SDG&E; Takeover Possible But Not Without a Big Fight, Consultant Says

A government agency that tries to take over San Diego Gas & Electric would face a “bear of a fight,” according to the Seattle-based consultant who on Friday told San Diego County Water Authority board members that municipalization of SDG&E; is economically feasible.

Kenneth J. Mellor cautioned that “it’s not fun” to tangle with an investor-owned utility such as SDG&E.; “If there’s no community interest in public ownership then the thing is going to die right here,” said Mellor, an executive engineer with R.W. Beck & Associates.

It was unclear on Friday if a new government agency--or a group of existing bodies--would try to take over SDG&E.;

“What we’ve done is undertake a study to provide some information to the general public,” water authority Chairman Dale Mason said Friday. “It is now, I think, in a different court.”

Government agencies around the county now must “consider whether or not they want to be in public power,” said Mason, who agreed that the matter would die unless “the public makes some noise . . . and lets their leaders know that, yes indeed, they would like the savings.”

The water authority spent $200,000 on the preliminary study that suggests municipalization is “economically feasible and attractive.” The study suggests that a government agency could acquire SDG&E; for between $2.8 billion and $4.4 billion, and subsequently reduce average electricity rates by between 5.6% and 10.4% during the first 13 years of operation.

SDG&E; officials on Friday argued that the water authority’s study grossly underestimates the cost of acquiring SDG&E.; The $4.4 billion acquisition price that Beck & Associates identified as the “high-end” price is about $2 billion below what the utility would sell for, SDG&E; Assistant Treasurer Malyn K. Malquist said.

The study’s high-end purchase price ignored $1 billion of SDG&E;’s short-term liabilities and various tax-related liabilities that would drive the price up another $1 billion, Malquist said.

“Under their best case, they’re saying they can deliver 2.5% to 8% rate reductions,” said Karen Hutchens, SDG&E; director of regional governmental affairs. “But that assumes the report is absolutely perfect--and it ignores the billions of dollars we’re talking about. Those are fatal flaws that just pop out at you.”

Problems Expected in 1990s

The Beck study acknowledged that SDG&E; will face problems during the 1990s, no matter what the ownership structure.

SDG&E;’s past practice of purchasing electric power from other utilities leaves it with an old, inefficient group of power plants that “raises concerns about future reliability, future availability . . . and environmental concerns,” Mellor said.

A municipal utility in San Diego would not have easy access to cheap, federally subsidized hydropower that is available in the Pacific Northwest, Mellor said. That finding clashed with views held by some proponents of municipalization.

And, SDG&E; is landlocked when it comes to transmission lines that could link the local utility to utilities with excess electricity, Mellor said. Eventually, that power glut will evaporate, forcing whomever owns the local utility to build new plants or find a new source of purchased power.

Despite those problems, Mellor maintained that a government-owned electric and gas utility could deliver lower rates to San Diego’s consumers.

Snow tied those lower rates to the “inherent” ability of a publicly owned utility to charge lower rates. That ability is driven largely by the absence of dividend payments to shareholders, the elimination of federal and state income taxes and the public sector’s ability to use tax-free borrowings to build future plant, Mellor said.

Condemnation Proceedings

If a public agency were to pursue municipalization, the price paid for SDG&E;’s assets would be set through condemnation proceedings in U.S. District Court in San Diego or through a complicated process involving the state Public Utilities Commission.

Mellor predicted that a price could be determined within two years, an estimate that Hutchens described as “overly optimistic.” For example, Hutchens said, negotiations leading to the creation of the Sacramento Municipal Utility District took 23 years to complete.

A proceeding before the PUC “is likely to be somewhat quicker but that’s never been tried before,” said Hutchens, who predicted that commissioners probably would set a purchase price that was higher than one generated by a federal court judge.

Zach McReynolds, a vice president with Rauscher Pierce Refsnes, a New York-based investment firm that assisted with the study, defended the $4.4-billion estimate as solid. “It is unlikely that anyone would set a price higher than this one,” McReynolds said.

The water authority will issue a final report after a blue ribbon committee reviews the preliminary study issued Friday.

So far, the water authority has spent $300,000 on a lawsuit initiated by SDG&E.; The utility contends that the water agency lacked the authority to fund the municipalization study.