S. Calif. Gas Co., San Diego Utility Propose Merger

In a record merger that would bring big-league energy competition to Southern California, the parent companies of San Diego Gas & Electric and Southern California Gas announced a proposed marriage Monday that would create the nation’s largest public utility.

The new company, representing a dramatic bid to stake out a strong position in the emerging free market for energy, was billed as a “merger of equals” between Pacific Enterprises, the parent of Southern California Gas, and Enova, parent of SDG&E.; The new firm is to be headquartered in San Diego.

For the roughly 1.2 million Orange County business and residences that use electricity and natural gas provided by the two utilities, the merger will have little immediate impact.

San Diego Gas & Electric provides electricity for 95,000 South County customers, while Southern California Gas has a near-monopoly on natural gas. Until utility deregulation begins in 1998, electric rates shouldn’t be affected by the combination of the two utilities, a SDG&E; spokesman said.

After deregulation kicks in, however, the utilities will be able to compete with one another to provide service--much like the long distance telephone carriers compete.

The principals insist that the merger--valued at $4.3 billion--would lower costs, spark competition among energy providers for Southern California consumers, and reduce gas and electricity prices. That’s the idea driving the escalating merger activity in the utility industry, and the goal of California’s electricity deregulation law signed by Gov. Pete Wilson last month.

The deal probably would put pressure on California’s other major utilities--Southern California Edison and Pacific Gas & Electric--to form similar alliances in a rapidly consolidating industry. The merger announced Monday was the ninth this year involving major U.S. utilities, and the biggest ever among investor-owned utilities.

As with all such mergers, some pain and uncertainty would ensue. About 1,000 jobs, or 9% of the two companies’ combined payroll, would be trimmed to cut costs, and some of those would be layoffs. Los Angeles Mayor Richard Riordan served notice Monday that he is not happy about losing a headquarters office and is worried about the competitive threat to the municipally owned Los Angeles Department of Water and Power.

And not everyone agrees that the merger is a win-win proposition for ratepayers. One consumer group said the effect on the natural gas market may be exactly the opposite because the merger would leave one local competitor where there were two.

In any event, the merger plan will be closely scrutinized at the municipal, state and federal levels. Significant regulatory hurdles remain, and community and consumer opposition could derail the combination, as has happened to similar proposals.

In 1991, opposition from environmentalists and consumer advocates brought down Southern California Edison’s proposed $2.5-billion merger with SDG&E.; San Diego politicians mustered significant political pressure to quash the proposal.

Pacific Enterprises and Enova say they have learned from Edison’s failure: In a key gesture to San Diego civic leaders, they promised to put the merged company’s corporate headquarters there. They were vague, however, on where the estimated 1,000 job cuts would be made and hinted that future employment growth would be concentrated in the Los Angeles area.

This time, San Diego officials greeted the plan favorably. Mayor Susan Golding said in a statement that the merger was “good news for San Diego. . . . This is much different from the previous takeover proposal,” referring to Edison’s aborted acquisition of SDG&E.;

By contrast, Riordan voiced concern over the merger’s competitive threat to the city-owned Department of Water and Power. In a statement, Riordan said his office will “carefully evaluate the proposed merger, with particular emphasis on the bottom line for the customer/owners of our utility company.”

Riordan “would characterize this as a wait-and-see, carefully evaluating what the bottom line concerns are,” said mayoral chief of staff Robin Kramer.

“The L.A. DWP is a customer-owned utility at the brink of entering a competitive energy market in which the only known is that there are a series of unknowns,” Kramer said. “Who ultimately wins and who pays are at issue, and they are poignant when the utility is owned publicly.”

The merger shows how the power business, once the reserve of monopolistic utilities, is rapidly reshaping itself to prepare for deregulation, the federally mandated process by which consumers will ultimately have the right to decide whom they buy power from.

Ultimately, that is supposed to mean lower electricity rates for residential and business customers.

If approved by regulators and shareholders, the merged entity would probably pose a major competitive threat to Edison, the major supplier of electricity in the L.A. Basin, and to the DWP. Top executives of the merger partners acknowledged that they intend to challenge both power providers.

