San Diego Gas & Electric Company
San Diego Gas & Electric Company
San Diego Gas & Electric Company (SDG&E), a west coast energy management company, derives 75% of its revenues from its utility businesses. The company provides electric service to San Diego County, California, and part of Orange County, and gas service to San Diego County. SDG&E owns two power plants, part of a nuclear generating station, a transmission line, and a natural-gas pipeline. The company also owns two subsidiaries: Pacific Diversified Capital Company, which owns various companies that serve utility and real estate markets, and Califia Company, used for general corporate needs, such as holding real estate.
SDG&E was founded in 1881 as the San Diego Gas Company and incorporated as San Diego Consolidated Gas & Electric Company in April 1905. Standard Gas and Electric Co. owned the bulk of the utility’s common stock. In 1910 San Diego Consolidated acquired the United Light, Fuel & Power Co. of San Diego. The utility also built its first principal electric generating plant, Station B, that year. It had a monopoly on the gas and electric business for San Diego and its suburbs. The utility grew rapidly. Its number of electricity customers increased from 2,212 in 1906 to 14,321 in 1912; gas customers multiplied from 4,594 in 1906 to 17,864 in 1912. Sales topped $1 million for the first time in 1912, and surpassed $2 million in 1918.
In November 1923 the company, headed by President Robert J. Graf and Chairman John J. O’Brien, contracted to connect its transmission lines with those owned by Southern Sierras Power Company of Pinon, California. Through this agreement, the company assured Southern Sierras of an uninterrupted power supply in the Imperial Valley of southern California should Southern Sierras experience shortages or power failures. By 1927 the company’s system included two steam electric generating stations, and it had signed an electric power interchange agreement with Southern California Edison Company (SoCal Edison). SoCal Edison was based in Rose-mead, California, and served parts of the Los Angeles area. The 1920s were a time of booming business throughout the United States and growth in California especially, and this showed in San Diego Consolidated’s sales, which grew from $2.6 million in 1920 to $7.3 million in 1929.
In May 1932, under Grafs successor as president, W.F. Raber, the company applied to the California Railroad Commission, its regulating body, to replace manufactured gas with natural gas in its service area. The application was approved and the company contracted with a subsidiary of Pacific Lighting Company, the Southern Counties Gas Co., to provide 24 million cubic feet of natural gas daily. The necessary pipeline, covering 120 miles from Long Beach to La Jolla, California, was estimated to cost $1.7 million. At the time, the utility was serving a population of 222,000. The company began supplying natural gas in September 1932. Two years later San Diego Consolidated bought a small share of the power produced by the Boulder Dam. The dam was erected by the U.S. government beginning in 1931 on the Colorado River. States, cities, and utilities bought or leased the output of the dam.
The utility’s sales dipped somewhat during the Great Depression, dropping to $6.8 million in 1934, but growth resumed the following year. The company remained profitable even in the Depression’s worst years.
In June 1939 the company entered a new agreement to increase the amount of power it exported to its wholesale customers in Tecate, Mexico. San Diego Consolidated was authorized to export 3.6 million kilowatt hours per year. Previously, the Federal Power Commission had set its export limit at 700,000 kilowatt hours per year. Mexico figured prominently in SDG&E’s long-term strategic plan.
In 1940 as a result of the Public Utility Holding Company Act of 1935, the Securities and Exchange Commission ordered Standard Gas & Electric to sell all its utility holdings, including San Diego Consolidated, which changed its name to San Diego Gas & Electric Company and became publicly owned. In 1941 the last unit of the company’s generating Station B was installed. During the 1940s, agriculture, mining, fishing, and aircraft manufacturing were important industries in San Diego. The population of the area had decreased slightly since the 1930s to 219,000. In 1942 Hance H. Cleland succeeded W.F. Raber as president. During World War II, army and navy bases became important to San Diego’s economy, and the navy continued to influence the company’s fortunes. In 1943 the Silver Gate steam electric generating station was completed. Operation began on January 27.
The population of SDG&E’s service area had grown to 620,000 by 1949, and its sales were up to $23.3 million. In view of this growth, the company had installed another unit at the Silver Gate plant in 1948, and planned to add a fourth turbogenerat-ing unit to the plant by 1952. Work also had begun on a generating station in Encino, California. SDG&E’s first turbogenerator came into service in 1954. That year, SDG&E requested and received a rate increase. Unit 2 of the Encino station came online on July 26, 1956, and Unit 3 became operational in July 1958. The company also bid on 144 acres of land as the site of a possible future steam-generating plant.
