SDG&E; Board Weighs Merger With Edison : Utility Fields Pressure From Wall Street, Critics, Shareholders While Measuring Tucson Plan

The decision facing San Diego Gas & Electric’s home-grown board of directors in the wake of Southern California Edison’s unexpected merger offer is a tough one: Would shareholders of the 107-year-old utility benefit if SDG&E; turned its 1 million customers over to SCEcorp, creating the nation’s largest electric utility with 4.8 million customers?

SDG&E;’s legal and investment firms will offer their high-priced opinions, but SDG&E;’s board of directors must make the final decision to accept or reject SCEcorp’s merger offer.

The biographies of that board read like a “Who’s Who” on San Diego’s business and civic scene: Malin Burnham is president of the sailing syndicate that will defend the America’s Cup against a New Zealand challenger. Clair W. Burgener spent 24 years as an elected official in San Diego.

The board also includes Intermark President Charles R. Scott and Ralph R. Ocampo, a local physician. Only Catherine Fitzgerald Wiggs, a Los Angeles-based consultant, is not a San Diegan.

Based upon Wall Street’s response, the board’s decision appears to be obvious: Industry analysts last week applauded Edison’s proposed stock swap, citing the 15% premium that SCEcorp Chairman Howard Allen offered on July 25. And, the proposal that Allen delivered to SDG&E; Chairman and Chief Executive Tom Page left the door open for negotiations that could raise the premium even higher.

But Page last week characterized the premium as closer to a “skinny” 10%. Page also said that SDG&E; will ignore SCE’s demand that SDG&E; abandon its proposed merger with Tucson Electric Power. SDG&E;’s board reportedly reviewed the proposal during a Monday board meeting.

Late on Friday afternoon, SDG&E; shareholder Ethel Zamurut filed suit in San Diego Superior Court, alleging that the utility’s officers and executives are “breaching their fiduciary responsibility” by refusing to negotiate in good faith with Edison and attempting to create obstacles to Edison’s making its highest offer to SDG&E; shareholders.

According to the lawsuit, SDG&E; is pursuing the previously announced merger “despite the superior offer” of Edison because, under the Tucson Electric transaction, SDG&E; will be the surviving company and SDG&E; executives “will retain their control positions of power, prestige and profit.”

Executives May Get Ax

Page and his associates “know that, because SCE is a prosperous and well-managed utility, that, upon a merger, (they) will become superfluous and unnecessary,” according to the suit, which seeks certification as a class action representing SDG&E;’s 72,000 shareholders.

Friday’s lawsuit underscored the growing complexity of the decision that SDG&E;’s board of directors must make before Edison’s Aug. 12 deadline.

William Shaffran, a municipal attorney representing the city of San Diego in utility rate cases, believes that SDG&E; will turn the offer down, largely because Page “is not yet ready to retire.”

Facing Tough Decision

“Tom Page is in a tough position because the financial analysts say this is a good deal for shareholders,” Shaffran said Friday. “He’s got a fiduciary responsibility to those shareholders, and he’s got to . . . (be concerned about) the possibility of shareholder suits being filed.”

Before SCEcorp’s surprise bid, the SDG&E; board had endorsed a merger bid with Tucson Electric, a coal-rich utility in Arizona that also owns an impressive grid of power lines. Those transmission lines are especially appealing to SDG&E;, which is trapped in an “energy desert,” according to Page.

Allen has acknowledged that SCEcorp’s merger bid was partly a response to the prospect of SDG&E; gaining access to that power grid. Utility industry observers believe that, if SDG&E; rejects Edison’s offer, the Rosemead-based utility will press the state Public Utilities Commission to prohibit the SDG&E-Tucson; Electric merger on anti-competitive grounds.

But those observers also have predicted that Edison’s merger proposal will draw fire from coal-rich utilities in the Southwest that offer excess electricity for sale to SDG&E; and Edison. Those utilities are expected to complain that it would be anti-competitive to give a mega-utility a lock on Southern California, the nation’s fastest-growing market for electricity.

SDG&E; board members also face the thorny issue of turning the local gas and electric company over to Edison--a not insignificant matter in a county that prides itself on remaining separate and distinct from the problems and promise of Los Angeles.

Edison’s merger proposal is “a very emotional issue with lot of people down here,” according to Shaffran. “My gut feeling is that (SDG&E;) will get swallowed up by (SCE) and we’ll lose whatever local control there might be.”

Turning the long-time local utility over to Southern California Edison “makes us seem even more to be part of one large megalopolis,” acknowledged Paul Devermann, vice president of the San Diego Economic Development Commission.

But the future is equally uncertain if SDG&E; merges with Tucson Electric, according to Shaffran. “That scares the hell out of me because you’re talking about (the Federal Energy Regulatory Commission) getting quite a bit of control over SDG&E;,” Shaffran said. “And FERC plays ‘give-away’ to utilities even more than the state PUC.”

Pride, Local Control Expendable

Local businessmen counter that civic pride and local control over the utility are expendable as long as electric rates, among the nation’s highest, fall.

