Judges Urge Rejection of Edison-SDG&E; Merger : Utilities: Their recommendation says the proposed $2.6-billion union would lessen competition in the state.

Dealing a major blow to a giant utility merger, two state administrative law judges on Friday recommended rejection of the proposed $2.6-billion combination of Southern California Edison Co. and San Diego Gas & Electric Co., arguing that the merger would lessen competition in the state.

The judges’ ruling, which does not hold force of law, is not the final word on the controversial merger that would create the largest investor-owned utility in the United States and affect more than 5 million ratepayers in Southern California. Final approval lies with the Federal Energy Regulatory Commission and the state Public Utilities Commission.

Gov. Pete Wilson, a former San Diego mayor who has not taken a position on the merger, could play a role in determining the outcome. He has said he soon will fill two vacancies on the five-member PUC.

In their exhaustive, 1,300-page ruling released in San Francisco, Judges Lynn Carew and Brian Cragg concluded that the proposed merger would lessen competition for electricity, give the merged companies undue control over transmission lines and accord them too much authority to negotiate contracts with power suppliers.

The judges also found that there was little that the companies could do to make the merger acceptable in terms of competition.

At Edison’s Rosemead headquarters, the company said in a statement: “We believe the record, at both the federal and state levels, demonstrates that any conceivable competitive impacts of the merger are slight and can be fully mitigated.”

The company added: “We continue to believe that the merger is in the public interest and provides a unique opportunity to serve well the customers of both utilities.”

But the judges’ report was enthusiastically received by San Diego Mayor Maureen O’Connor, who traveled to San Francisco on Friday to personally pick up a copy of the five-inch-thick document.

“I’m ecstatic,” O’Connor said shortly after reading the massive report’s executive summary. “The report followed in line with many objections that the city has made since the merger first was proposed.” San Diego, largely at O’Connor’s direction, has spent nearly $6 million fighting the merger in regulatory reviews and court challenges.

Competitive questions aside, the two judges acknowledged that the merger could save Southern California ratepayers about $1.039 billion from 1991 to 2000, a figure they called “significant” but “not very precise.” Savings would come mainly from eliminating 1,153 redundant jobs.

The estimate is less than Edison’s claim that the merger would save $1.7 billion, but more than the savings calculated by some critics, some of whom said the merger could raise costs.

The judges also said that the merger’s effects on air quality and other aspects of the environment would be significant but could be mitigated.

The judges’ ruling “is not surprising,” said Barry M. Abramson, an industry analyst with Prudential Bache in New York. “I don’t think it prevents the merger from happening; it’s just the opinion of the two administrative law judges.”

He added: “It’s important to note that the federal Justice Department’s antitrust (division) has already granted an opinion saying the merger would not violate their view of antitrust issues. . . . But certainly it makes it more difficult, because the companies must refute these arguments as well as they can.”

The PUC can adopt, modify or overrule the judges’ decision after at least 25 days of reaction from interested parties. In the next month, observers expect political pressures on the PUC’s three commissioners--two seats on the panel are vacant--to be intense.

The judges presided over months of often rancorous debate, with each side spending millions of dollars in legal fees to promote their causes in a deal that was proposed in July, 1988. Friday’s decision ended the hearing process.

In December, a federal administrative law judge similarly recommended against approval on competitive grounds, but the U.S. Justice Department and the staff of the Federal Energy Regulatory Commission have recommended that the commission disregard the opinion.

The FERC, like the PUC, still must rule on the merger.

The proposed merger has drawn heated opposition from San Diego officials, consumer groups and utility industry critics, all of whom have argued that the merger would wrest local control from San Diego, raise rates, increase air pollution and reduce competition.

For their part, Edison and SDG&E; officials have claimed that the merger would cut costs, lower rates and have no net effect on competition or air quality.

In San Diego, Lee Haney, SDG&E;’s senior vice president and chief financial officer, said in a statement that the utility will ask the PUC to reject the judges’ decision and approve the merger.

“The judges apparently felt the merger would have anti-competitive effects, which none of our proposed mitigation conditions would remedy,” Haney said. “This is in direct contradiction to the findings of the U.S. Department of Justice--the nation’s antitrust expert-- which found that with certain mitigation measures already accepted by Edison, the merger poses no competitive problems.”

In Sacramento, state Sen. Herschel Rosenthal (D-Los Angeles), a longtime utility industry critic, wrote Wilson, urging him to fill the vacancies on the PUC that opened when the terms of Commissioners Stanley Hulett and Frederick Duda expired Jan. 1.

Otherwise, two of the three remaining commissioners could approve the largest utility merger ever, he argued. Friday’s decision was based on a state law introduced by Rosenthal and passed by the state Legislature last year that required a demonstration that utility mergers not reduce competition.

The judges’ recommendation was based mainly on findings that the merger would reduce competition in the state. According to the judges’ report:

The merged companies would dominate use of transmission lines linking the Pacific Northwest to the Southwest, resulting in monopoly power over those lines. Also, by eliminating SDG&E; as a competitor to Edison, the merger would affect competition among other utilities and independent power producers for access to transmission lines into Southern California.

Because of this, the merged companies would also be able to dictate terms to power suppliers and would be able to distort prices to their advantage.

By eliminating SDG&E; as a retail competitor to Edison, the merger would reduce competitive pressures that help keep rates down for utility customers.