“The impact on people in the Los Angeles Basin is that there will be competition to serve them and that will mean lower prices in the long run,” said Pacific Enterprises Chairman Willis B. Wood. Officials from DWP and Edison were not available for comment on the proposed merger.

Edward Tirello, utility analyst at NatWest Securities, concurred: “Impact for Edison customers? You may be getting lower rates because you will have a direct competitor in your neighborhood.”

By contrast, consumer advocate Michael Shames of Utility Consumers Action Network in San Diego noted that the effect may be the opposite where natural gas is concerned. The merger would deprive customers throughout Southern California of any competition between two of the region’s biggest natural gas providers, SDG&E; and Southern California Gas. “Instead of two 800-pound gorillas, you have one 1,600-pound gorilla,” Shames said.

Though Edison and DWP will face competition anyway under California’s new electric deregulation law, the Enova-Pacific venture presents a powerful opponent because of Southern California Gas’ existing natural gas customer base of about 4.7 million customers--giving the new entity a ready-made list of potential power buyers and billing network.

The merged company also plans to use its size to compete nationwide for energy sales in the new free market. Size is a key to survival: The 200 investor-owned U.S. utilities could be winnowed down to between 50 to 100 over the next several years as the industry consolidates, observers say.

The consolidations just this year have included such gas pipeline giants as Enron Corp. of Houston with utilities such as Portland, Ore., General, and will someday create companies that offer everything from telecommunications to home security devices in addition to energy.

The new Southern California company, which has not yet been named, would serve about 5.9 million natural gas and electric customers, surpassing San Francisco-based Pacific Gas & Electric to become the biggest such utility in the nation in terms of customers. Both PG&E; and Edison International, parent of Southern California Edison, are larger in revenues and assets.

In Orange County, SDG&E; provides electricity to consumers in Mission Viejo, Laguna Niguel, South Laguna, San Juan Capistrano and San Clemente. Southern California Edison Co. provides electricity in all other areas of the county except Anaheim, which has its own city utility. And except for Anaheim, all natural gas in the county is delivered by Southern California Gas Co.

Monday’s proposed merger would creates a company with a combined stock market value of $5.2 billion. The merger value of $4.3 billion refers to the value of the shares exchanged and the assumed debt.

The new partners said Monday that the consolidation would save them $1.2 billion in costs over the next decade, largely through the elimination of about 1,000 of their combined 11,740 jobs by the end of next year. Most would come through attrition and retirement incentives, but there would be layoffs as well, the companies said.

Pacific Enterprises and Enova have already joined forces to bid on energy projects in Mexico. They are among a consortium that successfully bid on a new natural gas distribution system for Mexicali, Baja California, and have proposed a $600-million power plant for Rosarito, also in Baja California.

Pacific Enterprises shareholders would own about 52% of the stock in the new company. But each company would be equally represented on the board of directors. Job reductions would be made according to merit and not along any prescribed company-per-company formula, said Don Felsinger, president of San Diego Gas & Electric.

The designation of San Diego as headquarters indicated that jobs could be shifted initially from Los Angeles, where Pacific Enterprises is headquartered along with Southern California Gas, its main holding.

But the company’s long-term growth prospects are in Los Angeles because that’s where the company’s unregulated, or non-California gas and electricity business, such as marketing and managing power outside Southern California, would be concentrated. Southern California Gas operations also would remain in Los Angeles.

If the deal is approved, Pacific Enterprises President Richard Farman would become board chairman until 2000 when he is set to retire, ceding the position to Enova’s chief executive, Stephen Baum. Both companies’ current chairmen, Pacific Enterprises’ Willis Wood and Enova’s Thomas Page, are slated to retire at the end of 1997 when the deal is expected to close.

The combined operation would have annual sales of about $4.25 billion. About 60% of its revenue would come from sales of natural gas, about 35% from electric, and the rest from other operations, the companies said.

Under the terms of the agreement, Pacific Enterprises shareholders 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 of the new parent company for each of their 116.5 million shares.

Pacific Enterprises shareholders are receiving the sweeter end of the deal because it would effectively give them a 63% increase in their dividend payout. Not only would the effective dividend rate be raised from the current $1.44 per share to Enova’s $1.56 per share, but Pacific Enterprises shareholders would get an additional half a share in the new company.

Also contributing to this story was Times staff writer John O’Dell.