Flaws in Tucson Argument
Peter Navarro, an assistant professor of economics, argued in his commentary (“Tucson Merger Is the Logical One,” Oct. 22) that San Diego Gas & Electric’s now-defunct agreement to merge with Tucson Electric Power Co. is a far better deal for San Diego-area customers than our proposed merger with Southern California Edison.
But is it? Let’s examine some of Navarro’s arguments favoring the TEP merger:
First, he wrote, we San Diegans would enjoy lower rates by merging with Tucson than we can expect under a merger with Edison. He notes that Edison’s rates are, on average, 9% higher than ours and that this “gap is projected to continue for the next decade.”
Meanwhile, he says Tucson charges rates 20% lower than SDG&E.; This would mean lower rates for San Diego-area customers.
There are several holes in this analysis. First, we project that, due to high growth in our service territory, we are going to have to build new power plants in the near future, or purchase increasingly expensive power from other utilities, if we don’t merge with Edison.
Under this “stand-alone scenario,” we project our rates to go higher than Edison’s within the next couple of years. Furthermore, Edison’s costs over time are lower than ours due to its diversified fuel mix of cheaper coal and hydropower together with oil, gas and nuclear. For example, Edison has access to cheap hydropower, but Tucson does not, a fact ignored by Navarro.
Secondly, while it is true that Tucson’s current rates are lower than both Edison’s and ours, Tucson’s customers are facing large rate increases in the next couple of years due to TEP’s decade-long construction of new power plants. Tucson customers have yet to pay for these plants. When they begin paying for them, their rates will be comparable to those currently charged by SDG&E; and Edison.
He also ignored Edison’s pledge to reduce rates to our customers following the merger. This reduction is going to pump between $80 million and $100 million annually into the local economy in the merger’s first three years alone.
Some other points ignored by Navarro are: Edison’s transmission system reaches the same power markets reached by Tucson, giving Edison access to cheap coal-fired resources. Also, Edison’s record of reliable service is among the nation’s best.
Navarro says he believes Tucson could be purchased at bargain-basement prices because of its current difficulties with the Securities and Exchange Commission and because its shareholders are angered at the reported activities of a former chief executive officer who resigned under fire recently.
I maintain that these very same difficulties argue against a merger with Tucson. Regardless of the accuracy of these complaints, it is safe to assume that Tucson is going to be embroiled in legal proceedings for some time, and its management is going to be severely distracted by these issues. SDG&E; would not benefit from a partner preoccupied by legal distractions and thus unable to pay full attention to the many problems and opportunities facing today’s utilities industry. Tucson’s current troubled financial condition simply makes it a less attractive merger partner.
Regardless of Edison’s initial offers to merge, Tucson’s financial and regulatory problems should cause one to question whether the SDG&E-Tucson; merger would have been terminated by the two companies.
Navarro also alleges that the SDG&E-Edison; merger would be anti-competitive. However, he fails to note that the potential anti-competitiveness of the merger will be a major subject of the federal and the state regulatory hearings in months to come. While SDG&E; doesn’t believe there are any anti-competitive problems, should one be found to exist, it will be corrected or the merger will not be approved.
TOM PAGE
Chairman, President, Chief Executive Officer San Diego Gas & Electric
