From: ann.schmidt@enron.com
To: mark.palmer@enron.com, karen.denne@enron.com, meredith.philipp@enron.com, steven.kean@enron.com
Date: 2000-09-18 09:04:00+00:00
Subject: Dereg Articles

F.Y.I.

                          
  Business; Financial Desk 
  Sempra Still Feeling the Heat Energy: The parent firm of 2 Southern 
California
  utilities is weathering criticism from all sides, with more flare-ups on 
the horizon. 
  NANCY RIVERA BROOKS 
    
  09/17/2000 
  Los Angeles Times 
  Home Edition 
  Page C-1 
  Copyright 2000 / The Times Mirror Company 

  Sempra Energy just can't seem to get out of the hot seat.

  First there was the controversial 1998 merger between the parents of San 
Diego Gas &
  Electric and Southern California Gas, which created the Sempra Energy 
holding company
  and gave it more customers--21 million--than any other utility company in 
the nation.

  Now, although the calendar says autumn is less than a week away, warm 
weather still has
  Sempra sweating through a summer of electricity discontent. And winter 
doesn't look like
  much fun either for Sempra or its natural-gas customers, with residential 
gas bills projected
  to increase 30% to 35% without fueling anything above a strictly regulated 
rate of return for
  Sempra's gas utilities.

  Hanging over the San Diego-based energy company is a new uncertainty 
generated by the
  turmoil in California's restructuring electricity industry. Of particular 
concern to the
  investment community is a rapidly swelling debt caused by the difference 
between the high
  wholesale cost of electricity and the freshly capped retail power rates for 
the 1.2 million
  customers of San Diego Gas & Electric.

  Who will pay that debt--Sempra Energy's shareholders or SDG&E's electricity
  customers--and how big it will grow may not be known for years. The answer 
will hinge in
  part on an investigation of SDG&E's conduct by the California Public 
Utilities Commission.

  In the meantime, Sempra Energy, whose two utilities serve nearly 7 million 
gas and
  electricity meters representing about 21 million customers from Central 
California to the
  Mexican border, continues to post sparkling earnings largely because of its 
non-utility
  businesses. Sempra wants to be much more than its utilities, pushing into 
energy trading
  and electricity and natural-gas contracting outside of California.

  Indeed, Sempra has stressed that recent profit surges came not at the 
expense of its
  California utility customers. Consumer advocates are not persuaded, 
painting Sempra as a
  profit-hungry company that has not done enough to protect ratepayers.

  Despite all the tumult, Sempra's previously languid stock price has risen a 
bit this summer,
  a fact that appears to amaze even Stephen L. Baum, Sempra's new chairman 
and chief
  executive.

  "Maybe it's all the publicity we've been getting," he recently quipped, 
ruefully.

  It's a careful-what-you-wish-for proposition for Sempra Energy, which spent 
hundreds of
  thousands of dollars in the last two years to boost its corporate profile 
by, among other
  things, becoming a sponsor of Staples Center and rolling out a new logo 
that looks like a
  small flaming man. Now the corporation and its San Diego utility are 
puzzling over how to
  repair an image so scorched that angry residents in SDG&E's 
4,200-square-mile territory
  covering the San Diego area and southern Orange County have taken to 
verbally and
  physically abusing company employees.

  "This has been an agonizing time for all of us," Baum told the Federal 
Energy Regulatory
  Commission at a hearing Tuesday that is part of an investigation into this 
summer's
  gyrations in the California wholesale electricity market. "SDG&E takes 
enormous pride in
  serving this community with safe and reliable electric service at, what 
were until recently,
  just and reasonable prices."

  Although regulators themselves, not to mention consumer advocates, warned 
of looming
  shortages in power supplies, no one predicted this summer of sky-high 
prices during which
  wholesale electricity prices jumped fivefold and bills doubled for SDG&E 
customers, the
  first in the country to pay free-market power prices.

  That produced a "Ratepayer Rebillion"--so dubbed by Michael Shames, 
executive director
  of the San Diego-based Utility Consumers Action Network, a longtime SDG&E 
sparring
  partner. The shock waves quickly reached utility regulators and state 
lawmakers, the
  architects of electricity deregulation , who are still scrambling for 
solutions.

