City Weighs Options to Keep SDG&E;, Including Purchase

The city of San Diego, taking preliminary steps to block the merger of San Diego Gas & Electric and Southern California Edison, is considering purchasing the utility for public operation, City Atty. John Witt said Wednesday.

The City Council also may try to veto the merger, which was approved by the SDG&E; board of directors Wednesday, if it feels there would be long-term adverse effects on the community, according to Witt.

The city attorney’s office “is aware of potential evidence . . . that this merger is not in the best interest of SDG&E;’s ratepayers,” Witt said. He did not specify what that evidence is, but said that, if an analysis shows that the merger’s impact would have a seriously negative impact, the city would have “good reason to refuse consent.”

Written Into Charter

City officials contend their authority to veto the sale is written into the city’s charter and the state constitution, as well as the city’s franchise agreement with the utility. According to Witt, the franchise agreement prohibits either side from amending the franchise without the city’s approval.

“We have a deep concern that there may be lasting adverse effects of this merger,” Mayor Maureen O’Connor said Wednesday.

“I think we’ve got to look at all alternatives at this point,” she said. “The SDG&E; board of directors voted for the merger because they had a fiduciary responsibility to their stockholders . . . . Well, the mayor and City Council, too, have a responsibility to our stockholders, which are the citizens of San Diego.”

“If SDG&E; leaves town, San Diego would be the largest city in the country without a locally based utility,” said the mayor’s spokesman, Paul Downey. SCEcorp, the parent company of Southern California Edison, is based in Rosemead, a suburb east of Los Angeles.

Civic and business leaders reacted to the impending merger with fear that the loss of SDG&E; would further blur the national image of San Diego, a city that has long been trying to escape from the shadows cast by Los Angeles and San Francisco.

Although the SDG&E; board voted to approve the deal, the merger is still subject to approvals by shareholders and state and federal regulators, a process that could take a year to 18 months.

Authorized Financing

The City Council adopted a resolution Tuesday authorizing financing for the city attorney and city manager to participate fully in all regulatory proceedings required for approval of the merger, at both the state and federal levels. The resolution also directs the city attorney and manager to prepare evidence for a full public hearing before the council on the question of whether it should approve the transfer of SDG&E;’s franchises to operate in the city from SDG&E; to Edison or to a successor corporation.

Although the council has not officially decided to oppose the merger, if it does, it is committed to shelling out the money necessary to fight it, Witt said. He said it is too early to formulate a ballpark estimate of the cost of opposing the sale, but said it might be necessary to hire a new deputy city attorney to handle the case, at an annual salary of $40,000-plus.

“I think the City Council right now wants to expend as much as is necessary to do the job,” he said.

Michael Shames, executive director of the Utility Consumers Action Network, questioned whether the city is aware of the financial commitment it would take to challenge the merger before the state Public Utilities Commission.

“The big question for me is what kind of funding the city will provide,” Shames said. “If it’s a token $10,000 or $20,000, then they’re not really serious. It will take at least $100,000 in additional funds to do the job right.”

“I believe that cities all across San Diego County should band together and pool their funds to ensure that their citizens are represented” during the upcoming PUC hearings, Shames said.

1 Million Customers

SDG&E;, with 1 million gas and electric customers, serves all of San Diego County and about 70,000 customers in southern Orange County.

Intervenors in PUC proceedings generally pay thousands of dollars for experts who are able to decipher a utility’s complex rate programs and operating costs. UCAN, for example, spent $100,000 to intervene in a recent PUC review of SDG&E;’s electric and gas rates.

“This merger is bigger than a rate case,” Shames said. “If the city just sends their attorney, they’re not being serious. They have to decide how much money it will take and then spend it.”

Mayor O’Connor stressed that the council will refrain from making a decision until after a full public hearing, which has yet to be scheduled. In the meantime, she said, the city fully expects Witt to continue investigating the feasibility of acquiring the beleaguered utility.

Witt said he believes the acquisition by the city could be accomplished despite Proposition 13, the 1978 tax-cutting initiative that also limits city expenditures.

“Proposition 13 is always a problem, but I would assume that our experts can find a way to satisfy the requirements of the proposition and still do what is in the best interests of the people,” Witt said.

Various Funding Schemes

Among the options, he said, would be to run the utility as a nonprofit corporation, as a utility district supported by taxpayers or as a city department. Witt said the various funding schemes will be analyzed by his office if the council decides to pursue the idea of public ownership of the utility.

“It might well develop into the creation of a new taxing entity by a vote of the people,” Witt said. “It would be a formidable economic obligation on the part of taxpayers of this community to do something like that, but, in the long run, it might be more economical.”

Witt cited the East Bay and Sacramento municipal utility districts as examples of utilities successfully run as special districts. He also made note of the Los Angeles Department of Water and Power, which is run as a city department, and the San Diego Data Processing Corp. and the Metropolitan Transit Development Board, both of which are run by a consortium of local governments.

Witt said that, if the city does move to acquire SDG&E;, he expects it to be a long and convoluted process. “I suspect that, in the weeks and months and years to come, we will start down a number of tracks and find out they’re not feasible, then turn around and start again,” he said.