SDG&E began research into nuclear power in the late 1950s. In 1961 it agreed to participate in a 350,000-kilowatt nuclear power plant with Southern California Edison. SDG&E owned 20% of the plant, located in San Onofre, California; SoCal Edison owned 80%. The plant went into operation in 1967.
SDG&E’s new steam South Bay generating station was in operation by July 1960. H.G. Dillon became president in 1961, succeeding E.D. Sherwin, who remained on the board. Two years later, Dillon was chairman of the executive committee and J.F. Sinnott became president. The second South Bay unit began operation in June 1962. Unit 3 was put in service in September 1964.
SDG&E enjoyed the best earnings growth rate among California’s four largest utilities from 1963 through 1968, averaging 9% annually. By 1970, its ninth consecutive year of record earnings, it was one of the fastest growing utilities in the United States. That year, San Diego became the nation’s 15th-largest city. San Diego County’s economy was diversifying from a dependence on the aerospace industry and military installations to include recreation, electronics, oceanography, and education.
By the late 1960s antismog ordinances were hindering the company’s efforts to build plants to supply the booming population. Fuel oil costs increased in 1970 due to local regulations that required the utility to burn higher-priced low-sulfur crude. The company began to look elsewhere for its power needs.
Between 1971 and 1976, SDG&E began three plants that would use cheaper fuels: a coal-fired plant at Kaiparowits, an oil-burning plant at Sycamore Canyon, and a nuclear plant at Sundesert, all in California. Stringent environmental regulations, however, made construction of the new plants prohibitively expensive, and SDG&E eventually canceled them all. From 1973 to 1978, SDG&E’s cost of producing electricity increased by 250% while the rates it was permitted to charge increased only 145%. The company was in poor financial shape, its bond rating was lowered from AA to BBB, and $55 million it spent on Sundesert before canceling the project was a complete loss. In December 1978 SDG&E resorted to buying power, signing a ten-year contract with Tucson Gas & Electric Co. for up to 500 megawatts of power annually. In March 1979, needing cash, it sold a generating unit to a group of banks to raise $132 million, then leased back the unit since it needed the output.
In 1980 inflation, a time lag between application for a rate increase, action by the California Public Utilities Commission (CPUC), and weather both warmer in winter and cooler in summer contributed to a disastrous year. Although sales rose to $960 million, 29% more then the previous year, net income fell 26% to $52 million. SDG&E’s customers paid some of the highest rates in the United States because of the utility’s dependence on high-priced oil, the cost of its canceled plants, and repairs at its nuclear plant. As 1981 began SDG&E focused on the future: the CPUC had suggested annual rate adjustments, instead of bi-annual, to more accurately reflect prevailing economic conditions; and a new fuel mix would be utilized in the 1980s, consisting of nuclear, purchased, and geothermal power. Nuclear power from San Onofre Unit 1 was already available to SDG&E customers. Units 2 and 3 were nearing completion. The company was negotiating for the purchase of coal-generated power, with Public Service Company of New Mexico. It already had several contracts for the purchase of geothermal power from companies in the United States and from Mexico’s national utility, Comisión Federal de Electricidad. The proximity of San Diego to Tijuana, Mexico, encouraged cooperation between the two utilities. The experimental Heber binary geothermal plant was another avenue explored to reduce the use of oil. The binary cycle process used the hot brine that lies just beneath the surface in the Imperial Valley to produce high-pressure gas. The gas, in turn, ran a turbine that generated electricity. In June 1983, work began on the plant. At completion in 1985, energy produced at Heber would serve 45,000 residential customers. SDG&E was the majority owner of the plant. The U.S. Department of Energy paid for half of the project but was not an owner.
