SDG&E; Agrees to Sale of Grid

San Diego Gas & Electric reached an agreement with Gov. Gray Davis on Monday to sell its 1,800 miles of transmission lines for $1 billion, a move that could put the state closer to its goal of creating a statewide power grid.

But like a deal reached April 9 to buy Southern California Edison’s larger network for $2.8 billion, the SDG&E; deal must overcome considerable legislative and financial hurdles.

Together, the two transactions would give the state control of nearly 14,000 miles, but would still leave it without the 18,000-mile transmission grid of Pacific Gas & Electric, the San Francisco-based utility that filed for U.S. Bankruptcy Court protection in April.

Davis on Monday hailed the pact with SDG&E; as another milestone in his effort to rescue the state’s two largest utilities from financial ruin and to rebuild California’s frayed electrical system.

The transaction, worked out between Davis and Stephen Baum, chief executive of SDG&E; corporate parent Sempra Energy, also paves the way for the utility to eliminate roughly $750 million in balloon payments that consumers originally were expected to pay. The payments cover the difference between what the utility and the state could pay for power and what regulators would allow SDG&E; to charge its customers.

“This is a huge relief for the people of San Diego and a large burden lifted from their shoulders,” Davis said in announcing the agreement.

The sale of transmission assets, which include 170 high-voltage lines stretching from southern Orange County to the Mexican border, requires the approval of the Legislature and the Federal Energy Regulatory Commission.

Although state legislators have yet to agree with the plan by Davis to use a transmission grid purchase to rescue Edison, they voiced some support for the deal reached Monday.

“It wipes out the . . . $750-million debt that ratepayers had due,” Sen. Steve Peace (D-El Cajon) said.

Senate President Pro Tem John Burton (D-San Francisco), a critic of the Edison deal, said the Sempra agreement appeared to be better.

“It looks in some way that Sempra is giving more than Edison,” Burton said.

Unlike Davis’ proposed deal with Edison, the agreement with Sempra--reached after four months of closed-door negotiations--does not require the state to take over SDG&E;’s high-voltage transmission lines.

Sempra is in a fundamentally different position from Edison. While Edison teeters close to bankruptcy, owing roughly $3.5 billion to various creditors, Sempra has no appreciable debt to generators.

Rather, under legislation approved last year, the difference between the capped retail rates and high wholesale cost of electricity is placed in a “balancing account.” San Diego ratepayers are on the hook for what amounts to a $750-million balloon payment.

Residential ratepayers would be charged as much as $400 to offset the debt. Small businesses would pay up to $1,400, and larger commercial users could be required to pay as much as $12,000, subject to California Public Utilities Commission action.

Under the deal, outlined by Davis and his legal affairs advisor, Barry Goode, Sempra would make a series of accounting changes and settle various claims pending before the PUC to bring the $750 million down to zero.

The San Diego utility would, for example, write off $219 million of the $245 million it allegedly has overcharged customers.

In exchange, SDG&E; would agree to sell power from the San Onofre nuclear power plant to the state at a relatively low price.

Additionally, Sempra would delay a request for a rate hike by one year, and it agreed to spend $3 billion over the next six years to upgrade its system of delivering electricity to its 3 million customers. That amount would increase to $3.5 billion if the state does not take control of San Diego’s transmission system.

The state’s efforts to purchase transmission lines remain controversial. Both the Edison and SDG&E; transmission deals pay the companies almost twice what the assets are worth, said Robert Mitchell, executive vice president of Trans-Elect, a private Washington, D.C., company that is attempting to purchase transmission lines.

Mitchell said that, on Wednesday, Trans-Elect will offer Edison International $1.8 billion for its transmission grid, arguing that there is little chance that the Legislature will ever approve the Davis plan.

Mitchell said he has also approached Sempra, offering about $700 million for its lines.

The state has valued the transmission assets at 2.3 times “book value,” an accounting measure of what a company lists as the value of an asset. Market prices of assets, however, can often be more than book value.

Mitchell believes that transmission lines are worth 1.2 to 1.4 times book value.

“At $1 billion, this is considerably overvalued, but if Sempra can get that type of money for its transmission lines, congratulations,” Mitchell said. “I don’t think it will happen.”

Sempra CEO Baum conceded that the price of the deal was determined by factors largely unrelated to his company.

He said the method of calculating the price was determined by what Edison and PG&E; need to get for their grids to become credit-worthy, “a factor that doesn’t bear on the SDG&E; situation.”

Baum said the state can afford to pay the $1 billion. Negotiators, he added, calculated that if the state offers long-term bonds to pay for purchase, it could cover the debt payments from what it collects in transmission fees as the grid operator. By selling tax-free bonds, the state typically pays a smaller interest rate to borrow money than do private-sector companies.

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Times staff writer Nancy Rivera Brooks contributed to this story.