When asked to comment on the city’s proposed purchase, SCEcorp Chairman Howard Allen said, “If they want to pay what we paid, tell them to join the bidding.”

SDG&E; Chairman Thomas Page voiced “serious doubts” that a municipal utility in San Diego could produce rates as low as those of a combined Edison/SDG&E.;

Doubts About Lower Rates

Despite assurances by Edison, the mayor and other civic leaders have stated their doubts that the merger will lead in the long-term to lower utility rates. SDG&E; rates are now among the highest in the nation.

Local leaders are also concerned about the potential loss of about 1,000 jobs in San Diego--most of them high-paying executive positions. However, Allen has said that most of those jobs will be eliminated by attrition at Edison and SDG&E.;

Furthermore, the specter of losing yet another local corporate headquarters has proved worrisome. In recent years, Pacific Southwest Airlines, Signal Co. and Wickes Cos. have all closed their corporate headquarters here. Last August, shortly after SCEcorp made its unsolicited bid for SDG&E;, San Diego Chamber of Commerce President Lee Grissom remarked, “We might as well rename (the county) Branch Diego, because that’s about all we’ll have left.”

SDG&E; would have celebrated its 108th anniversary on April 18, 1989. Its loss would be especially painful for San Diego, which has never been able to attract and retain many Fortune 1,000 companies.

With SDG&E; gone, Home Federal Savings & Loan, with $16.1 billion in assets, and Great American First Savings Bank, with $15.8 billion, will continue to dominate the city’s corporate skyline. San Diego County also serves as headquarters for Price Co., with $4 billion in annual revenue, and Rohr Industries, with $986 million in annual revenue.

Still Has the Navy

And San Diego still benefits economically from its longtime association with the Navy and the Marine Corps. Military spending and military retirees contributed an estimated 22% of the county’s estimated $42.1-billion economy during 1987.

Still, city leaders generally agreed that Wednesday was “a sad day for San Diego and San Diegans,” according to San Diego Economic Development Corp. President Daniel Pegg. “We’ll be negotiating our future destiny with someone who’s 120 miles away.”

“During the last few years under Page’s leadership, SDG&E; became a first-rate company by any standard,” Pegg said. “They had a good management team, a good strategic plan, and they were delivering the goods (in the form of) lower rates.”

Losing SDG&E; “has psychological effects which are not soothing to think about,” said San Diego Chamber of Commerce Chairman William Nelson.

Although civic leaders mourned the loss of SDG&E;, they took care not to paint Allen as a villain.

“We’re not getting someone who wears a black hat,” Nelson said. “Howard Allen obviously cares about his customers and employees.”

“We can only hope that Southern California Edison, which has a reputation of being a good utility, will be the kind of corporate citizen that (Allen promised) early on in the negotiations,” Pegg said.

SCEcorp has pledged to keep Page in San Diego, where the executive would serve as vice chairman of Edison’s San Diego division.

Civic leaders plan to meet with Edison executives “to find out exactly what protection they’ve been able to build into the merger agreement,” Nelson said.

Chronology of SDG&E; Merger

Important dates leading to San Diego Gas & Electric’s merger with Southern California Edison:

- June 13, 1988: SDG&E; announces a planned merger with Tucson Electric Power, an Arizona utility with excess electrical generating capacity and an extensive electrical transmission grid. The resulting utility, to be headquartered in San Diego, would have $5.6 billion in assets, 3.8 million customers and 5,681 employees.

The proposed merger would help control energy costs and “ensure a more reliable supply of power for the future,” according to SDG&E; Chairman Thomas Page.

- July 26: SCEcorp, the Rosemead-based parent of Southern California Edison, surprises SDG&E; with an uninvited, $2-billion stock-swap merger offer. SCE plans to merge SDG&E; into Edison, creating the nation’s largest investor-owned electric utility, with 4.8 million customers.

- Aug. 19: SCEcorp raises the value of its stock-swap merger offer to $2.03 billion.

- Aug. 31: SCEcorp raises the value of its stock-swap merger offer to $2.16 billion.

- Sept. 1: SDG&E;’s board rejects SCEcorp’s offer as unacceptable to shareholders, ratepayers and employees. The San Diego utility announces its intention to complete the previously announced merger with Tucson Electric. SCEcorp Chairman Howard Allen leaves SCEcorp’s offer open “indefinitely.”

- Sept. 30: SCEcorp asks a Superior Court judge in San Diego for access to SDG&E;’s shareholder lists. SCEcorp wants the lists to take its case directly to them. Court filings indicate that SCEcorp is considering a proxy fight, a stock exchange offer or a special shareholder meeting.

- Nov. 3: SDG&E; and Tucson Electric abandon their planned merger. The two utilities blame expected stiff opposition from SCEcorp. SDG&E; will consider “a possible combination with SCEcorp and other extraordinary transactions,” according to Page.

- Nov. 23: SCEcorp increases the value of its stock-swap merger proposal to $2.4 billion. SDG&E;’s directors come close to accepting the offer during a four-hour board meeting but end up asking for more time. SCEcorp agrees to extend its deadline until Dec. 1.

- Nov. 30: SDG&E;’s board unanimously accepts SCEcorp’s offer. The proposed merger now must be approved by SDG&E; shareholders and regulators in California and Washington.