PUC Orders SoCal Gas to Cut Customer Rates by 7%
California regulators on Wednesday ordered Southern California Gas Co. to reduce its rates by 7%, a boon to consumers but a ruling that points to layoffs, deep cost cuts and a possible rethinking of a proposed $6-billion merger with Enova Corp.
In effect, the decision by the state Public Utilities Commission will force SoCal Gas to cut annual costs by $160 million by the start of next year to offset the reduced revenue.
Unless costs are cut dramatically, the decision will effectively cut the projected profit of SoCal Gas, which in turn would diminish the value of its parent, Pacific Enterprises, to prospective merger partner Enova. That, in turn, might force San Diego-based Enova to insist on more favorable merger terms, Enova sources said.
The order will also mean an average $2.25 reduction of monthly bills for SoCal Gas residential customers, the utility said.
SoCal Gas, whose parent has applied for permission to merge with Enova to form the nation’s largest utility with 6 million customers, said it had expected the PUC to order a reduction of up to $110 million. The higher amount, passed in a unanimous 5-0 vote, apparently caught the utility by surprise.
The decision came in the utility’s first rate review in three years.
“The decision reflects a lower cost of doing business than in previous years,” said Michael C. Amato, supervisor in the PUC’s office of ratepayer advocates.
In an interview, SoCal Gas President Warren Mitchell said the company would need time to study the decision before outlining any specific cost-cutting measures. The company had already planned 200 voluntary job cuts but “additional reductions will be required,” Mitchell said.
“SoCal Gas will decrease our operating costs consistent with the rates, which will be $160 million less than . . . last year,” Mitchell said.
Mitchell would not rule out layoffs among his 7,000 employees but said terms of the utility’s union contract limit involuntary job cuts to 250 per year. Mitchell said the gas company has no intention of renegotiating that clause with its unions.
As for the merger, Mitchell said the utility should be able to meet the earnings targets that helped set the terms of the agreement with Enova. When asked whether the terms of the merger would have to be rewritten, Mitchell said: “I don’t think so.”
But a spokesman for Enova said the company had no comment on whether the PUC decision would require a redrafting of the merger agreement, which is heading toward a March 1998 decision by the PUC. The Enova board will take up the issue at a meeting Tuesday.
“We are studying the decision to determine its effects on Pacific Enterprises and on the new company resulting from the pending merger,” Enova spokesman Doug Kline said.
Douglas Cristopher, an analyst with the investment firm Crowell, Weedon & Co. of Los Angeles, said he didn’t think the order was “enough to throw the merger in jeopardy,” but added that previous cost cuts have left very little fat to trim.
“They run a pretty tight ship and they have made a lot of changes over the last couple of years cutting back staff and administrative costs. Their rates have been declining over the past few years,” Cristopher said.
Pacific Enterprises stock closed at $33.81, down 13 cents, while Enova closed at $24.75, up 13 cents in New York Stock Exchange trading Wednesday.