  "SDG&E has become the corporate equivalent of the gang that couldn't shoot 
straight,"
  Shames said. "They have the distinction of having the market blow up on 
them in a very
  visible way . . . and I'm quite convinced they didn't have a clue how 
customers were going
  to respond."

  This high-voltage atmosphere visited the San Diego area because SDG&E did 
such a good
  job selling its power plants, as required under deregulation . The 1996 law 
that launched
  the overhaul of California's electricity world broke the industry into 
three separate
  businesses: companies that make electricity, companies that distribute 
electricity and
  companies that sell electricity directly to consumers and businesses.

  SDG&E and the state's other big investor-owned utilities--Edison 
International unit Southern
  California Edison and PG&E Corp.'s Pacific Gas & Electric--lost their 
secure monopoly
  status. They were deemed to be electricity distribution companies 
only--though still
  monopolies in that segment of the business.

  The utilities handed over their long-distance transmission systems to a new 
nonprofit, the
  California Independent System Operator, and were required to buy their 
electricity from
  another new nonprofit, the California Power Exchange. The utilities 
remained the default
  provider for customers who didn't pick a new electricity retailer, but they 
were required to
  pass along the cost of electricity with no markup.

  Electricity rates for consumers and small businesses were frozen until the 
utilities paid off
  their "stranded assets"--investments in nuclear power and renewable energy 
contracts that
  became unprofitable under deregulation --or until March 2002. Rates are 
still frozen for
  SCE and PG&E customers, but SDG&E customers lost that protection in July 
1999, after
  the San Diego utility sold its power plants to eager buyers who were 
willing to pay much
  more than book value.

  The rapid payoff surprised even regulators, who had developed no 
post-freeze rules. The
  California Public Utilities Commission allowed SDG&E to maintain a 12% 
ceiling on prices
  for the summer of 1999 and recoup any excess electricity costs later. 
Thanks to a cool
  summer and a smoothly functioning wholesale market, the ceiling was little 
employed.

  This summer, however, no ceiling was allowed by the PUC as part of its 
original post-freeze
  order, SDG&E executives said. And prices on the California Power Exchange 
began
  behaving strangely, spiking higher and higher even in the middle of the 
night when demand
  was low.

  San Diego-area electricity users began seeing "true market prices from a 
market that's
  dysfunctional," Baum said. "Of course I wish we had foreseen this market 
spike. We
  didn't."

  Consumer fury has been calmed somewhat by a new law that caps electricity 
prices for
  SDG&E residential and small-business customers at 6.5 cents a 
kilowatt-hour, compared
  with the 21.5-cent peak this summer. Who will eventually pay the 
electricity costs above
  the cap, currently collecting in a balancing account, is left unclear by 
the legislation.

  It could mean a big balloon payment for customers, or some of the costs 
could be shared
  by SDG&E if a PUC investigation finds that the utility didn't act in the 
best interests of its
  customers in buying electricity. A companion bill that would use $150 
million in taxpayer
  funds to defray some of the costs passed the Legislature but has not been 
signed by Gov.
  Gray Davis.

  "I don't think that we did anything wrong," Baum said. "This is a bum rap 
that has been
  hung on us, on SDG&E, that we somehow mismanaged the power supply for our
  customers."

  PUC officials and consumer advocates have criticized SDG&E for not 
"hedging" more by
  buying ahead of time when prices are relatively low, for example. SDG&E 
said that it asked
  the commission for such authority but didn't get it. What's more, Baum 
said, SDG&E found
  better prices for its customers than did SCE or PG&E, even though they have 
broader
  hedging ability.

  SDG&E will have to borrow money to pay for the electricity, since 
ratepayers aren't paying
  the full cost. SDG&E says the under-collection of electricity costs could 
eventually top
  $800 million, whereas sponsors of the rate-cap bill put the total closer to 
$150 million.

  The future debt and the unsettled state of the deregulation process in 
California were the
  reasons given when Moody's Investors Service recently changed the credit 
outlook for
  Sempra and SDG&E to "negative."

  Shareholders can't be happy with Sempra's stock price, which fell from a 
high of about $28
  a share right after the 1998 merger between Enova and Pacific Enterprises, 
which was
  loudly opposed by consumer advocates because of the market clout a merged 
company
  would wield, to a low of $16.63 in April. Sempra bought back 36.1 million 
shares at $20
  each in February and lowered the stock dividend to $1 a share from $1.56 a 
share. The
  stock closed Friday up 14 cents at $20.14 on the New York Stock Exchange.

