Commentary : Tucson Merger Is the Logical One : Utilities: Several features of the Arizona power company make it, not Edison, a good match for SDG&E;.

The most glaring omission in the regulatory review of the proposed merger between San Diego Gas & Electric and Southern California Edison is the failure to compare the Edison merger with the now-abandoned merger between SDG&E; and Tucson Electric Power.

Shortly after the ink was dry on the cooperative Tucson merger, the plan was scuttled by Edison's hostile takeover tactics. Today, under the gun of Edison lobbyists, both the California Public Utility Commission and the Federal Energy Regulatory Commission have rejected entreaties by the city of San Diego, the Utility Consumers Action Network and other intervenors to compare the Edison and Tucson merger plans before passing judgment on Edison's application.

In fact, the Tucson merger is the far superior alternative, both for San Diegans and for electricity customers in the broader Southwest region. If the Tucson merger, rather than the Edison merger, were consummated, San Diego electricity consumers would pay lower rates for more reliable service, and the San Diego air basin would probably suffer far less pollution.

Electricity rates would be lower under the Tucson merger for several reasons. First, Edison's electricity rates for all customer classes--commercial, industrial and residential--are higher than SDG&E;'s, and the current 9% rate gap is projected to continue over the next decade.

Because Edison is forbidden by the PUC to charge different rates to customers in different service territories, San Diego ratepayers will see their rates rise inexorably to Edison's much higher levels over time. Moreover, even if Edison is allowed to temporarily lower rates for San Diego customers (as per its public promises), our rates will inevitably climb.

In contrast, Tucson's rates are more than 20% below SDG&E;'s. Under the Tucson merger, San Diego rates would either remain low or drop even further below Edison's.

Second, Tucson affords SDG&E; a more economically diverse generation mix than the Edison merger. Ninety-four percent of Tucson's power is coal-generated. This coal power perfectly complements SDG&E;'s reliance on gas, oil and nuclear generation and provides SDG&E; with a resource diversity that is a strong buffer against future oil shocks.

In contrast, the generation synergies offered by the Edison merger are virtually nil because Edison's resource mix is almost identical to SDG&E;'s.

Third, both Tucson and SDG&E; are small compared to Edison, but together they could be a potent countervailing market force to Edison's attempted monopolization of the Southern California and Southwest electricity markets. The resultant competitive pressures in purchased power markets would save ratepayers throughout the region hundreds of millions of dollars.

In fact, many knowledgeable observers believe that the primary motive behind Edison's hostile takeover was foreclosing competition in this market and preserving its hegemony.

Beyond the rate issue, the Tucson merger provides San Diego electricity customers with much more reliable service. Whereas SDG&E; has warned that it may run short on power by the mid-1990s, Tucson seriously overbuilt during the '70s and '80s and has substantial power reserves that could be used by SDG&E; through the end of the century.

Moreover, Tucson possesses an excellent, under-utilitized transmission network that would give SDG&E; access to 37 additional utilities throughout the Southwest, Midwest and Northwest.

In contrast, the only excess power that Edison has to offer SDG&E; is very high-cost generation from one of its unregulated subsidiaries, Mission Energy. Mission Energy is a "money pump" formed to exploit a loophole in a federal law designed to stimulate small power production through inflated prices. Edison buys Mission Energy power, passes the high prices on to its ratepayers and passes the profits from its unregulated subsidiary on to its shareholders.

The Edison merger might also significantly increase air pollution in San Diego, while, under the Tucson merger, pollution would be reduced. As the San Diego County Air Pollution Control District has documented, the Edison merger could raise pollution levels significantly, ranging from 119% for carbon monoxide to an astounding 6,947% for sulfur oxides. Edison would do this by cutting down generation at some of its polluting plants in the Los Angeles air basin and replacing it with generation from San Diego plants.

The Edison merger would also have several additional unwanted side effects. They include the loss of jobs and local control, as well as reduced charitable contributions from the resulting utility.

Last, but not least, the Edison merger would prove an unwelcome stimulant to the ongoing "Los Angelization" of San Diego by provoking an equally unwelcome "political merger." This merger between an Edison seeking new customers and an already-too-powerful development industry would have as its aim continued rapid growth.

Since the Tucson merger was abandoned, Tucson Electric Power has undergone considerable internal controversy. Its chief executive officer resigned under fire, the company has experienced large losses in both its unregulated holdings and power operations, and its stock price has fallen. All of these events suggest that there is now an even better economic opportunity for SDG&E; to pursue a cooperative merger with Tucson.

Toward that end, the San Diego City Council or Board of Supervisors should send an emissary to Tucson to explore the reopening of merger talks. The council should also pass a nonbinding resolution recommending that SDG&E; reopen discussions and reaffirm to both the PUC and the Federal Energy Regulatory Commission the desire to see the Tucson merger included as part of the regulatory review.

In March, 1990, Chairman Tom Page and the SDG&E; board of directors will be free to terminate the Edison merger agreement without penalty, because of a "drop dead" clause in the contract. If Mr. Page and the board would simply discard their "golden parachutes" and put the interests of San Diego above their own, there would be no obstacle to renewed discussion between Tucson and SDG&E; about a merger that is founded in common sense and mutual benefit rather than in Edison's exploitative power play.

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