The judges also ruled that the merger would increase the opportunity for Mission Energy, a non-regulated energy producing subsidiary of Edison parent SCECorp. to sell power to the merged entity. That would give Mission an unfair advantage over other power suppliers and possibly raise costs to ratepayers.

The judges said Edison could remedy that potential problem by divesting itself of Mission Energy operations in the western United States and Canada. Analysts doubted that SCECorp. would be so inclined, since Mission provides SCECorp.’s best chance for substantial profit growth in coming years.

With the judges’ report now in hand, the merger issue is headed into the political arena--”the Super Bowl, so to speak,” San Diego Mayor O’Connor said.

“Edison is well connected politically and they spend money freely,” O’Connor said. “Ratepayers and San Diegans don’t have the major political and financial clout in Sacramento, so we’ve got to rely upon the rightness of our stand.”

Consumer advocates also applauded the findings. “We are very glad to see this proposed decision,” said Audrie Krause, executive director of TURN, a San Francisco-based consumer group that has opposed the merger since it was first proposed. “This is a very strong recommendation against it.”

While TURN applauded the law judges for focusing on competitive problems, Krause said she was “a little concerned . . . that they bought into the argument that there will be substantial up-front benefits” for ratepayers.

Consumer groups such as TURN and San Diego-based Utility Consumers Action Network (UCAN) have consistently attacked utility claims that the merger would generate $1.7 billion in savings that could be used to help reduce electric rates during the coming decade.

Earlier, the PUC’s Division of Ratepayer Advocates said that very little savings would be generated, because Edison’s logic was faulty. However, the division said that, using Edison’s premise, about $1.3 billion in savings would accrue.

UCAN Executive Director Michael Shames said that the $1 billion in savings, when spread over a decade, would produce “an almost insignificant impact on rates.”

The judges’ report also suggested that it would be illegal for Edison to follow through on its promise to seek an immediate 10% rate reduction for customers in SDG&E;’s existing service area. Edison had pledged to seek the rate cut in late 1988, when it first proposed the merger. Don Klein, founder of Ratewatchers, a small, San Diego-based group that doubts the merger benefits claimed by utility executives, believes commissioners will approve the merger.

But Klein also believes the PUC has “an obligation . . . (to include) a number of conditions . . . designed to make this merger in the public interest. . . . I truly believe that that’s their responsibility.”

High on merger opponents’ shopping lists are conditions that would force Edison to make good on its pledge to seek immediate rate cuts for SDG&E;’s residential customers.

That pledge, made when Edison offered lower rates than SDG&E;, could be difficult to keep, opponents have said.

Edison executives have countered with studies showing that SDG&E;’s rates will again exceed Edison’s by 1993 or 1994. By the year 2000, the studies claim, a stand-alone SDG&E; would be charging rates that will exceed those charged by Edison.

Opponents also want the PUC to adopt conditions that would ensure that air quality is not degraded if additional power plants are pressed into service following a merger. And, they want the PUC to severely restrict Edison’s policy of buying power from Mission Energy.

Lee reported from Los Angeles and Johnson reported from San Diego.

NEXT STEP

The merger case now goes to the Public Utilities Commission, which has the option to adopt, modify or overrule the judges’ decision after 25 days of reaction from interested parties. In the next month, observers expect political pressures on the PUC’s remaining three commissioners to be intense. The PUC is down from five commissioners. Although Gov. Pete Wilson indicated he would fill the two vacancies soon, it is unclear whether the appointments will come in time for a decision on the merger. Meanwhile, the Federal Energy Regulatory Commission must make its own ruling on the merger. In December, a federal judge recommended against approval on competitive grounds, but the U.S. Justice Department and FERC staff recommended that the commission disregard the opinion.

CHANGING BUSINESS: Two administrative law judges who recommended against Southern California Edison’s merger with San Diego Gas & Electric suggested that the deal would hurt non-utility power producers in California. D1

A BUMPY ROAD FOR MERGER PLANS

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

June 13, 1988: San Diego Gas & Electric 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.

July 26, 1988: SCEcorp, the Rosemead-based parent of Southern California Edison, surprises SDG&E; with an uninvited, $2-billion stock swap merger offer. The merger would create the nation’s largest investor-owned electric utility with 4.8 million customers.

Nov. 3, 1988: SDG&E; and Tucson Electric abandon their planned merger. The utilities blame anticipated stiff opposition from SCEcorp. SDG&E; will consider “a possible combination with SCEcorp and other extraordinary transactions,” according to SDG&E; Chairman Tom Page. Tucson Electric subsequently stumbles badly as the Arizona economy goes into a recession. Observers believe the financially troubled Arizona utility eventually will head into bankruptcy proceedings.

Nov. 30, 1988: SDG&E;’s board unanimously accepts SCEcorp’s sweetened $2.4-billion stock swap merger offer.

April 18, 1989: SDG&E; shareholders approve merger with SCEcorp’s Southern California Edison subsidiary.

April 20, 1989: SCEcorp and Southern California Edison shareholders approve merger with San Diego Gas & Electric. State and federal regulators begin lengthy reviews of the planned merger.

Nov. 27, 1990: A Federal Energy Regulatory Commission law judge recommends that the merger be denied on antitrust grounds. However, the U.S. Justice Department and the energy commission staff subsequently argue that commissioners should ignore the report when a final decision is made by the commission.

Feb. 1, 1991: Two administrative law judges recommend that the merger be denied on the grounds that it would stymie competition among California utilities. The finding, however, is not a final decision. The Public Utilities Commission could vote on the merger as early as the first week of March.