“I don’t care if you call it Pacific Gas & Electric,” quipped Gary Estes, a San Marcos businessman who organized a local industry group that successfully opposed a recent SDG&E; rate rise. “I’m for it as long as the rates come down.”

SCEcorp Chairman Allen’s July 25 letter to Page promised that Edison would institute “meaningful rate reductions shortly after consummation of the acquisition.”

But some observers in San Diego question Allen’s analysis, and instead predict that, in the long run, Edison’s merger would actually mean rate increases for SDG&E;’s 1-million customers in San Diego County and southern Orange County.

“Short-term, rates would go down,” according to Michael Shames, executive director of Utility Consumers Action Network, a San Diego-based public-interest group. “Administrative and operating efficiencies will ensure that.”

“But rates will be on par with SDG&E;’s in a couple of years,” Shames predicted. “I don’t know where the analysts are getting this figure of $200 million in annual savings” that supposedly would result from a merger involving Edison and SDG&E.;

Those rate increases are expected as Edison pays its share of construction costs at the Palo Verde nuclear power plant in Arizona. Edison owns 15.8% of the plant that is managed by Arizona Public Service Co.

“Edison has had lower rates than SDG&E; for a number of years but (PUC data) seem to indicate that as of (Jan. 1, 1989), their rates are going to be very close together,” Shaffran said. “And, as of Jan. 1, 1990, Edison’s rates are going to be higher because of Palo Verde.”

Shames and Shaffran aren’t the only ones predicting higher rates following an SDG&E-Edison; merger: Page has been arguing that SDG&E; is a “rate-decreasing company” in an era when other utilities are seeking rate hikes.

SDG&E;’s major customers, who are saddled with some of the nation’s highest electric rates, seem dubious that either merger will bring substantial rate reductions.

“One of my first questions is if (Edison’s merger proposal is) really going to save customers money,” said John Morse, an energy manager with San Diego-based Home Federal Savings & Loan. “Or is it simply going to save shareholders some money?”

Morse believes that Page will sell shareholders on the merger that best serves shareholders.

“SDG&E;’s got to have the ratepayers sitting No. 3 in their package,” Morse said. “It’s going to be shareholders, then management, then ratepayers.”

Merger Would Mean Job Cuts

SDG&E;’s proposed merger with Tucson Electric would leave the San Diego-based utility’s upper management ranks intact. However, Edison’s merger bid would probably eliminate many jobs, including those of Page and the board of directors.

According to terms of his employment contract, Page would receive a $980,000 golden parachute if the board accepted Edison’s offer. Board members who are not salaried employees of SDG&E; receive $2,000 a month from SDG&E.;

SDG&E; two years ago joined the ranks of companies that bolstered their anti-takeover provisions. Zamurut’s Friday lawsuit alleges that the “poison pill” package adopted by shareholders left SDG&E;’s management “in a position to resist or defeat a takeover or merger attempt not to their liking or use their control positions to negotiate terms which disproportionately favor themselves over SDG&E;’s other shareholders.”

Customers Watching Closely

Not surprisingly, SDG&E;’s large industrial and commercial customers--many of whom recently added electrical generating plants to cut their dependence upon the high-cost local utility--are watching the merger activity with interest.

“I want the best possible deal that’s good for the shareholder and the ratepayer,” Estes said. “If we don’t have a healthy utility, then they’ll have to make future (rate) adjustments to protect themselves, and we really don’t want (SDG&E;) to self-destruct.”

“But maybe SDG&E; is just too small to exist,” Estes added. “Maybe there’s a size that a utility has to be to remain economically viable and SDG&E; needs the merger . . . to do that.”

Rate predictability is important to Morse, who said that HomeFed on average spends 30% more for electricity in San Diego than in Los Angeles. HomeFed’s peak electric rates in Los Angeles are about 9 cents per kilowatt hour, contrasted with about 13 cents per kilowatt hour in San Diego, according to Morse.

The Navy, which shocked SDG&E; in 1986 by threatening to abandon the utility’s grid after receiving an $80-million annual electric bill, also is monitoring SDG&E;’s merger bids.

The Navy, which continues to negotiate with SDG&E; for lower electric rates, will take an active role in the PUC’s upcoming review of the Tucson Electric merger. It is too early to tell if the Navy would oppose either the Tucson Electric or Edison mergers, according to a spokesman.

The PUC’s yearlong investigation into SDG&E;’s proposed merger with Tucson will begin with an Aug. 15 hearing in San Francisco. That merger also will be reviewed by regulators in Arizona and Washington.

However, the PUC would not become involved in SCE’s merger bid until after it were approved by SDG&E;, according to PUC Chairman Stanley Hulett.

That lack of PUC participation worries Shames. Utility Consumer Action Network, which draws contributions from disgruntled SDG&E; customers, has hired a consultant to study what effect Edison’s merger would have on rates.

“If SDG&E; did reject (Edison) and I thought it was injurious (to SDG&E;’s customers) then I’d scream loud,” Shames said. “But SDG&E; would be totally within its rights to ignore me. And I don’t know who would hear me.”