Special Scrutiny of Affiliate Transactions

In acquisitions and mergers, the California Legislature and the Commission have afforded special scrutiny to transactions between public utilities and affiliated corporations (some unregulated) that may result in anticompetitive practices detrimental to ratepayers. This special scrutiny of transactions with affiliated corporations is expressed by the Legislature in enacting Pub. Util. Code § 314(b) that authorizes "inspections of the accounts, books, papers, and documents of any business which is a subsidiary or affiliate of . . . an electrical, gas, or telephone corporation with respect to any transaction between the electrical, gas, or telephone corporation and the subsidiary, affiliate, or holding corporation on any matter that might adversely affect the interests of the ratepayers of the electrical, gas, or telephone corporation." This is precisely the type of investigation underway in this proceeding, and SCE is an appropriate party seeking discovery that may produce admissible evidence on these affiliated transaction issues.

For its part, the Commission has acted specifically and repeatedly to prevent anticompetitive transactions between Sempra and its affiliates. The Commission's close regulation of affiliated corporations and their transactions has allowed the Sempra entities to obtain exemptions under the federal Public Utility Holding Company Act of 1934, 15 U.S.C. § 79 et seq. (1997) (PUHCA).

Sempra was created by a merger of two public utility holding companies, Pacific Enterprises (parent company of SoCalGas and other subsidiaries) and Enova (parent company of SDG&E and other subsidiaries). See In re Pacific Enterprises, 79 CPUC 2d 343 (1998) (Sempra was named "Mineral Energy Company" at the time). To consummate the merger, the companies had to secure the consent of the Federal Energy Regulatory Commission (FERC) (under the Federal Power Act), the California Corporation Commission (under section 854 concerning mergers and acquisitions), the U.S. Securities and Exchange Commission (SEC) (under PUHCA), and other regulatory agencies. The SEC's approval was perhaps the most important of these regulatory clearances. Under the proposed merger, Sempra would emerge as a holding company with indirect ownership of two public utilities, potentially violating PUHCA. The SEC granted Sempra an exemption from many PUHCA requirements based in part on a determination that California would provide "effective state regulation."²

In its own approval of the merger, the Commission repeatedly sought to provide the "effective state regulation" upon which the SEC based the exemption. This effort toward effective regulation of a predominately intrastate holding company can be seen in the Commission's initial approval in 1995 of the reorganization plan, initiated by SDG&E itself, that resulted in Enova and its subsidiaries including SDG&E. As one of the conditions of this approval, the Commission imposed the following obligation on Enova and its subsidiaries:

The officers and employees of Parent and its subsidiaries shall be available to appear and testify in Commission proceedings as necessary or required. The Commission shall have access to all books and records of SDG&E, Parent, and any affiliate pursuant to PU Code Section 314. Objections concerning requests for production pursuant to PU Code Section 314 made by Commission staff or agents are to be resolved pursuant to ALJ Resolution 164 . . . . SDG&E is placed on notice that the Commission will interpret Section 314 broadly as it applies to transactions between SDG&E and the holding company or its affiliates and subsidiaries in fulfilling its regulatory responsibilities carried out by the Commission, its staff and its authorized agents. Requests for production pursuant to Section 314 made by Commission staff or agents are deemed presumptively valid, material and relevant.

In re San Diego Gas and Electric, 62 CPUC 2d 626, 650 (1995) (emphasis added).

In approving the 1998 merger that created Sempra and its subsidiaries, the Commission imposed virtually the same conditions as set forth above on Sempra, SDG&E, SoCalGas, and any affiliate. In re Pacific Enterprises, 79 CPUC 2d 343, 446 (1998).

Thus, in approving the reorganizations and mergers that resulted in Sempra's current corporate configuration, the Commission imposed perpetual transparency on the parent, subsidiaries, and affiliates to ensure that the conditions of the merger continue to be satisfied and anticompetitive transactions among these entities do not occur. This proceeding has been initiated to determine whether the Sempra entities have complied with relevant statutes and Commission decisions pertaining to the holding company and the transactions among the affiliated corporations. This regulatory oversight also fulfills PUHCA's expectation of effective state regulation of holding companies granted an exemption under the act. Discovery aimed at obtaining admissible evidence concerning these issues is a necessary component of this proceeding and assists the Commission in satisfying its regulatory obligations. Because the Sempra entities, including SET, have an ongoing obligation to provide information sufficient to demonstrate compliance with prior Commission decisions and orders concerning the mergers, they must provide this information at their own expense.

² Under the Public Utilities Holding Company Act, a public utility holding company must be limited to a single integrated utility system located in a single operating area. 15 U.S.C. § 79k(b). PUHCA allows an exemption under section 79c when the holding company and each of its major public utility subsidiaries operates predominately intrastate. Also, the proposed merger must produce substantial economies of scale, local management, efficient management, and effective regulation. Id. § 79k(b)(1). The Securities Exchange Commission exempted the merger from most provisions of PUHCA based on the findings reached by the California Public Utilities Commission in the section 854 proceeding. As the SEC indicated, "It is a fundamental purpose of the [PUHC] Act to facilitate state regulation. Moreover, the exemption . . . appears to be premised on Congress' assumption that a holding company whose interests are essentially intrastate is susceptible of effective state regulation." Sempra Energy, 1998 SEC LEXIS 1310, *26-27 (June 26, 1998) (citing sections 1(b)(3) and (5) [15 U.S.C. §§ 79a(b)(3)+5] of the Act as "identifying as abuses of the holding company to obstruct state regulation and the lack of effective public regulation . . ."). I take notice of the SEC's decision under Rule 73, Rules of Practice and Procedure, and Evidence Code § 452(c).