IV. Discussion

We deny the petition. As explained below, we find that Sempra has failed to demonstrate that its proposed reorganization is authorized by D.98-03-073. Before Sempra may gain authorization for its reorganization, Sempra must show that its new proposal would satisfy the applicable requirements under Pub. Util. Code § 854(b) and (c). Sempra's petition does not even attempt to make this showing.

A. The Proposed Reorganization is Outside the Scope of the Merger Authorization

Based on our comparison of Sempra's new proposal with the merger proposal that was reviewed and authorized in the merger decision, we conclude that Sempra has not shown that its proposed reorganization was contemplated or authorized by the merger decision. Sempra's petition describes a plan under which key operations of SDG&E and SoCalGas - such as distribution, account management, and customer service - would be integrated and under the direction of common officers. Those officers would either be under the employ of the parent holding company, Sempra, or would report to another officer under the employ of Sempra. (Petition at 5.) The effect of this integration will be to push more responsibility for the conduct of essential customer-affecting functions to the holding company level. Sempra describes a plan under which responsibility for functions such as billing, call centers and meter reading for both utilities would be centralized under a single officer accountable not to the respective utilities, but to the holding company. Under the current structure in which these functions are not integrated, accountability lies with the senior officers and directors of the regulated utilities.

Sempra has not shown that we had such a proposal before us when we approved the merger or that the merger decision authorizes such integration. In the merger decision, the Commission evaluated and approved a particular merger proposal offered by the merger applicants.¹⁶ This was consistent with Section 854 (b) and (c), which require the Commission to find that a merger "proposal" satisfies a number of criteria.¹⁷ The merger decision shows that the Commission was not considering a proposal that would have integrated key customer-affecting operations for the two utilities. Instead, the merger decision is clear that the Commission was considering a proposal that would retain the separate nature and identities of the two regulated utilities.

The merger decision contains the following findings of fact:

146. After the merger, both SDG&E and SoCalGas will remain separate Commission-regulated public utilities, subject to all of the Commission's regulatory authority and audit power.

147. The merger will preserve the jurisdiction of the Commission and the capacity of the Commission to effectively regulate and audit SDG&E's and SoCalGas' public utility operations. (D.98-03-073, Mimeo. at 142).

Elsewhere, in the discussion of merger savings, the decision finds that the driving force behind the merger is the enhanced ability of a merged enterprise to capitalize upon opportunities in unregulated markets. The decision states:

The merger can therefore largely be justified in terms of the ability of the merged company to conduct more extensive and comprehensive unregulated activities than the two individual unmerged companies. (Mimeo. at 25).

In this vein, the merger decision points out that the proposal does not effect a consolidation of the regulated utilities:

Any savings in regulated activities received by ratepayers are incidental. SDG&E and SoCalGas will continue their separate corporate existences under their existing names. Both utilities will remain as they are today - regulated in their tariffed utility services by the Commission - with no change in the status of their outstanding securities or debt, and with both still under the ownership of their respective parent holding companies, and headquartered as they are today. (Mimeo. at 24).

Thus, the Commission did not believe it was reviewing a proposal to consolidate major functions of the two regulated utilities under common officers directed by Sempra. In contrast, the proposed reorganization blurs the separate and distinct nature of the two regulated utilities and shifts accountability for major customer functions from officers of the separate utilities to one or more Sempra officers.

Sempra's petition relies upon a variety of statements in the merger decision showing that the Commission envisioned a sharing of resources between the two regulated utilities. Typical of such statements is the following excerpt from adopted guidelines regarding affiliate transactions:

SDG&E and SoCalGas will be organized in a manner that allows them to provide the highest quality utility service that focuses on safety and reliability, and is responsive to customers' needs. Each utility Affiliate will, to the extent it makes business sense, share resources with the other utility Affiliate. (Mimeo, Attachment B, p. 18, italics added.)

The sharing of resources that was anticipated in the merger decision does not clearly encompass the formalized integration that is proposed here. To share resources does not necessarily involve a common officer acting at the direction of Sempra. In contrast, the petition seeks authorization for a formalized consolidation of three major customer-affecting functions (distribution, account management, and customer service) under the direction of one or more Sempra officers. By formalizing the integration of operations and having major divisions of the two companies reporting to the holding company, the proposal in the petition takes the concept of sharing of resources to another level that was not described or analyzed in the merger decision.

Our conclusion is bolstered by the fact that Sempra itself acknowledges the possibility that the Commission would consider its request outside of the authorization granted by the merger. For that reason, Sempra makes the alternative request that we treat its pleading as a petition to modify the merger decision. Because we find that Sempra's new proposal falls outside the authority granted by the merger decision, we treat its pleading as a petition to modify D.98-03-073.

B. Sempra Has Not Shown That Its New Proposal Satisfies the Requirements of Section 854

Sempra asks the Commission to modify the merger decision to permit its proposed integration of operations. However, Sempra makes no attempt to show that its new proposal satisfies the requirements of Section 854. The failure to make such a showing is fatal to Sempra's petition.

Had Sempra presented its new reorganization plan as part of its original merger application, the reorganization plan would have been part of the proposal analyzed by the Commission under the criteria set forth in Section 854(b) and (c). We will not permit Sempra to evade such scrutiny by obtaining authority for a limited merger proposal and then failing to satisfy the Section 854 requirements for an expanded merger proposal. If Sempra wishes to gain this Commission's authorization for its new plan, it will need to make a showing that its new proposal meets the requirements of Section 854.

To provide guidance for Sempra in the event it wishes to pursue its proposed reorganization, we note two areas of concern. However, by mentioning these two areas, we by no means wish to suggest that we are satisfied that the other criteria of Section 854 would be met.

Section 854(c)(7) requires the Commission to consider whether the merger proposal will "[p]reserve the jurisdiction of the commission and the capacity of the commission to effectively regulate and audit public utility operations in the state." To the extent that the reorganization proposal vests responsibility for direction of the new integrated operations at the holding company level, the proposal may not comport with this requirement. In this regard, we take notice of the fact that, in a pending Commission investigation (I.01-04-002), Sempra asserts that the Commission is devoid of jurisdiction to enforce any Commission-adopted conditions related to the Sempra holding company. Sempra argues that it is an unregulated entity out of the jurisdictional reach of the Commission.

In light of this contention, Sempra's reorganization proposal will not likely pass muster under Section 854(c)(7). Sempra has signaled that it will challenge orders or directives that apply to the Sempra holding company, particularly any orders attempting to regulate how Sempra conducts its affairs. The reorganization proposal appears to push decision-making responsibility for key customer-affecting functions to the holding company level. In contrast, under the current organization, decision-making responsibility for these as yet unintegrated customer functions resides with the respective utilities, not with the holding company. Were we to approve the new integration proposal, we would court a challenge from Sempra any time we attempted to investigate actions taken at the holding company level or to impose obligations on the holding company in its management of essential customer operations. In light of Sempra's position in I.01-04-002, we will have a difficult time finding that it would be in the public interest to allow a reorganization proposal that will invite litigation any time we attempt to assert authority over Sempra.

We also note that any future request by Sempra will need to satisfy the requirements of Section 854(b)(2), which requires that ratepayers receive at least 50% of the forecasted benefits of the merger. Because the new integration proposal was not considered by the Commission in the merger decision, Sempra will need to present an analysis addressing whether there are any additional forecasted economic benefits (above those already addressed in the merger decision) resulting from the new integration proposal. If we find that there are any additional economic benefits, at least 50% of those benefits will have to be shared with ratepayers.