DANIEL E. LUNGREN Attorney General
J. LINDSAY BOWER Deputy Attorney General
AGO 97-1216
No. 97-1216
California Attorney General Opinion
Office of the Attorney General State of California
January 2, 1998
THE
PUBLIC UTILITIES COMMISSION has requested an advisory
opinion, pursuant to Public Utilities Code section 854, on
the following questions:
1.
Will the proposed merger between Pacific Enterprises and
Enova Corporation adversely affect competition?
2.
What mitigation measures could be adopted to avoid any
adverse effects on competition that do result?
CONCLUSIONS
1.
The proposed acquisition between Pacific Enterprises and
Enova Corporation should not by itself adversely affect
competition in the markets for interstate gas or wholesale
electricity.
2.
The merger may eliminate the disciplining effect of San Diego
Gas & Electric as a potential competitor in the partially
regulated intrastate gas transmission market. We recommend
that the Commission consider requiring the merged entity to
auction offsetting volumes of transportation rights within
that system.
ANALYSIS
The
proposed merger of Pacific Enterprises and Enova Corporation
is a response to the mandatory restructuring of the electric
industry which began on January 1, 1998. Through their
subsidiaries, Pacific is the leading southern California
supplier of intrastate gas transmission services, Enova is an
electric distributor and a relatively minor participant in
the wholesale electricity market, and both firms distribute
gas within their respective service areas. As regulated
utilities doing substantial business within this state, the
parties have submitted their application under Public Utility
Code section 854. This memorandum responds to a Commission
request for an opinion on the competitive effects of the
transaction.
Challenges
to the merger have primarily focused upon alleged effects in
the markets for wholesale electricity, interstate gas and
intrastate gas transmission. Through Southern California Gas
Company (SoCalGas), Pacific provides gas transmission
services to many of the gas-fired generation plants within
southern California, including plants now owned by San Diego
Gas and Electric (SDG&E) and Southern California Edison
(Edison). Edison and others contend that the merged company
will "leverage" its position in the gas
transmission market to manipulate the price of electricity
sold by these plants in the wholesale market. Intervenors
also allege that the applicants will unfairly benefit in
financial markets and that, by exercising options to purchase
competing intrastate facilities, their alleged ability to
manipulate electricity prices will be enhanced in the
future.
We
conclude that this merger will not adversely affect
competition within either the wholesale electricity or
interstate gas markets. Because gas-fired plants now owned by
SDG&E will be subject to comprehensive price regulation,
the merged entity will lack any incentive (or, usually, the
ability) to manipulate wholesale electricity prices.
Moreover, the wholesale electricity and interstate gas
markets are already highly integrated, and comprise most of
the western United States. Price data -- as opposed to
theoretical models -- shows that the wholesale electricity
market connects California with numerous out-of-state
suppliers over a transmission system that has never reached
capacity. These out-of-state suppliers, along with California
generation plants outside the SoCalGas service area, would
defeat any attempt by the merged entity to raise wholesale
electricity prices above competitive levels. In any event,
SoCalGas cannot significantly increase the costs of southern
California gas-fired plants, whose gas prices are determined
in the competitive interstate market and most of whose
intrastate transportation rates are at their regulatory
caps.
We
also conclude that the merger of the utilities'
procurement operations will not adversely affect competition
in the interstate gas market and that the applicants are not
actual potential competitors for retail electricity services.
On the other hand, because the merger may eliminate the
disciplining effect of SDG&E as a potential competitor in
the partially regulated intrastate gas transmission market,
we recommend that the Commission consider requiring SoCalGas
to auction offsetting volumes of transportation
rights within that system. Finally, because of the uncertain
effects of electric industry restructuring, we also recommend
that the Commission retain limited jurisdiction over this
merger for the purpose of reexamining the question of whether
the merged entity has used its intrastate gas transmission
system for the purpose of manipulating the price of
electricity it sells in the wholesale market.
I.
PRIOR PROCEEDINGS AND THE NATURE OF THIS
OPINION
A.
Prior Proceedings
This
merger would be completed by combining Enova and Pacific into
NewCo, a holding company created for the purpose of
consummating this transaction. 1 NewCo Enova Sub would
merge into Enova, with Enova as the surviving corporation.
Likewise, NewCo Pacific Sub would merge into Pacific with
Pacific as the surviving corporation. Enova and Pacific would
be wholly-owned NewCo subsidiaries. Enova, Pacific,
SDG&E, and SoCalGas would operate separately and under
their existing names.
On
June 25, 1997, the Federal Energy Regulatory Commission
(FERC) conditionally approved the merger.2 In general, the
conditions imposed by FERC would require SoCalGas to treat
SDG&E and other affiliates "in the same way
pipelines treat their gas marketing
affiliates."3 The applicants subsequently
incorporated those conditions, along with other proposed
restrictions, within their merger application.[4]
B.
This Advisory Opinion
This
is the fifth opinion letter submitted by this office under
the 1989 amendments to Section 854.5 Public Utility Code
section 854 refers to the opinion as advisory.[6] Consequently
this document does not control the PUC's finding under
section 854, subdivision (b)(3). However, the Attorney
General's advice is entitled to the weight commonly
accorded an Attorney General's opinion (see, e.g.,
Moore v. Panish (1982) 32 Cal.3d 535, 544
("Attorney General opinions are generally accorded great
weight"); Farron v. City and County of San
Francisco, (1989) 216 Cal.App.3d 1071).
II.
THE APPLICANTS AND THE INTRASTATE GAS TRANSPORTATION AND
ELECTRICITY SERVICES THEY PROVIDE
Pacific
Enterprises and Enova Corporation currently compete on a very
limited basis. SoCalGas purchases gas in the interstate
market, which it distributes to its 4.7 million residential
and other "core" customers in southern and central
California. "Core" customers include residential
and commercial customers without alternate fuel capability,
whereas "non-core" customers are large commercial
and industrial consumers that can buy gas from different
sources. SoCalGas is the leading supplier of intrastate gas
transmission and gas storage services for both
"core" and "noncore" customers within
southern California. Pacific Enterprises also sold
electricity in the wholesale market through QF facilities,
all of which were recently divested.7 In 1996, Pacific
generated revenues of $1,613 million from its gas
distribution operations and $778 million from intrastate gas
transportation services provided to commercial/industrial and
gas-fired generation plants.
SDG&E,
which actively buys and sells power in the wholesale
market,8 sells electricity to 1.2 million
retail customers in San Diego and southern Orange Counties
(including parts of the SoCalGas service area). SDG&E
also purchases gas in the interstate market,[9] which it
distributes within its separate service areas.[10] SDG&E
provides no gas transmission services outside of San Diego
County.11 In addition, an affiliate of Enova
Corporation, Enova Energy, conducts extensive wholesale and
retail energy marketing activities throughout California. In
1996, Enova generated revenues of $1,591 and $348 million
from its electricity and gas distribution operations,
respectively.
Applicants
have formed a joint venture, Energy Pacific, to market gas,
power and a "broad range of value-added energy
management products and services." 12 The applicants
also recently purchased AIG Trading, a natural gas and
electricity marketer and a trader in financial markets for
electricity and gas contracts.13 Both of those
companies are actively involved in the electricity and gas
markets in California. This section discusses intrastate gas...