SDG&E had another disappointing year in 1981. In April Robert Morris, president since 1975, was elected chairman of the board of directors, and Thomas A. Page, formerly executive vice president and chief operating officer, was elected president. On October 1, Page also assumed the position of chief executive officer, and continued to emphasize SDG&E’s goal of reducing its dependence on oil. Almost every part of the company suffered adverse affects during 1981. The San Onofre nuclear plant’s Unit 1 was out of service for 14 months in 1980 and 1981 due to equipment failure and retrofitting required in the wake of the Three Mile Island disaster. In addition, SDG&E ran into problems with a fuel oil exchange. In the late 1970s the utility had excess oil and, rather than sell it at a loss, agreed to an oil exchange with United Petroleum Distributors Inc. of Houston, Texas, which later failed to deliver the oil it owed SDG&E when the utility needed it. SDG&E lost $31 million and was ordered to refund $4.4 million on the transaction in 1980-1981, representing the price of the replacement oil it had to buy, to its customers by the CPUC in 1982. There was a positive development in December 1981, when the company received CPUC approval to construct the eastern interconnection transmission line, later named the Southwest Powerlink, that connected SDG&E with less expensive, coal-fired power generated in Arizona and New Mexico. The transmission line would extend 280 miles from the Palo Verde switchyard near Phoenix, Arizona, to SDG&E’s Miguel substation southeast of San Diego. Cost of the Powerlink was estimated at $320 million.
By 1982 San Diego had grown into the eighth-largest city in the country. Energy demand, however, had leveled off due to lower industrial energy consumption and energy conservation measures. SDG&E reaffirmed its decision to purchase more of its power. Utility networks were one way to mitigate the effects of variations in energy consumption. Work on the Southwest Powerlink began in mid-1982 with anticipated completion in 1984. At the same time, two new transmission lines to Mexico were under construction, with completion anticipated in 1983 and 1934. Power production would be boosted by San Onofre Units 2 and 3. Both units were scheduled to begin full power production by the end of 1983. SDG&E hoped to sell a portion of both units’ output to help cover the costs of construction and keep rates down. Unit 1 was again out of service as questions about the plant’s ability to withstand earthquakes had been raised.
After several difficult years, 1983 held the promise of improvement in SDG&E’s financial health. The utility’s bond rating was upgraded to A, making the cost of borrowing money much lower. San Onofre Unit 2 was put in operation while full power testing went on in Unit 3. Average fuel costs declined for the first time in ten years, and natural gas prices were stabilized. SDG&E closed its 60-year old Station B generating plant and temporarily shut down its Silver Gate plant. Three-quarters of the Southwest Powerlink was completed. At this point, 44% of the company’s electric energy was purchased from other utilities, and SDG&E began to define itself as an energy management company.
In 1984 both Moody’s and Standard & Poor’s upgraded SDG&E’s bond ratings again. The company’s short-term debt was eliminated, and common stock was trading at a ten-year high. The Southwest Powerlink became operational in May. San Onofre Unit 1 returned to operation in November for the first time since closing down for engineering modifications in 1982. A second transmission link with Mexico also was completed that month.
In 1985 the company had record earnings of $3.25 per share, and San Diego itself continued to enjoy record residential growth. The business community expanded to include information services companies, biomedical research, and other scientific industries. SDG&E’s Heber geothermal plant was completed on schedule in May. Page sought approval from the CPUC to establish a holding company that would allow SDG&E to venture into unregulated industries. Stockholders approved the plan on November 1. In March 1986 SDG&E received conditional approval from the CPUC to diversify into real estate, utility services, and energy products. Pacific Diversified Capital Company, an SDG&E subsidiary since 1982, was activated to manage all nonutility operations. The subsidiary quickly acquired Phase One Development, Inc., a commercial real estate development company; Computer Solutions, Inc., a software company; and a majority holding in Mock Resources, Inc., a natural gas and petroleum products distributor.
Early in 1986 SDG&E’s final single-fuel power plant, Encino, was converted to burn either gas or oil, allowing the company to purchase the least expensive of the two fuels. SDG&E signed a ten-year power purchase contract with Mexico’s national electric utility. The U.S. Navy, SDG&E’s largest single customer, announced in 1986 that it planned to withdraw from SDG&E’s system and contract for a cogeneration plant to meet its power needs. SDG&E quickly began negotiations with the navy to prevent this from happening. In October, the CPUC decided to disallow $329.9 million in San Onofre Units 2 and 3 costs, about half of the original figure. The decision included $69.1 million in costs for SDG&E, owner of 20% of the plant. SDG&E vowed to appeal the ruling. In spite of this, SDG&E posted record profits while reducing customer rates in 1986.
