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PG&E Is All Charged Up 

The S.F.-based utility embarks on a nationwide buying spree

Wednesday, May 14 1997
Quietly, yet relentlessly, PG&E Corp., the mammoth San Francisco-based utility that supplies gas and electricity to most of Northern California, is preparing to extend its local dominance of power markets onto a national, then international stage.

With mountains of cash it has only begun to tap, PG&E has spent the past few months positioning itself in the race for $300 billion worth of now-regulated electricity business as electricity markets open to competition. In California, state regulators will allow consumers to shop around among electricity suppliers come Jan. 1, and states around the nation are expected to eventually follow suit. What was once a staid business -- in which regional monopolies worried more about clipping branches around power lines than what the utility down the freeway was doing -- is becoming a jet-setting, nationwide industry, complete with corporate raids, sophisticated marketing, and cutthroat battles for customers. Where once business trips for PG&E employees generally consisted of driving to the Sierras to check on a hydroelectric dam, the company's executives can now be found flying weekly to Houston, New York, and Australia.

That is because PG&E -- long among the most sober of America's lumbering monopoly utilities -- is spending the money amassed selling gas and electricity to Northern Californians in order to place it among the front-runners in this race, before it pushes beyond into international markets.

At the same time, PG&E is spending ferociously to become a national player in the other side of its energy business -- natural gas. In the chaotic energy markets envisioned by PG&E planners -- where electricity from natural-gas-fired power plants in Texas might be sold to a Wisconsin utility by a San Francisco energy trader -- PG&E hopes to reign supreme.

"My mission coming in was to build the best and biggest energy services company in the world as quickly and intelligently as possible," says Scott Gebhardt. Gebhardt was hired two months ago as president and CEO of PG&E Energy Services, the company's 4-month-old division dedicated to unregulated electricity markets. Gebhardt won't specify just how much PG&E plans to spend on the first, nationwide expansion, but recent purchases by PG&E's gas division appear to hint at soaring ambitions.

It has spent $403 million to buy the natural gas trading company ESI and the Teco Pipeline Co. in Texas, and is now waiting for a go-ahead from federal regulators for a proposed $1.5 billion purchase of Valero Energy Corp., a natural gas and oil pipeline and marketing company.

PG&E intends to spin these companies' natural gas marketing and trading arms into an all-encompassing energy trading division, which will also trade deregulated electricity. The resulting energy-trading juggernaut will give PG&E an important edge in upcoming deregulated electricity markets.

In these new markets -- which are soon going to come into existence with deregulation -- private electricity resellers, municipalities, companies, and other energy consumers may purchase electricity and gas futures contracts to fix their energy costs.

Just as cattlemen might buy grain futures at the Chicago Board of Trade to guarantee a fixed price for next year's feed, cities and smaller localities will lock in prices at PG&E's energy trading floor by buying power needed in the future at prices set in the present.

In the past, municipalities and companies that wanted to lock in stable energy prices had to build their own power plants.

In preparation for this new regime, PG&E split itself the first of this year into four separate divisions. Each division -- from energy services to distribution to generation to gas -- has been instructed to break out of its Northern California market, and think nationally. Its generating division, for example, has joined with San Francisco-based Bechtel to go around the country, and around the world, building private power plants for companies, governments -- whoever's buying. Its distribution, or power line, division will of course remain in California -- it's hard to ship high-tension-wire networks around the nation. But it, too, will become more integrated into the national power grid, collecting fees from far-flung utilities that wish to sell power to north-state customers.

At first glance, PG&E would appear at a disadvantage in this brave new world of deregulated electricity. It is starting its energy services division nearly from scratch. Already more than 100 other companies have entered the deregulated energy business, including giants such as Duke Louis Dreyfus of Connecticut, Mission Energy of Southern California, and the Southern Companies in Georgia.

Some of PG&E's competitors, such as Houston's Enron Corp., already have vast experience in deregulated energy markets such as natural gas, and have long done business in foreign countries' privatized, and essentially deregulated, energy markets.

Enron, for example, has launched a $30 million national advertising campaign to promote its retail energy services; it is negotiating with state regulators in Oregon to allow a $12.5 billion merger with Portland General Electric; and it is currently in discussions that could lead to an embarrassing encroachment onto PG&E turf. Enron has signed a letter of intent with a consortium of small Northern California utilities -- which includes the Port of Oakland across the bay from PG&E's corporate headquarters -- to provide electricity-related services once the California market opens for competition in 1998. The group considered choosing PG&E as its deregulated energy partner, but decided not to.

"We didn't want to be stuck with a company that was still chanting the ancient mantra of regulated monopoly utilities," says Don Dame, manager of marketing and member services of the Northern California Power Agency, as the 700,000-customer consortium is known. "It was important to work with a company with the kind of dynamism Enron offers."

But Wall Street bankers expect PG&E to prevail. They know that PG&E solves business problems the old-fashioned way -- it throws money at them.

"I don't think there will be much of a clash down the road with Enron," says Ed Tirello, energy analyst at Natwest Securities, a New York investment firm. "I think PG&E will have substantially more cash than Enron. They're bigger, and they haven't used up their capital."

Indeed, with $26 billion in assets, PG&E is by some measures the largest utility in the United States. Under California's energy deregulation law, PG&E must sell off four of its California fossil-fuel-based power plants -- including the Hunters Point Power Plant in San Francisco -- valued at $400 million. The money could provide an important contribution to the company's deregulated energy war chest as it pushes its business nationwide, Tirello says.

The company plans to eventually buy telecommunications companies, software providers, billing services, information consulting firms, or any other sort of firm whose experience and technology might help PG&E peddle power.

From California, to the New York island, to the Gulf Stream waters, to the Redwood forests -- by its S.F. executives' new way of thinking -- this land was made for

About The Author

Matt Smith


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