$6.9 million profit from the West is not much to show for all of the sleeving Sempra did for the ISO.

Sempra's trading unit generates a windfall
 
By Craig D. Rose 
STAFF WRITER 
July 27, 2001 

Sempra Energy, the parent company of SDG&E, reported a 25 percent surge in profit to $137 million last quarter but said yesterday it lost money on the sale of electricity under a long-term contract to California. 
On the other hand, Sempra said its largest source of profits was its energy trading unit, a middleman that earned $69 million during the quarter buying and selling energy produced by others. 
The results underscore the transformation of relatively simple utility companies into diversified energy holding companies that have learned to profit in new ways from the deregulation of electricity and the turmoil in energy markets. 
The surprising announcement -- that a company lost money selling power during California's run-up in electricity prices -- was explained by Sempra as an intentional consequence of the long-term contract it signed with the state to provide power. 
Stephen Baum, chairman and chief executive officer of Sempra, said the company agreed to provide a steep discount to California during the summer months but would recoup the losses later in the 10-year deal. 
California sought long-term electricity purchase contracts so it could reduce its purchases in daily and near-term power markets, where prices reached record levels. 
Critics say Gov. Gray Davis rushed into long-term deals because of concerns about getting through next year's election. They also say the contracts will saddle customers with higher costs for years. 
The governor has acknowledged that long-term contracts might cause consumers to pay relatively high prices for electricity in later years, but he maintains it is a fair price to pay for lowering prices that were devastating the state economy. 
Michael Shames, executive director of the Utility Consumers' Action Network in San Diego, said the steep discount Sempra provided to the state on power this summer raised questions about the governor's proposal to help San Diego Gas & Electric Co. clear a debt of $750 million. 
SDG&E says it is owed that money for power purchases on behalf of its customers. 
In a media conference last month, Davis said the agreement would eliminate the threat of a possible balloon payment for consumers, who he said might have faced the so-called balancing account debt as early as next year. 
Shames says the proposal, which took the form of a memorandum of understanding, or MOU, is costly for consumers and a bonanza for Sempra. 
He said the relatively cheap power provided by Sempra this summer "makes the MOU sound like more of a hidden payback to Sempra than a real relief plan for local ratepayers." 
Shames said he will release an analysis of the state's Sempra plan next week. The state Public Utilities Commission is expected to rule on the plan in August. 
A Sempra spokesman said there is no connection between discount power and the tentative agreement to clear the $750 million debt. Doug Kline, the Sempra spokesman, said the power contract with the state was signed in early May and the agreement on the balancing account was reached in mid-June. 
Sempra Energy Trading, meanwhile, said only 10 percent of its $69 million profit was earned from sales of energy in the western region, which includes California. The trading operation earned $40 million in profit during the comparable period last year. 
California's Independent System Operator, which manages most of the state power grid, and other investigators have said trading and bidding strategies were tools used by energy companies to raise prices during the California power crisis. 
Though Sempra earned money on trading, its wholesale power generating business lost $9 million during the quarter. Baum said the discounts on electricity provided the state were the prime cause of the loss for Sempra Energy Resources but added that a plant outage also contributed. 
Sempra Energy Resources, which co-owns a generating plant near Las Vegas with Reliant Energy, earned $2 million during the second quarter last year. 
Baum added that Sempra's long-term contract with the state -- under which it will provide up to 1,900 megawatts -- has allowed its wholesale business to pre-sell about half the power it expects to generate from the Nevada plant, which will be expanded, and three generating facilities it expects to build. 
Profits at SDG&E slipped to $37 million during the quarter ended June 30, down from $40 million last year, according to Sempra. SDG&E, whose business is restricted to delivering gas and electricity, said it provided increased customer service during the crisis, which lowered profits. 
Wall Street analysts generally applauded Sempra's results, noting that the company was ahead of its plan to generate at least a third of its profits from its newer businesses by 2003. 
"They're really two years ahead of schedule for their non-utility businesses," said Brian Youngberg, an analyst with Edward Jones & Co. 
Bud Leedom, a San Diego-based analyst with Wells Fargo Van Kasper, said Sempra's move into energy trading now seems shrewd. "We never dreamed they were setting themselves for a windfall like this," Leedom said. 
Investors pushed Sempra shares up 17 cents yesterday, to close at $25.49 in trading on The New York Stock Exchange.
Bloomberg news service contributed to this report. 
 


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