Merger of Two Major Southland Utilities OKd

The proposed $5.2-billion merger of the parent companies of Southern California Gas Co. and San Diego Gas & Electric Co. was approved by federal regulators Wednesday, on the condition that California take steps to prevent a vast potential for market abuse by the merger partners.

The marriage of Pacific Enterprises, which controls the Los Angeles-based natural gas utility, with Enova Corp. of San Diego, primarily an electric power company, would create a utility with the largest number of customers in the nation--6 million. It is part of a trend toward the convergence of gas and electric utilities as power deregulation gathers force.

In approving the merger, the Federal Energy Regulatory Commission voiced concern about the Gas Co.’s overwhelming control of the gas supply and distribution in the region and called on California regulators to address that during hearings that start in September.

Specifically, FERC called on the state Public Utilities Commission to guard against the Gas Co.--which controls natural gas distribution to 96% of the gas-fired power generators in Southern California--from using its dominance to raise prices to competing power providers, including Southern California Edison Co., while favoring partner SDG&E.;

Edison, which is fighting the merger, burns natural gas to produce much of the electricity it sells and is the Gas Co.’s biggest single customer. Edison fears that SDG&E--soon; a competitor under electric deregulation--will be able to buy gas more cheaply from the Gas Co. once the firms merge.

The FERC identified several ways the merged company could manipulate the market to the advantage of SDG&E;, including secret discounts, denying competitors access to pipelines, sharing market information and manipulating intrastate gas tariffs. It set specific conditions to prevent such abuses and called on the PUC to adopt them.

But the FERC approval, albeit with provisos, came as a “pleasant surprise” to Enova, which had expected further hearings before winning clearance, a spokesman said. Pacific Enterprises President Richard Farman said the decision was an “affirmation of our strategic rationale.”

Analyst Ronald M. Barone of Standard & Poor’s said FERC’s conditions appear to be “mostly procedural, not a shock to anybody. The FERC has given the companies its stamp of approval. It could have made them divest assets, not approved it, or told them to come back later.”

Edison said it had hoped FERC would require the merged company to sell some of its gas pipeline and storage facilities. But it applauded the conditions imposed by the federal agency.

“This is not a setback at all,” said Stephen Pickett, associate general counsel for Edison “The FERC did approve it but they approved it conditionally and they recognized the competitive anti-market power problems we raised. They adopted them as conditions and indicated they want the PUC to adopt them as well.”

The federal body could have undercut the proposed merger by prolonging the review process with more hearings, as it has done in other cases, or requiring the partners to sell off assets. But the FERC said the decision for the first time sets guidelines for mergers of this type.

Consumer groups have also weighed in against the merger, saying it will be anti-competitive. Opponents will air their complaints at the PUC hearings in September.

“We are opposed to the consolidation of the utility business in general,” said Nicolette Toussaint, media director at The Utility Reform Network (TURN) in San Francisco. “If public policy in the state assumes that competition will result in lower prices and better service to consumers, our question, in the face of this unprecedented consolidation is, ‘where is competition going to come from?’ ”

Michael Shames, executive director of Utility Consumers’ Action Network (UCAN), said that the conditions set by FERC “mean the competitive and market power matters are far from being resolved,” suggesting that the PUC may reject or modify the merger plan.

In its decision, FERC specifically said the PUC must ensure that the Gas Co. and SDG&E; do not “inappropriately” share market information; the Gas Co. does not abuse its control of gas pipelines and storage facilities, and that its electronic bulletin board showing gas sales and deliveries be interactive so that competitors can act on market information immediately.

Investors weren’t much impressed either way. Enova stock closed at $23.875, down 25 cents; Pacific Enterprises closed at $32.44, down 19 cents, and shares of Edison International, parent of

Southern California Edison finished the day at $24.875, off 37.5 cents

The PUC will begin hearings in September on the merger with a preliminary decision due in January. A final decision is not expected until March 1998. The merger partners also need anti-trust clearance from the Justice Department.

The PUC approval process was set back nearly three months when the PUC rejected the Gas Co.’s new performance-based rate request earlier this month. A preliminary draft by the PUC would allow the Gas Co. about $53 million less margin than it proposed. Farman said Wednesday that the company would have to reduce costs by that amount if the PUC prevails, but that he didn’t expect it to jeopardize the merger or its terms.

The merged utility, whose name has not yet been decided, would rank 14th nationally in revenue, with $4.5 billion, and 22nd in assets, with $9.8 billion. Employees would total about 11,000. The firms promise no layoffs, but 750 positions will be reduced through attrition and voluntary severance.