Lungren, 010298 CAAGO, AGO 97-1216

Docket Nº:AGO 97-1216
Case Date:January 02, 1998
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...

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