SDG&E Is Looking to Leave the Power-Buying Business

In a dramatic sign of California’s changing energy market, San Diego Gas & Electric wants to stop buying and selling electricity.

In recent days, the company has asked lawmakers to introduce legislation that would let SDG&E reduce its role – while also pushing the state to enter the energy market in a big way.

The company’s vision could eventually require the state to buy out its long-term power contracts and possibly pay the company for several natural gas-fired power plants it owns.

SDG&E is pitching this idea as the company prepares to lose about half of its power customers within the next few years.

Last month, San Diego Mayor Kevin Faulconer said he wants to form a “community choice” agency, known as a CCA, to buy and sell power on behalf of the city’s 1.4 million people. Other smaller cities across the county are likely to join that effort, creating an electricity buyer’s club that will compete with SDG&E and leave the company with more power than it can sell.

“We think it makes better sense for SDG&E to eventually move out of the commodity role,” said Kendall Helm, the company’s vice president of energy supply. “But it’s important to always provide clean, safe and reliable delivery to all customers in our service territory.”

That may sound like it’s bad for business, but it may be more of an opportunity. A well-run utility can make a steady profit from delivering power.

SDG&E – one of the region’s largest employers – makes most of its money that way, which is why its bottom line won’t be at much at risk if it stops selling power. The company already gets guaranteed revenue from the sprawling system of power lines and cables it’s built over the last century to each home and business in the region. It also delivers natural gas.

Instead, the company is looking to shed the risk it now faces trying to buy power for a customer base that is looking to jump ship.

“Signing contracts that are 10 and 20 years in length while the cities are discussing the possibility of joining together to buy their energy from a CCA provider will be tricky to say the least and thus we are looking at what the best options are for the near future related to our efforts,” SDG&E’s vice president for government affairs, Mitch Mitchell, said in a Nov. 14 letter to state Sen. Ben Hueso. (Disclosure: Mitchell sits on Voice of San Diego’s board of directors.)

For years, most California power companies did it all – they owned both the power and the lines that delivered it to customers.

Now, following years of deregulation and changes in the industry, the state’s three big energy utilities – Southern California Edison, Pacific Gas & Electric and SDG&E – no longer own all of the power they deliver. Much of their power comes from long-term contracts they signed with other companies.

Even that market is eroding as governments enter the energy market.

SDG&E’s parent company, Sempra Energy, sees that and recently paid just under $9.5 billion to control Texas’ largest utility, Oncor, which only delivers electricity.

In the future, SDG&E could look more like Oncor.

The question is how to get there.

A draft bill, which Hueso’s office provided, shows what SDG&E is asking lawmakers to consider. The company urges the state to create a way for the company to sell off its long-term power contracts to a “state-level electrical procurement entity.” The first step would be a state-level task force to sort through all the issues involved, which would be many.

Matthew Freedman, a staff attorney for The Utility Reform Network, said there are already discussions about the state stepping in to help develop renewable power resources. But those discussions are about developing new power – like geothermal projects in Imperial County – not paying companies for existing contracts.

“That is the legitimate part of what SDG&E is teeing up, but I don’t think they are the right messenger,” he said. “Their motives are not pure on this, and what they have put on the table now is more of a manifesto than an actual proposal.”

For one thing, it’s not clear what state agency would step up to pay for all of this.

One power-buying entity already exists at the state level, a small division within the state Department of Water Resources known as California Energy Resources Scheduling. The division – known as CERS by the few people who know about it – was created in 2001, during the energy crisis, to buy and sell power to avoid rolling blackouts across the state. But in the nearly two decades since the crisis, only a skeleton crew now runs the division, mostly to ensure the state is fully compensated for the power it bought years ago.

There’s also the matter of the power plants SDG&E does own – four plants that generate power by burning natural gas. The draft bill would make sure the company is “fully compensated” for those plants in certain scenarios. This could put the state in the awkward position of paying for fossil fuel-fired power even though California lawmakers this year set a goal of having all electricity sold in the state come from renewable resources by 2045.

SDG&E said it’s already taking steps to minimize the number of gas-fired power plants it owns. For a while now, it’s been expecting that it would be forced to buy another gas-fired plant from Texas-based energy company Calpine for $280 million. The forced sale is part of a bizarre deal involving former California Public Utilities Commission President Michael Peevey.

Helm said SDG&E has worked out a deal with Calpine that would not require SDG&E to buy the plant.

SDG&E gets the rest of its power – roughly three-fourths of the electricity it sells – from other sources, largely long-term contracts it signed with wind and solar farms across the southwestern United States and northern Mexico. It cannot make money on the power it buys and then resells from customers.