REGION: A rough week for SDG&E

But while image is tarnished, utility will weather financial storm, experts say

By DAVE DOWNEY - Staff Writer | Saturday, September 6, 2008 11:16 PM PDT ∞

Under attack from state agencies, victims of last year's wildfires and a new verdict in a Marine helicopter crash case, San Diego Gas & Electric Co. is facing a tarnished public image and a potential payout in the hundreds of millions of dollars for lawsuits and fixes to its power lines.

Industry observers say the company, which has 4,000 employees and serves 3.4 million people in San Diego County and southern Orange County, is not in danger of failing. SDG&E has deep pockets and it is a subsidiary of Sempra, a Fortune 500 company with more than $11 billion in annual revenues.

"The company is financially solid," said Stephanie Donovan, a spokeswoman for SDG&E, in a telephone interview Friday. "And we have been serving this community for 117 years."

Still, SDG&E has been rocked hard enough by a cascade of bad news to shake its corporate reputation.

"This is a public relations disaster," said Steve Erie, UC San Diego political science professor and director of the university's urban studies program. "It raises questions about the trustworthiness and the credibility of San Diego Gas & Electric. It's not just one, it's several incidents here."

Donovan countered that the incidents are not all related.

"Each of these situations is separate and unique, and has its own set of facts, and should really be viewed that way," Donovan said. "They just simply happened to have occurred within a short time frame."

As for the company's reputation, she said, "I can't speak for the more than 3 million people in our community who are our customers. But what I can say is that the last chapter of this has yet to be written and we aren't going to speculate on the outcome. We are going to let this play out. And we are going to vigorously defend ourselves in all of these cases."

A state regulatory agency last week alleged that the utility not only set the stage for last October's wildfires by failing to properly maintain its backcountry power lines, but impeded the California Public Utilities Commission's investigation into the cause of the fires. The company has denied those allegations.

The commission joined California's statewide firefighting agency, the California Department of Forestry and Fire Protection, or CalFire, in placing the blame for three wildfires ---- including the Witch Creek fire, the fourth-largest in state history ---- at the feet of SDG&E.

CalFire produced a report in July and demanded that SDG&E reimburse it for more than $20 million spent fighting runaway blazes nearly one year ago.

Also last week, a San Diego County jury awarded $55 million in damages to families of Marines who died in a nighttime helicopter crash into a Camp Pendleton power line tower in 2004 and found SDG&E negligent for failing to install lights on its transmission towers.

And that came not long after state commissioners accused the company of intentionally giving them false information about an aspect of SDG&E's Sunrise Powerlink, a proposed $1.5 billion, 150-mile high-voltage power line.

"It hasn't been a good couple of weeks for SDG&E," said Bill Powers, a San Diego engineer and activist who closely follows developments in the utility industry.

Taking a hit

And more bad news may come in the weeks ahead.

More than 500 families who lost property in the Witch Creek, Guejito and Rice fires, which combined to torch more than 200,000 acres and destroy more than 1,300 homes, are suing SDG&E.

But while the winds of fortune haven't exactly been blowing in SDG&E's direction lately, the San Diego region's electric utility remains a company with lots of money and a parent that is a financial heavyweight.

Bob Schlax, a controller for SDG&E, stated in court last week that the company has a net worth of $2.4 billion. Schlax said that as of the midpoint of the year, SDG&E had earned $135 million in net income.

For all of 2007, SDG&E reported net income of $287 million in a report filed with the Federal Energy Regulatory Commission.

"Their credibility has taken a huge hit throughout the state," said Michael Shames, executive director for the San Diego watchdog group Utility Consumers' Action Network.

But he said the company has taken a smaller hit financially.

"Sad to say, but $55 million to SDG&E is not a big number," Shames said.

That is not to say the company doesn't face risks going forward.

Last week's report by the Public Utilities Commission's Consumer Protection and Safety Division faulted SDG&E for its design and upkeep of backcountry power lines, saying it failed to keep wires far enough apart at the ignition point for the Witch Creek fire and failed to trim in a timely manner a sycamore tree next to wires that sparked the Rice fire.

The division's report recommended that state commissioners order SDG&E to survey its power-line system to determine whether wires are too close to avoid slapping into each other in high wind in other places around the county, and, if so, to make repairs.

Those repairs could prove to be extensive, Shames said.

"The biggest exposure is the potential cost for remediation that SDG&E will likely have to come up with, to shore up and further fireproof its backcountry power lines," he said. "That could be hundreds of millions of dollars. That is real money. They have a lot of transmission lines and a lot of territory.

"And insurance doesn't cover that."

But Donovan said the company could pass those costs on to customers and would not be burdened by such a program. She said SDG&E stands ready to take measures to fireproof its system, and is exploring replacing old wooden poles with metal ones and using thicker wire.

"We are absolutely committed to looking at what we can do to make our system safer during the red-flag conditions," Donovan said.

No crippling damages

On the other hand, Shames said SDG&E has plenty of insurance to cover potential court awards to fire victims.

According to the 2007 report filed with the Federal Energy Regulatory Commission, SDG&E is preparing for that likely impact.

"The company has in excess of $1 billion in liability insurance and has notified its insurers of the lawsuits," the report stated.

If insurance isn't able to cover all the awards, the company may be able to pass on some costs to ratepayers for damages that compensate victims for their losses, said Susan Carothers, a spokeswoman for the Public Utilities Commission. However, she said utilities may not pass on costs for punitive damages.

In any event, even if exhaustive awards for damages materialize and extensive repairs are ordered, the company will survive the financial storm, experts say.

"I don't think this at all seriously compromises them financially," said Erie, of UC San Diego.

Shames agreed.

"So far, we have not seen any crippling damages," he said. "Bankruptcy is a ways off. And if they get the Sunrise Powerlink approved, they will be swimming in money."

The commission is scheduled to decide by the end of this year whether to license the controversial transmission line that has environmentalists and backcountry residents up in arms. They are angry because the project would thread Anza-Borrego Desert State Park and the communities of Ranchita, Santa Ysabel, Ramona and Rancho Penasquitos with wires strung from metal towers as tall as 160 feet. Business leaders favor the project and say the line is needed.

"Right now, this is probably more of a public relations nightmare than a financial nightmare," Shames said.

Contact staff writer Dave Downey at (760) 745-6611, Ext. 2623, or ddowney@nctimes.com.