  Baum acknowledged that the company has lagged in return to shareholders, 
blaming that
  partly on a turning away by investors from utilities and other old-economy 
companies to
  Internet and other new-economy stocks.

  Sempra wants to be much more than its utilities and has made some promising 
inroads
  into unregulated areas, such as energy commodity trading, 
telecommunications,
  power-plant building and the sale of electricity and natural-gas to 
consumers and
  businesses in other states, Mexico, South America and Canada, analysts said.

  In fact, Sempra Energy Trading, which buys and sells electricity, natural 
gas, oil and coal,
  earned more money in the first quarter--$3 million--than in all of 1999. 
That subsidiary's $40
  million in second-quarter earnings was primarily responsible for Sempra's
  better-than-expected income for the period of $110 million, or 55 cents a 
diluted share, up
  34% from the second quarter of last year.

  Analyst Paul Fremont of Jefferies & Co., who has a "buy" rating on Sempra, 
notes that the
  trading company income will be volatile and that the other subsidiaries 
remain unknown
  quantities.

  "They've really got to have sustained growth in that [unregulated] part of 
the business
  because there's not a lot of growth in the utility part" in California, 
Fremont said.

  Sempra's earnings growth during this electricity furor has consumer 
advocates fuming even
  though company executives emphasized that electricity trading gains came 
from the East,
  not California.

  "Consumers don't need to feel sorry for this company," said Mindy Spatt, 
spokeswoman for
  the Utility Reform Network, also known as TURN, a San Francisco-based 
consumer group.
  Spatt noted that Sempra's new El Dorado power plant near Las Vegas "did 
very well"
  selling electricity in Nevada and California during most of the second 
quarter.

  "We don't think consumers should be responsible for the failures of 
deregulation , and we
  think that Sempra is in a much better position to pay for some of these 
costs than the
  average San Diegan," Spatt said.

  Sempra has had some problems in reaching beyond its California utility 
origins. One
  subsidiary, Energy America, which sells electricity and natural gas door to 
door in six
  Eastern states, has run afoul of regulators in two states because of 
aggressive sales
  tactics that prompted complaints from consumers. The company has been 
variously fined
  and ordered to retrain salespeople.

  Sempra is on track to reach its goal of reaping one-third of its earnings 
from its
  non-California businesses by the end of 2003 and to increase overall 
earnings by 8% to
  10% compounded annually in the next four years, Baum said.

  That success is whipping up customer ire.

  "People tend to look at Sempra-SDG&E as a monolith. . . . People are 
saying, 'They're
  making a ton of money here. That company is doing very well. We're getting 
screwed, and
  we don't like it, and why should we have to pay for it?' " Baum said. "It's 
a very natural
  reaction. People don't understand, and they don't care to understand."

  One of SDG&E's immediate concerns is fixing relations with its customers. 
Baum said the
  utility recently polled customers and found that 9% considered it credible, 
down from 35%
  ("which is not much to brag about, but it's not bad in the utility 
business") before the
  electricity crisis.

  "I don't know that a corporation can do very well with a credibility rating 
of 9% on a
  sustained basis. That is something I worry about," Baum said.

  SDG&E President Debra L. Reed said most customers don't understand that the
  investor-owned utilities are now only distribution companies, despite a 
$90-million education
  campaign by the Public Utilities Commission.

  "They see our name on the bill and they think we're making money on the 
commodity,"
  Reed said. "We have a lot of education to do with our customers. But we 
realize that it is
  probably not the best time to educate them in the middle of what they see 
as a crisis. . . .
  What we're trying to do is help them through this."

  (BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

  Metering Sempra Energy

  Earnings are up at Sempra Energy, but the San Diego company is spiking on 
the
  controversy meter because of soaring bills for customers of its utilities, 
San Diego Gas &
  Electric and Southern California Gas. Sempra's name is not well-known, but 
its utilities
  serve 21 million people from the Central Valley to the Mexican border.

