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'We're going to play to win' franchise agreement, says CEO of SDG&E's parent company

Source: 
San Diego Union-Tribune

The CEO of San Diego Gas & Electric's parent company expressed optimism Wednesday that the utility will maintain its hold on the franchise agreement it has held for the past 100 years with the city of San Diego.

"Our focus and attention is on controlling what we can control, which is we want to put forward the best and most compelling value proposition to the city," said Jeff Martin, chairman and chief executive of Sempra Energy, during a wide-ranging conference call with Wall Street energy analysts about the company's second-quarter numbers. "These are our neighbors and this is a place we care about a lot and we're going to play to win."

Under a franchise agreement, a municipality allows a utility the exclusive use of public right-of-ways for transmission and distribution, as well as the right to install and maintain wires, poles, power lines and underground gas and electric lines within its territory.

SDG&E has held the rights for the past century through two separate 50-year agreements. The latest pact, however, runs out in January and the city is looking to sign a new deal on more favorable terms by holding a competitive bidding process.

So far, three companies have expressed interest in winning the agreement — SDG&E, Orange County-based Indian Energy and Berkshire Hathaway Energy, a subsidiary of billionaire Warren Buffet's Berkshire Hathaway Inc. Formal bids are expected to be submitted to the city sometime in the fall.

"It's always good to have a dose of humility and try to find the best way to put your foot forward," said Martin, who was SDG&E's CEO from 2014 to 2016. "Our goal is to put the best value proposition in front of the city and we have a fair amount of confidence we can do that."

Martin did not directly address what the ramifications would be should another company win the bid.

But SDG&E executives have complained about a host of recommendations put forth by a consultant hired by the city. Among the proposals by the JVJ Pacific Consulting is a new franchise agreement lasting 20 years and requiring the winning bidder put up at least $62 million upfront, a price SDG&E has called "astronomical."

Howard Golub, the managing member at JVJ, has called SDG&E's complaints about the upfront fee "truly absurd," with his firm estimating the city's electric and gas franchises are worth roughly $6.4 billion in profit to the winning bidder over the course of a 20-year agreement.

Some groups have argued for increasing the $62 million minimum, others have called for a shorter term of perhaps five or 10 years for the new franchise agreement and some complained about the process. The local law firm of Aguirre & Severson last week filed a lawsuit alleging a recent meeting by the city council's Environment Committee violated the state's open meetings law.

The San Diego City Council has scheduled an emergency meeting Thursday at 1 p.m. and one of the four items on the agenda will be a discussion about what the franchise agreement should entail.

As for Wednesday's Sempra earnings call, it marked the first time the San Diego-based company has reported quarterly numbers since the full economic impact of the COVID-19 pandemic has been felt.

The company announced adjusted earnings of $485 million between April and June, up 57 percent compared to the second quarter of 2019.

SDG&E's profits for the quarter came in at $193 million, up from $143 million during the same period last year. Southern California Gas reported earnings of $146 million, up from $30 million in the second quarter of 2019. The nearly four-fold increase at SoCalGas was due to relief from a regulatory liability that was related to income tax forecasts in recent years and a delay in a general rate case by the California Public Utilities Commission that affected 2019's numbers.

Sempra also announced that its massive Cameron LNG facility on the Louisiana Gulf Coast that manufactures and exports liquefied natural gas to foreign markets has just about completed the addition of a third production unit — called a "train" in the parlance of the gas industry.

The company expects to earn between $400 million and $450 million per year at Cameron, starting in 2021. "Over the life of the project, it's going to be greater than $12 billion in cash after debt service," Martin said.

But due to slowdowns in the natural gas market due to the pandemic, Sempra's final decision to build another big LNG facility, this one in nearby Port Arthur, Texas, has been put off until 2021.

Sempra's subsidiary in Mexico, IEnova, is also in a holding pattern. It is looking to add an export component to an already existing LNG facility at its Energía Costa Azul facility near Ensenada but has been waiting for months to get one final permit from the Mexican government.

Maritn said the delay is due to slowdowns in the permitting process in Mexico, not from potential opposition from President Andrés Manuel López Obrador, a longtime critic of energy reform measures that opened up Mexican energy markets to foreign investment.

López Obrador met with President Donald Trump last month and Martin was one of about 20 business leaders from the U.S. and Mexico who attended a dinner attended by both leaders.

"There is true warmth and authenticity to that relationship," Martin said. "Obviously, the conversation three years ago was more around the border (but) today there is broad recognition of the joint opportunity between both countries ... I think there's a real near-term opportunity for collaboration and we think there's an opportunity for energy companies like ours."

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(c)2020 The San Diego Union-Tribune

Visit The San Diego Union-Tribune at www.sandiegouniontribune.com

Distributed by Tribune Content Agency, LLC.

Discussions

Gary Hilberg's picture
Gary Hilberg on Aug 7, 2020 3:22 pm GMT

This is a very interesting development in that a monopoly supplier must value, bid on and win the rights to continue to operate the monopoly.  With the changing regulatory landscape in California, getting into that market seems challenging, but it appears that SDG&E makes a profit so that will bring in the competition.  A dramatically shorter contract term would seem to raise the risk for any new entrant, but who knows what terms of the franchise agreement are.  A loss by SDG&E would be staggering.  

Matt Chester's picture
Matt Chester on Aug 7, 2020 4:13 pm GMT

It's compelling that we're able to watch the changing landscape of the utility sector that many have predicted finally unfold in front of our own eyes

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