January 26, 2001

SDG&E Announces Measures To Avoid Financial Crisis Impacting Other California Utilities

San Diego Gas & Electric (SDG&E) this week unveiled several measures intended to help it avoid the severe financial crisis currently facing the state's other two large investor-owned electric utilities.

The measures include a filing today with the California Public Utilities Commission (CPUC) requesting authorizations intended to manage SDG&E's growing undercollection of the costs of purchasing electricity for customers and provide for the amortization of these undercollected costs in customer rates. If approved, the filing would reduce the amount of balloon payments for electricity that customers would otherwise see in future rates. Additional measures include the initiation of a cash-conservation program and a resumption of bill-collection activities.

"Despite the change of seasons, the serious problems in California's dysfunctional wholesale power market continue - problems that the Federal Energy Regulatory Commission has refused to address," said Debra L. Reed, president of SDG&E. "Additionally, the state government's actions are not keeping pace with the sharp rise in wholesale electricity prices, which remain out of control and have far surpassed the record prices of last summer. Our customers have been paying only a small fraction of these power costs. The majority is being deferred into a growing `balancing account.'"

State law AB 265, which does not apply to California's two other major investor-owned electric utilities, allows SDG&E to recover its prudently incurred electric commodity costs.

Reed emphasized that cash flow and access to capital markets is an ongoing issue for SDG&E that could adversely impact the company's ability to serve customers in the future, as long as the cost of procuring energy is significantly higher than what the company is authorized to charge customers.

"No business on a sustained basis can charge far less than it pays for its product," Reed said. "Thus far, the undercollected balance for our customers' power costs has exceeded all expectations - about $450 million at the end of 2000.

"In recent months, we have received hundreds of calls from customers saying that they want to pay off the deferred electric costs now in a way that helps them spread out these costs in a more manageable fashion. We need to take a number of proactive steps toward reducing the size of the future payments for customers, while, at the same time, preserving SDG&E's liquidity, so that we can continue to provide reliable service in San Diego and southern Orange Counties."

The specific steps announced include:

· A request for a 2.3-cents-per-kilowatt-hour (kWh) electric bill surcharge, beginning March 1, 2001, to manage the growth of SDG&E's uncollected power costs and begin amortization of the costs. This would add approximately $11.50 a month to the typical residential customer electric bill of $72 for the next five years, with the exception of low-income customers, who would be exempted from the surcharge;

· Initiation of a $100 million cash-conservation program, including sales of non-essential property, containment of new hiring, reduction of outside contractors, and deferral of information-system and construction projects that do not affect the core reliability of electric service to customers;

· And, resumption of bill-collection activities, which have been suspended since July 2000 to help consumers manage higher energy costs.

Effective Oct. 1, 2000, and retroactive to June 1, 2000, under AB 265, SDG&E residential and small-business customers began paying a capped electricity rate of 6.5 cents per kWh. Over the past 30 days, however, wholesale electricity prices in the state market have averaged a record 25 cents per kWh, about seven times the level of a year ago. Under state law, the difference between the wholesale electricity costs and the capped retail commodity rate of 6.5 cents per kWh is being recorded in a regulatory balancing account, or "IOU," for later payment, subject to a prudence review by the CPUC.

SDG&E's balancing account, originally estimated to reach $800 million by the end of the legislatively mandated cap period, now is expected to reach $1.45 billion in 2003 _ resulting in estimated balloon payments totaling nearly $800 for the typical residential customer. The CPUC ultimately will determine how this money is collected, but, even if the balance were to be spread out over two years, the average monthly bill increase for residential customers would exceed $30.

SDG&E's cash-conservation program is expected to defer as much as $100 million or more this year, by postponing lower-priority construction projects, containing hiring for non-essential positions and reducing expenses for contract labor, information systems and administrative overhead. While the company is not planning employee layoffs at this time, Reed said all expenses and activities not tied directly to the maintenance of essential services and safety will continue to be scrutinized and deferred, if possible.

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