “Our analysis of Rancho Seco is based purely on economics, and it is not an economic project in today’s market,” Bob Haywood, PG&E; vice president of power contracts, said in an interview Friday.
PG&E; made its offer in a letter to SMUD late Thursday, responding, it said, to the district’s request to continue buying surplus PG&E; power to replace some of the 900 megawatts formerly furnished by twin-towered Rancho Seco located 26 miles southeast of the state capital. Since the present prolonged shutdown, SMUD has had to hustle to contract for more costly power from PG&E.;
No Official Response
As a result, its customers’ electric bills have soared more than 60% since March, 1985. The average SMUD residential customer today pays a few cents more than PG&E;’s counterpart--$63.89 for 750 kilowatt hours versus $63.35.
SMUD’s board of directors, which met Thursday night, adjourned without an official response to the proposal. But Vice President Cortus Koehler was quoted in Friday’s Sacramento Bee as calling the letter a “challenge and maybe an opportunity to see whether it’s in the best interests of the district.”
In his letter, PG&E; Chairman Richard A. Clarke offered to buy all of SMUD’s properties and facilities, but specified no price. Industry and analyst estimates range from more than $1 billion to as high as $2 billion. Clarke also said his company would terminate SMUD’s current plan to restart Rancho Seco but pay for closing and decommissioning the plant. PG&E; also would drop its present lawsuit demanding up to $1 billion in back utility payments from SMUD for power from Rancho Seco that PG&E; maintains it had contracted to receive but never got because of “mismanagement” of the plant.
In addition, Clarke said, PG&E; would freeze Sacramento County electricity rates at their present level “for several years” and retain all of the district’s nearly 3,000 employees. Finally, he added, local governments would collect about $15 million yearly from tax and franchise payments from which the municipally owned district is exempt.
SMUD’s customers should find those terms attractive, said utilities analyst John Curti of the Birr, Wilson brokerage in San Francisco. “Something’s got to be done about Rancho Seco one way or another,” he said, “and either way it’s going to cost and somebody’s going to have to pay it.”
For PG&E; shareholders, on the other hand, the acquisition would mean short-term costs but long-term benefits, Curti said. The proposed rate freeze and no layoff guarantee would deny PG&E; the immediate cost benefits of the acquisition, he noted.
San Francisco-based PG&E; would add 400,000 customers in a fast-growing service area where it already supplies gas, plus access to SMUD’s own low-cost hydroelectric generating capacity, and the consolidation would enable it to spread fixed costs over a larger base.
The acquisition would be subject to approval by the California Public Utilities Commission. “We would have a very significant role to play,” PUC President Stanley W. Hulett said in an interview. Hulett said PUC attorneys already are exploring such questions as whether a referendum on the sale by SMUD’s customer-owners would be necessary and what would happen to the funds PG&E; paid for the district’s assets.
PACIFIC GAS & ELECTRIC AT A GLANCE
California’s largest public utility, PG&E; supplies gas and electricity to 48 counties virtually all in the northern half of the state. Declining usage by large industrial customers has forced the company to hunt aggressively for new business in recent years.
Year ended Dec. 31 (in millions): 1986 1985 1984 Revenue $7,816 $8,431 $7,829 Net Income 1,081 1,030 788.0
Assets: $21 billion Employees: 29,200 Shares outstanding: 373.2 million 52-week price range $19-$27.375 Friday close (NYSE) $20
