L.A. Utility’s Lobbying Power Cited : SDG&E; Kills Tucson Deal, Opening Way for SCEcorp
San Diego Gas & Electric and Tucson Electric Power on Thursday scrapped their merger plans, an unexpected move that could help Rosemead-based SCEcorp in its bid to acquire the San Diego utility.
Instead of merging with the Tucson company, SDG&E; will give consideration to “remaining independent, pursuing a possible combination with SCEcorp, and other extraordinary transactions,” according to a terse statement issued by SDG&E; Chairman and Chief Executive Thomas Page.
Officials of SCE, the parent of Southern California Edison, confirmed that they still are interested in SDG&E.; “We made the proposal to buy San Diego on the condition that the Tucson Electric merger wasn’t consummated. Nothing’s changed,” SCE spokeswoman Diane Wittenberg said.
Would Be Largest in U.S.
Combining SDG&E; and Edison would create the nation’s largest electric utility with 4.8 million customers. Edison’s southern service region would stretch from northwest of Los Angeles to the Mexican border.
Utility analysts have predicted industry consolidation for more than a year, but few mergers have taken place. SCE’s uninvited merger proposal was a particularly unusual move for the usually staid industry.
SCE unveiled its surprise $2.16-billion stock bid for SDG&E; in early July, shortly after the San Diego utility announced its planned merger with TEP. On Sept. 1, SDG&E;’s board unanimously rejected SCE’s bid and set out to complete the merger with TEP.
However, SCE promised to use its considerable lobbying power to persuade regulators that SDG&E;’s merger with TEP was not a good pairing. That threat evidently was “large enough to make TEP’s board believe they weren’t going to win in the long run,” according to Steve McNamara, an analyst with the investment firm Bateman Eichler, Hill Richards in Los Angeles.
Merger ‘a Good Deal’
“SDG&E; is going to have a hard time turning down SCE’s bid now,” McNamara said. “And, from a shareholder point of view, it’s a good deal.”
In a joint release issued Thursday, SDG&E; and TEP acknowledged that SCE’s opposition to their proposed deal would “significantly complicate” an already complex regulatory approval process that would have involved more than half a dozen agencies.
In addition to regulatory hurdles, SDG&E; has been been fending off SCE in Superior Court in San Diego. SCE has been trying to gain access to SDG&E;’s shareholder lists so it can communicate directly with shareholders about a possible proxy fight or stock swap.
Thursday’s announcement might have been prompted by a cost-saving study that SDG&E; and TEP were conducting, according to Michael Shames, executive director of Utilities Consumer Action Network, a San Diego watchdog group.
SDG&E; “was supposed to be quantifying savings that would occur because of the TEP merger,” Shames said. “If savings were substantial, SCE’s opposition wouldn’t have mattered.”
Shames speculated, however, that the study failed to turn up the potential for substantial savings. The merger scuttled Thursday would have paired SDG&E;, which has among the nation’s highest electric rates, with TEP, known as one of the nation’s lowest-cost producers.
10% Cut for S.D. Customers
SCE, on the other hand, has suggested that it could win regulatory approval for its proposed acquisition because of the likely cost savings. SCE Chairman Howard Allen has said that Edison’s rates will remain lower than SDG&E;’s, but that the customers of the San Diego utility will get a 10% electric rate cut anyway if the deal is completed.
Page has countered that electricity rates across Southern California will soon be equal because Edison’s rates are rising while SDG&E;’s are falling.
Regulators are not expected to approved an SCE-SDG&E; deal unless they can prove that it would cut, or at least hold down, costs for customers of both companies.
SDG&E; and TEP’s merger proposal might also have been hurt by a recent Federal Energy Regulatory Commission ruling involving Pacificorp, a Portland, Ore.-based utility holding company that is in the process of merging with Utah Power & Light. FERC ruled that the utilities can merge only if they agree to let other utilities--and large customers--transmit power over their transmission lines.
Some analysts had suggested that the SDG&E; merger with TEP would be less attractive if the new company were saddled with that transmission requirement.
SDG&E; and TEP’s late-afternoon announcement surprised SCE executives, Wittenberg said. “We heard that they’d be sending something out late (Thursday),” he said. “But we had no idea of what they were going to say.”
