Sempra Sees Need for Market Reform

When Debra L. Reed took over as president of San Diego Gas & Electric Co. in July 2000, she landed in the hottest of hot seats. Electricity prices had jolted to record heights and SDG&E; customers were tearing open the biggest energy bills they had ever seen.

Standing before an audience of energy executives and officials in Houston recently, Reed confessed: “I had nightmares last night recounting this experience in my career.�

Even so, for whatever educational value it might provide others, Reed relived California’s wrenching energy crisis and described its ugly effects on customers and the utilities she manages under the Sempra Energy umbrella: Southern California Gas Co. and SDG&E.;

Looking back, one big lesson about energy demand stood out, she told her colleagues. No matter how often customers were urged to conserve energy, they didn’t act aggressively until they felt the pain of bigger bills.

SDG&E; customers curtailed electricity use by up to 9% in 2000, and then cut back more the following year with the help of incentive plans, Reed said, and Southern California Gas saw similar results as the price of natural gas soared.

Today, customers are becoming acclimated to relatively stable electricity prices that are more than 50% above pre-crisis levels, Reed said. And people have gone back to their old ways, fueling a usage rebound that could bring demand at SDG&E; this year back to peak levels of the late 1990s.

Before her turn at SDG&E;, Reed had spent her career climbing the corporate ladder at Southern California Gas. After steering the San Diego utility through the statewide energy debacle, marked by rolling blackouts, rate increases and customer revolt, Reed in early 2002 became president and chief financial officer of Sempra Energy Utilities, whose subsidiaries serve 7.5 million customers.

After her presentation in Houston, Reed talked with The Times about energy issues.

Question: What changes are needed in California’s energy market today?

Answer: On the gas side ... we would like to see access to new supply sources. And secondly, some way to ensure customers that their gas is going to get from point A to point B. It’s mainly regulatory, but there are some infrastructure issues that would have to occur.

On the electric side, we need clear rules for what is the utility’s role, who are their customers, what are the rules regarding customers coming or leaving, what should the utilities be expected to do in terms of providing generation resources, and what assurances do you have that once you make those investments [in power plants], you’ll have a chance at recovering the costs? There’s also this whole issue of transmission and transmission-siting. There’s a huge need to address the expediency of getting transmission infrastructure built in this state.

Q: So we need more of those huge transmission towers?

A: I’ll give you an example of why it’s necessary. During the [San Diego] fires, the major line, the Southwest Power Link that connects us with Arizona, that line tripped off. We were very, very close to having another major transmission line that comes in from the coast also be affected by the fires. Had that occurred, we would have lost [power for] a great percentage of San Diego.

We’ve either got to do a better job of planning and moving forward with the plans, or accept the fact that blackouts are going to be common. And that’s not reasonable. You cannot have an economy with periodic blackouts; that just doesn’t work.

Q: What’s your view on the role utilities should play?

A: We went through a time frame where the goals of the state were to have the utilities get out of everything except for transporting energy. The view was to get us out of buying for customers, to get us out of having any kinds of conservation programs for customers, demand-side management for customers -- all of that was supposed to be open to the market. That’s not what customers truly want in the long run, and the energy crisis was a real awakening on that.

Our view of our role going forward is to really be a full-service provider for our customers and to be there for the customers, particularly the residential customers.

Q: Should we go back to having a regulated industry?

A: Certainly for residential customers, in the near term, that seems to make the most sense. For commercial industrial customers, on the gas side, we don’t buy for them now. For the small-business consumers, those customers were kind of literally left in the dark with some of this ... their expectation is that the utility will provide them with reliable energy and try to provide some price protection in terms of spikes and volatility. We’re willing to do that role, but if we’re going to be responsible, then we have to have the ability to control some of the pieces that go into doing that.

Q: You have two U.S. projects in the works, including one in Baja California, to import liquefied natural gas. How important is LNG?

A: We think it will be very positive for California. We want to have access to very diverse supplies of natural gas for the future because we think that will benefit our customers. We get most of our California gas through two interstate pipelines. Those pipelines bring gas in from predominantly two gas basins ... and the gas wells in those areas are showing signs that the production is decreasing year by year.

Q: Can’t natural gas prices be manipulated? Didn’t we learn that from recent scandals?

A: I think that without proper market rules, and without proper market monitoring, there’s always a danger. But if you look at what’s happened recently on the gas side, any time there is an increase in gas prices, there is an immediate investigation as to what caused the price spike and whether or not it was caused by supply-demand, a regular economic force, or if there was any manipulation. I think having had some of the lessons on the electric side, the diligence now by the regulators is much greater. So I think it’s a lot less likely.