Judge Opposes the Merger of SCE, SDG

A federal law judge Tuesday recommended that the Federal Energy Regulatory Commission prohibit Southern California Edison from merging with San Diego Gas & Electric because the combination would stifle utility competition, generate few benefits for utility customers and further degrade Southern California air quality.

Merger opponents greeted the 125-page report as further proof that federal and state regulators should prohibit the controversial merger that would create the nation’s largest electric utility, with 4.8 million customers.

San Diego Mayor Maureen O’Connor, a strident opponent of the planned merger, said Tuesday that the utilities designed the merger to benefit “SCE, the corporation, and SCE shareholders. . . . there’s not any benefit for the citizens of San Diego, rates would go up and environmental quality would go down. . . . It’s what we’ve been saying all along.”

But utility executives predicted that the federal commission’s five members will ignore many of the law judge’s objections and issue a favorable, final decision on the merger early next year.

Commissioners have the option of rejecting or accepting all or part of the report written by George P. Lewnes, the administrative law judge, after he conducted the FERC’s merger hearings this past summer in Washington.

The federal merger review is one of two remaining hurdles for utility executives who proposed the merger in late 1988. FERC approval is necessary because two utilities own a substantial number of the interstate transmission lines, and the commission is responsible for determining whether antitrust laws would be violated.

The California Public Utilities Commission is also conducting a review that is now scheduled to be completed early in 1991.

Although Lewnes’ report focused largely on antitrust concerns, it also faulted the utilities for failing to prove that the merger would generate cost savings needed to provide “substantial net benefits” for consumers in the form of lower electric rates.

“I don’t see how the FERC could overturn this decision,” said Michael Shames, executive director of Utility Consumers Action Network, a San Diego-based consumer group that has opposed the merger since it was first suggested in 1988. “This decision is so strongly worded and is so strenuous in its objections that it, for all intents and purposes, kills the merger.”

But SDG&E; Vice President Lee Haney said commissioners might ignore the more negative portions of Lewnes’ report. In 1988, Haney said, commissioners rejected an equally bleak recommendation from Lewnes when they unanimously approved Portland-based Pacific Power & Light’s now-completed merger with Utah Power & Light.

Lewnes’ negative recommendation was “not unexpected,” said Edison spokesman Lewis Phelps, who maintained that Lewnes is known to believe that “larger utilities are by definition anti-competitive.”

Shames maintained that commissioners will be hard-pressed to ignore Lewnes’ arguments in the review of the Edison-SDG&E; merger.

“The regulatory environment is different in the 90s than it was during the 1980s,” Shames said. “I don’t think you’ll see the same Edison having the same kind of success in lobbying Washington, D.C. regulators that Pacific Power & Light had.”

O’Connor called for FERC members to “listen to the facts. . . . Not only is the FERC law judge saying it’s a bad deal, the PUC staff is saying it’s bad. Edison hasn’t won one ruling based on the facts. They’re sitting back and waiting until they get to the politicians.”

An attorney who is familiar with FERC proceedings Tuesday said that commissioners can--and do--toss administrative law judges’ recommendations aside if they feel the reports incorrectly represent testimony taken during hearings. “That’s what they did with Pacific Power, and they could do it again here,” the attorney said.

Phelps said that Lewnes’ recommendation ignored Edison’s contention that the merger will generate $1.7 billion in cost savings that would be passed through to utility customers. Haney said that Lewnes also ignored an agreement that the utilities have reached with the Department of Justice that would eliminate possible antitrust concerns.

The FERC recommendation prompted a mixed reaction on Wall Street. SCEcorp, Edison’s Rosemead-based parent company, closed up $.125 at $38.25 on New York Stock Exchange trading while SDG&E; closed down $2 at $43.25.

Edward J. Tirello Jr. a New York-based utility industry analyst with Smithy Barney, Harris Upham & Co., said Tuesday that Lewnes’ recommendation was “no surprise . . . because he hates” utility mergers.

“Lewnes was overruled (by the FERC) in Pacific Power, and that’s exactly what’s going to happen here,” Tirello said. “Lewnes also ignored the fact that the merger has the support of FERC staff members and the Department of Justice.”

Both the FERC and PUC regulatory reviews were conducted by administrative law judges, who are supposed to act as impartial observers of both fact and law. PUC and FERC staff members have also reviewed the mergers and made recommendations that the law judges are free to accept or reject. Similarly, the commissioners have the right to reject or accept reports offered by staff members and law judges.

Steven Miles, a Washington-based attorney who represents the city of San Diego in the FERC’s review, described Lewnes’ recommendation as “a major finding. We’re obviously gratified by the decision, which reaches the appropriate and correct finding . . . that the merger should be killed.”

Tirello, the New York-based utility industry analyst, on Tuesday predicted that the state PUC will issue a final decision that is favorable to the utilities. “The PUC is a pretty level-headed group,” Tirello said. “I think they’re going to issue a (positive) decision.”

In a related development Tuesday, state PUC Chairman G. Mitchell Wilk for the first time acknowledged that the PUC’s long-running merger review won’t be completed by the end of December. Wilk, in a prepared statement linked the delay to the thousands and thousands of pages of evidence that must be reviewed.

Wilk’s admission that the merger review won’t be completed by year’s end raised the question of whether the merger review should be determined by the current PUC or by the PUC that will exist after Gov.-elect Pete Wilson replaces two commissioners whose terms expire Dec. 31.

O’Connor on Tuesday suggested that Wilson appoint two new commissioners, including “hopefully, one from San Diego” because the two commissioners whose terms will expire on Dec. 31 seem likely to approve the merger. “Southern California Edison has been steam-rolling this from the beginning,” O’Connor said. “They know how the system works, and they’ve got big, deep pockets.”

California Atty. Gen. John Van de Kamp on Tuesday described the FERC recommendation as “a major step toward preserving competition, and the potential for lower utility bills and a cleaner California environment.”

Van de Kamp, during state and federal reviews, has described the merger as “contrary to antitrust laws.”