Dividends went up for the 11th consecutive year in 1987. An employee incentive program begun in 1986 to encourage money-saving ideas helped the company save $2 million. The experimental Heber geothermal plant was shut down in 1987 because its production costs were too high. SDG&E established an environmental department to respond to concerns including the removal of polychlorinated biphenyls (PCBs) in it system.
In June 1988 SDG&E agreed in principle to merge with Tucson Electric Power Company (TEP), a company with which it had a long-term power sale agreement made possible by the Southwest Powerlink. TEP had excess capacity and SDG&E sought the merger as a way of assuring its access to low-cost coal-fired power. Just a month after the merger was announced, SoCal Edison’s parent company, SCEcorp, made an unsolicited $2.3 billion bid for SDG&E. If approved, the merger would join California’s second- and third-largest utilities to create the largest investor-owned utility in the United States, with approximately $17 billion in assets. By August the city of San Diego called for hearings on the legality of a merger with SoCal Edison. SDG&E had not yet decided whether to accept the second merger offer. SCEcorp promised to reduce residential power rates by 10% within six months of completing the merger. On September 1, the day SDG&E’s board was to consider its previous offer, SCEcorp increased its bid to $2.36 billion. SDG&E’s board voted unanimously to decline SCEcorp’s new offer and merge with TEP. If SCEcorp’s bid were successful, between 800 and 1,000 SDG&E employees would lose their jobs. In light of the vote, SCEcorp’s Chairman and Chief Executive Officer Howard P. Allen did not rule out a hostile takeover. Any deal would have to be approved by the CPUC. Allen said he was willing to wait years for a merger to go through.
In November 1988 SDG&E ended its agreement to merge with TEP. The two utilities had disagreed over the best way to counter SCEcorp’s efforts to stop their merger. SCEcorp continued to pursue SDG&E, raising its offer to $2.53 billion and offering Tom Page the position of vice chairman of SCEcorp and president of the San Diego division. On November 30, by a vote of six to two, SDG&E accepted SCEcorp’s offer. The two directors who voted against the merger resigned from the board.
Apart from merger negotiations, 1988 was an active year for SDG&E. The U.S. Navy dropped plans to generate its own power and signed a ten-year contract with SDG&E. SDG&E applied for a rate decrease, which CPUC approved effective in January 1989. The company hooked up its one millionth customer, and revenues rose to $2.1 billion from $1.9 billion in 1987.
SDG&E’s merger into SoCal Edison was contingent on approval by the CPUC, the Federal Energy Regulatory Commission (FERC), and shareholders of both companies. The companies were sensitive to the politics of the approval process and promised rate reductions for commercial, industrial, and agricultural customers, in documents filed with the CPUC in April 1989. This pledge was in addition to the 10% rate cuts promised residential customers before the merger vote.
In December 1989 SDG&E approached the CPUC to begin the licensing process for a new two-unit, 460-megawatt, combined-cycle power plant. The plant would combine a natural gas turbine generator and a steam-producing unit to produce more cost-efficient power. If the merger did not take place, this plant would put SDG&E in a better position to generate more of the energy it needed in the future. In another move to augment its power resources, SDG&E anticipated returning its Silver Gate plant to service in 1992 due to a growing customer base.
In February 1990 California state Attorney General John Van de Kamp and an advocacy division of the CPUC stated their opposition to the merger. In November George P. Lewnes, an administrative law judge for the FERC, also opposed it on the basis that it was anticompetitive, but his decision was not binding on the FERC board, which was still considering the merger. SCEcorp Chairman Allen retired at the end of 1990 with a decision still pending. On February 1, 1991, two judges with the CPUC had not yet voted. SCEcorp and SDG&E both claimed they would rather cancel the merger than be forced to sell unregulated subsidiaries, which the CPUC judges had recommended should the merger go through. The CPUC began its final hearings on the merger in March 1991. In May the five-member board handed down a unanimous decision rejecting the merger, citing a lack of longterm benefits and the lessening of competition. The two companies agreed not to appeal the CPUC’s ruling and withdrew the application before the FERC. The decision meant that SDG&E needed to line up new sources for purchased power almost immediately. SoCal Edison was one of those sources.
Pacific Diversified Capital Company; Califia Company.
—Lynn M. Kalanik