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California’s Davis agrees to buy SDG&E’s transmission system

California Gov. Gray Davis said he reached an agreement for the state to buy San Diego Gas & Electric Co.’s transmission system for 2.3 times book value in a deal worth about $1 billion.

In a first, the plan also includes a provision dealing with past power costs run up when SDG&E’s wholesale electricity costs exceeded what it could recover under a retail rate freeze. SDG&E ran up about $750 million of debt last year because the rates it was permitted to charge were less than prices it paid for wholesale power.

Under Monday’s agreement, SDG&E will contribute about half the amount needed to cut the outstanding balance. The state agreed to contribute about $180 million of debt the utility owes.

Without the agreement, SDG&E ratepayers would have paid a one-time $400 balloon payment for residential customers and $12,000 for mid-size businesses.

“We know that many of our customers are extremely concerned about the potential of large balloon payments looming in the future to address our past undercollections,” said Edwin A. Guiles, group president of Sempra Energy’s regulated business units and chairman of SDG&E. “We are pleased that today’s agreement provides the framework to resolve major regulatory issues to the benefit of our customers.”

The agreement with the utility’s parent Sempra Energy requires SDG&E to sell power it generates at cost-of-service rates for 10 years. SDG&E has sold most of its generation but still owns 20% of the San Onofre nuclear plant.

In addition, it would settle several regulatory cases before the California Public Utilities Commission (PUC) and gives the state the opportunity to purchase 15,780 acres of environmentally sensitive lands owned by the company along the Colorado River.

However, the deal is not contingent on the purchase of SDG&E’s transmission network, which includes 170 electric lines exceeding 69 kv in capacity and spans about 1,800 circuit miles from southern Orange County to the Mexican border. The system also includes about 135 electric substations and transmission interties with Southern California Edison Co.’s system at the San Onofre nuclear plant.

The memorandum of understanding(MOU) also calls for the Department of Water Resources (DWR) to continue buying power for SDG&E until certain conditions are met. DWR has been purchasing power for SDG&E customers since early February.

SDG&E and its sister utility, Southern California Gas Co., agreed to spend about $3 billion over 6 years on capital improvements, and the utility agreed to drop legal claims against the state.

The MOU signed today is the second with California’s investor-owned utilities. An agreement with Southern California Edison Co., a unit of Edison International, is pending approval before the state legislature. Unlike the Edison agreement, however, only acquisition of SDG&E’s transmission lines is subject to legislative action.