  (BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

  Branching Out

  Sempra Energy also is pushing into other businesses, primarily outside of 
California:

  Sempra Energy Trading: Trades energy commodities

  Sempra Energy International: Develops and operates energy projects such as 
power plants
  and natural gas lines in international markets

  Sempra Energy Solutions: Markets electricity, natural gas and energy 
services to large
  electricity users

  Sempra Energy Resources: Develops or buys power plants and natural gas 
facilities in the
  United States

  Sempra Communications: Invests in telecommunications

  Sempra Energy Financial: Invests in affordable housing partnerships

  Source: Company reports 

  PHOTO: Sempra's San Diego headquarters; ; GRAPHIC: Metering Sempra Energy, 
Los
  Angeles Times; 


                                                  

  Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved. 

  
                        
  Financial 
  Is Another Energy Crisis Ahead?; Winter Fuel Costs Will Rise; After That, 
Nothing Is
  Certain 
  Kenneth Bredemeier 
    
  09/17/2000 
  The Washington Post 
  FINAL 
  Page H01 
  Copyright 2000, The Washington Post Co. All Rights Reserved 

  This winter the mailman will be delivering markedly higher heating bills 
throughout much of
  the country, including the Washington area.

  Those who use natural gas--the dominant heating fuel in the Washington area 
and
  throughout the United States--face a 27 percent increase. Heating oil 
customers,
  particularly in the Northeast where 35 percent of homeowners use the fuel 
to warm their
  houses, may have to pay more than $2 a gallon--twice the current price--as 
the days grow
  shorter and temperatures plunge.

  Motorists get hit in the wallet every time they pull into a service 
station: They now typically
  pay more than $1.60 a gallon for gas, and the days of 90-cent-a-gallon 
gas--yes, it was just
  last year--are but a distant memory. At least that's better than in 
England, France and
  Belgium where motorists are waiting in long lines to buy $4-a-gallon gas, 
only to find that
  some stations have run out.

  Is this the start of an energy crisis?

  Many energy analysts and government economists say not, that supplies of 
various forms
  of energy will prove sufficient over the next few months, but that the 
costs will continue to
  follow the law of supply and demand. When there's not an excess of a fuel 
available--and
  numerous types of fuel reserves are quite low--consumers will likely think 
the product costs
  too much, at least compared with the prices they've been accustomed to 
paying.

  But as winter approaches, several loosely connected events that spanned the 
globe over
  the past couple of years have heightened awareness of energy in our lives 
and reminded us
  of a lesson learned in the 1970s: Energy prices can be volatile, 
unpredictable and can
  reverberate throughout the economy.

  As Philip Verleger Jr., a partner with the Brattle Group, a Cambridge, 
Mass., economic
  consulting firm, concluded, "Consumers will have to spend more on energy. 
They will have
  less to spend on other things."

  On top of the triple-whammy of higher natural gas, heating oil and gasoline 
prices,
  consumers are also vulnerable to the vagaries of the electricity market 
because the industry
  has been in the midst of deregulation .

  While California and other states have struggled with power prices during 
the adjustment to
  the new competitive environment, electric utilities locally have maintained 
stability.
  Potomac Electric Power Co. says its 621,000 residential customers in the 
District and
  suburban Maryland--about 15 percent to 20 percent of whom heat their homes 
with
  electricity--will find their bills about 5.5 percent lower this winter, 
assuming they use the
  same amount of electricity as last year. Across the Potomac River,Dominion 
Virginia
  Power's customers in Northern Virginia are likely to see their bills stay 
about the same.

  Much of the current energy pricing is out of consumers' hands, analysts 
say, because the
  United States has chosen, to a large degree, to remain dependent on oil 
pumped out of
  distant lands controlled by OPEC nations.

  The 11-member Organization of Petroleum Exporting Countries agreed last 
weekend to
  increase its oil production by 800,000 barrels a day in hopes of pushing 
the price down to
  $28 or so. Even so, oil prices hit a new 10-year high on Friday, closing at 
$35.92 a barrel
  amid worries about tensions between Iraq and Kuwait. These are prices not 
seen since the
  days of the military buildup before the Persian Gulf War in November 1990.

  Analysts say that 21 months ago, when oil was below $10 a barrel and 
natural gas was at
  $2 per 1,000 cubic feet, drilling companies, many of which produce both 
fuels, began to
  curtail their exploration as a result of dwindling revenue.

