Seeing the Light : Pacific Enterprises, Enova Go After Market Share

The proposed Enova Corp.-Pacific Enterprises merger announced Monday is less about gas or electricity than it is about gaining customers.

True, when electricity is deregulated in California after Jan. 1, 1998, Enova will be offering electricity and natural gas to 6 million customers in special packages and at special rates. But it will also be hawking other services ranging from home security alarms to telephone service to travel reservations.

And it will be offering all those services not only to its own customers but to those of Southern California Edison, the L.A. Department of Water and Power and any other energy supplier on the horizon.

“We’ll offer to supply electricity to customers who buy gas from us, but they don’t have to buy it. They can stay with their present supplier or buy from someone else,” explained Stephen Baum, president of Enova, who will become chief executive of the merged company in 2000.

Baum was describing the marketing free-for-all that utility deregulation will become for residential and small-business customers who now have no choice but to buy power from the designated local monopoly supplier at prices fixed by state regulation.

Under deregulation, price reductions will be offered to induce customers to buy from Enova--or from the Edison or DWP marketing company, or the marketing companies of Enron, Pacificorp, Duke Power and other companies intent on coming into the California market.

That’s right, Duke Power from North Carolina intends to market electricity in California, buying power wholesale from a grid fed by local generating stations and reselling it retail.

Electricity and gas marketing agents will call potential home and small-business customers on the phone, offering the kind of special rates now reserved for large industrial companies.

Utility bills will be stuffed with circulars offering package rates for gas and electricity with a home alarm or other premium thrown in.

“They’ll be competing with frequent-flier miles,” said Edward Tirello, an analyst of the utility industry with NatWest Securities.

With deregulation, the utility business will behave much as the airline and long-distance telephone businesses have over the last two decades. Consumers may be confused for a time by competing claims, but rates for customers will come down.

Although the Enova-Pacific Enterprises merger will create a larger company, with more than $4 billion in revenue, deregulation will force the split-up of most utility companies. Power generation will be in a separate corporation, with its electrical output traded in futures exchange markets as natural gas has been since its deregulation in the 1980s, explained Fred John, senior vice president of Pacific Enterprises.

That “disaggregation,” as John calls it, will bring down electric rates because high-cost power that utilities must now buy from third-party suppliers or from nuclear plants will become noncompetitive.

There will be no shortage of electricity or natural gas because energy is in surplus nationwide. In fact, oversupply is one of the underlying reasons for utility deregulation. The local monopolies that were necessary in former times to finance and build power plants and pipelines for scarce resources are being forced into a weeding-out competition because the resources are no longer scarce.

The other reason for deregulation is that industrial customers demanded competitive choice in their power suppliers and they got it.

Enova, formerly San Diego Gas & Electric, is a pioneer of multi-state marketing. It supplies Sears stores in the Western United States with gas and electricity, analyzing store usage and customizing power supply at the most economic price.

Now that kind of service is being extended to homes and small businesses nationwide. Enova is in an experimental program selling power to residential customers in Massachusetts. “We hope to make New England a main marketing area,” Baum said. “This is not only about California.”

In Baum’s statement lies a competitive tip to Edison, DWP and other local companies. Competition in the deregulated utility age will not be about size in the traditional sense of generation plants and transmission lines, but in the number of customers a company can reach with its services and its monthly billings.

In that sense, the best defense will lie in a good offense. If out-of-state suppliers are going to invade California’s market, local companies will have to take the battle directly to other states--or other countries.

Already, explained analyst Douglas Christopher of Crowell Weedon in Los Angeles, Enova and Pacific Enterprises are partners in a venture to supply natural gas to Mexicali, Mexico, extending gas distribution lines from San Diego to gain industrial customers across the border.

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Powerful Partners

As deregulation of the utility industry looms, two would-be competitors, Enova Corp. of San Diego and Los Angeles-based Pacific Enterprises, announced a planned merger Monday in which Enova would pay $4.25 billion in stock and assumed debt for Pacific Enterprises. A look at the deal:

The Impact

Natural gas industry: The merger deal is part of the rapid consolidation in the electric and natural gas industries sparked by deregulation. Utilities are scrambling to expand and cut costs before consumers are free to shop for the least expensive suppliers, analysts said.

Shareholders: Pacific Enterprise stockholders would receive 1.5038 common shares of the new parent company for each of their 83.2 million shares, while Enova stockholders would receive one share for each of their 116.5 million shares.

Employees: Company representatives expect the merger to produce cost savings of about $1.2 billion over 10 years, mainly from combining management and administrative functions. The companies say they will eliminate 9% of jobs, or roughly 1,000 positions, through attrition and buyouts, but add that they may add jobs as business expands.

Customers: No immediate changes in rates are expected.

Regulatory issues: The deal, expected to close by the end of 1997, is subject to approval by the Federal Energy Regulatory Commission, the California Public Utilities Commission, the Federal Communications Commission and the Nuclear Regulatory Commission, as well as shareholders of both companies.

The Territories

Southern California Gas and San Diego Gas & Electric overlap only in the south Orange County communities of Dana Point, Laguna Beach, Laguna Hills, Laguna Niguel, Mission Viejo, San Clemente and San Juan Capistrano.

The Companies

The merger of Pacific Enterprises--whose attempts at diversifying through the purchase of Big 5 Sporting Goods and the Thrifty Drug chain failed in the 1980s--and Enova would create a company with about 6 million customers. A look at the companies:

Pacific Enterprises

Headquarters: Los Angeles

President: Richard Farman

Employees: 8,000

Subsidiaries: Southern California Gas Co. is Pacific Enterprises’ largest subsidiary. It also has interests in interstate and offshore natural gas pipelines, foreign natural gas distribution systems and alternate energy development. Pacific and Enova are partners in energy distribution ventures in Mexico.

1995 Revenue: $2.38 billion

1995 Earnings: $185 million

Customers: 4.7 million

Areas served: 535 communities.

Shareholders: The nation’s largest natural gas distributor has about 100,000 shareholders.

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Enova Corp.

Headquarters: San Diego

President: Stephen L. Baum

Employees: 3,900

Subsidiaries: San Diego Gas & Electric Co. is Enova’s largest subsidiary, accounting for 97% of revenue in 1995. Enova has six other U.S.-based subsidiaries.

1995 revenue: $1.87 billion

1995 earnings: $233 million

Customers: SDG&E; provides electric service to 1.2 million customers in Southern California and gas service to 700,000 customers in San Diego County.

Areas served: Provides all of San Diego County with electricity and gas and seven Orange County cities with electricity.

Shareholders: The largest publicly held company in San Diego has about 150,000 shareholders, 80% of whom are individuals.

Sources: Times, wire and company reports

Researched by JENNIFER OLDHAM / Los Angeles Times