  The OPEC nations cut their production at the time to force prices 
upward--and now they
  have more than tripled. Private exploration for more natural gas in the 
United States, chiefly
  in the Gulf of Mexico and several southern and southwestern states, only 
grew after drillers
  concluded that the demand was significant enough and they had sufficient 
capital to look
  for more.

  Peggy Laramie, spokeswoman for the American Gas Association, the 
natural-gas utilities'
  trade group, said the low price of gas at the time contributed to a feeling 
by producers that
  there was plenty of supply, so they cut back on drilling for about nine 
months, from August
  1998 to April 1999. Fewer than 400 rigs were drilling at the time, although 
now that figure
  has topped 800.

  With little new natural gas exploration, the flow through the supply chain 
slowed, of course,
  even as demand increased in the United States, Europe and Asia.

  The result was predictable: Higher natural-gas prices at the wellhead and, 
over time, bigger
  bills for consumers. The $2 wellhead price has now risen to $5. Laramie 
said the last time
  wellhead prices were this high was in 1985.

  As Verleger said, "Demand was growing. We didn't pick up the supply 
and--whoops, there's
  a problem."

  In the Washington area, where perhaps 70 percent of all homeowners heat 
with natural gas,
  Washington Gas Light Co. estimates that its residential customers will see 
the typical
  monthly bill jump $26, to $112.50, in the November-to-April period, a 27 
percent increase
  over last winter.

  Laramie said the gas utilities' trade group believes that with the renewed 
exploration, natural
  gas prices "will be moderating by spring, but we don't want to 
over-promise."

  The price of oil and its derivative products is expected to remain 
volatile, depending on a
  host of factors, including demand by consuming nations, the severity of the 
upcoming
  winter months after a string of three relatively mild winters, and how much 
more oil OPEC
  nations might decide to produce if prices stay high.

  This mix of factors leaves the analysts, OPEC and government economists 
using a lot of
  "ifs" and "buts" and "possibilities," but mentioning few certainties.

  OPEC President Ali Rodriguez predicted this past week that oil prices could 
reach $40 a
  barrel this winter, even if only for a relatively short time.

  "Crude oil prices are very high and will remain very high throughout the 
rest of the year,"
  said John Lichtblau, chairman of the Petroleum Industry Research 
Foundation, which is
  funded by oil companies. In terms of gasoline, a shortage is unlikely, "but 
prices will be
  high," he said. "It can go back to $1.40 a gallon because of more 
production and lower
  crude prices. It won't start right now, maybe later this year or early next 
year."

  But with heating oil, he said, an unusually cold winter in the Northeast 
could bring about
  problems, given low inventories. "I don't see a shortage, but prices will 
be very high."

  Verleger was less certain.

  "We do have a problem," he said. "I think we're going to see high prices 
this winter for
  heating oil and natural gas. But I'm not certain about it. I'm not willing 
to go out and say it's
  going to be awful."

  With oil prices at record levels, President Clinton last week came under 
increasing
  pressure to tap the nation's Strategic Petroleum Reserve, nearly 570 
million barrels of crude
  oil stashed at four sites in Louisiana and Texas.

  The reserve is intended for use in cases where the president determines 
there is a national
  supply emergency. High prices alone do not qualify. The White House says 
all options to
  combat the current low reserves of various fuels and high prices are under 
consideration. In
  the past, however, the oil reserve has been tapped to combat mechanical 
breakdowns in
  the oil industry's pipeline system or to trade lower-quality oil for a 
better grade.

  "If the Strategic Petroleum Reserve is released, that would knock $15 a 
barrel off the price,"
  Verleger said. "One piece of news like that and this [crude oil price] will 
drop like a rock."

  At least for the winter months, electric utilities generally have found a 
way around the high
  price of oil and natural gas that some of them must use during peak-demand 
periods in the
  summer to generate electricity. They're able to focus their winter 
generation on cheaper
  fuels--coal, nuclear and hydroelectric power.

  "That's cheaper fuel and fuel that's less subject to the volatility of the 
world oil and world
  natural-gas markets," said Chuck Linderman, director of energy generation 
and supply
  policy for the Edison trade group. "Generally we're in good shape on 
supply." 

  Contact: http://www.washingtonpost.com 


                                                  

  Copyright , 2000 Dow Jones & Company, Inc. All Rights Reserved.