MINERAL ENERGY CO
U-1/A, 1998-01-28
GAS & OTHER SERVICES COMBINED
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As filed with the Securities and Exchange Commission on January 28, 1998. 
 
                                                       File No. 70-09033 
 
                                          UNITED STATES OF AMERICA 
                            SECURITIES AND EXCHANGE COMMISSION 
                                             WASHINGTON, D.C. 20549 
              ___________________________________________________________ 
 
                                                   AMENDMENT NO. 2 TO 
                         FORM U-1 APPLICATION OR DECLARATION 
 
                                                               UNDER 
 
                THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 
 
                                                    Mineral Energy Company 
                                                          101 Ash Street 
                                                San Diego, California 92101 
 
           (Name of company or companies filing this statement and 
            address of principal executive offices) 
 
                                          None 
 
            (Name of top registered holding company parent of each applicant
             or declarant) 
 
Richard D. Farman 
President and Chief Operating Officer 
Pacific Enterprises 
555 West Fifth Street, Suite 2900 
Los Angeles, California 90013-1001 
(213) 895-5000 
Stephen L. Baum 
President and Chief Executive Officer 
Enova Corporation 
101 Ash Street 
San Diego, California 
(619) 696-2000 
 
 
                                   (Name and address of agents for service) 
 
                 ___________________________________________________________ 
 
The Commission is requested to send copies of all notices, orders and
communciations in connection with this Application to 

                                             Ruth S. Epstein, Esq. 
                                             Covington & Burling 
                                             1201 Pennsylvania Avenue, N.W. 
                                             P.O. Box 7566 
                                             Washington, D.C. 20044-7566 
 
 
                 UNITED STATES OF AMERICA {PRIVATE} 
                 SECURITIES AND EXCHANGE COMMISSION 
 
 
Mineral Energy Company                ) 
                                      )     File No. 70-9033 
Amendment No. 2 To Application On     ) 
Form U-1 Of Mineral Energy Company    ) 
 
                           INTRODUCTION 
 
            On March 26, 1997, Mineral Energy Company, a newly  
formed California corporation (the "Company"), filed an  
application on Form U-1 (the "Application") with the Securities  
and Exchange Commission (the "SEC" or the "Commission") seeking  
(1) authorization for its acquisition of Pacific Enterprises  
("Pacific") and Enova Corporation ("Enova") (the "Transaction")  
under Sections 9(a)(2) and 10 of the Public Utility Holding  
Company Act of 1935)(the "1935 Act" or the "Act"); and (2) an  
order exempting the Company under Section 3(a)(1) of the Act from  
all provisions of the Act except Section 9(a)(2).  The Application  
was amended on May 13 and July 21, 1997, by the submission of  
additional exhibits. 
            The Company hereby amends the Application for the  
purpose of expediting the Commission's action on the Application  
by providing information about the progress of related approval  
proceedings before the California Public Utilities Commission (the  
"CPUC"), and the Federal Energy Regulatory Commission ("FERC").   
These proceedings are in their final phases.  FERC has approved  
the Transaction, subject to certain conditions over which it  
retains jurisdiction.  The CPUC has completed extensive hearings  
concerning all issues raised by the Transaction, and has received  
a favorable opinion from the California Attorney General regarding  
the absence of any adverse effect of the Transaction on  
competition.  A 
                              - 1 - 
 
<PAGE> 
preliminary decision by the administrative law judge in the CPUC  
proceeding is expected in February, with a final decision by the  
CPUC likely in March.  
            The CPUC and FERC proceedings directly address a  
number of issues that overlap, to some extent, with the issues in  
this proceeding under the 1935 Act.  The most significant of these  
issues is the effect of the Transaction on competition, an issue  
that has been raised by intervenors in all three proceedings.  As  
to this issue, the Company requests the Commission to apply the  
doctrine of "watchful deference."  Where the Commission and  
another regulatory agency both have jurisdiction over a particular  
transaction, the Commission, with judicial approval, has held that  
it is appropriate for the Commission to "watchfully defer" to the  
proceedings before -- and the results reached by -- that other  
agency.   
            The Company requests the Commission to issue its final  
order on the Application promptly upon completion of these  
regulatory proceedings.  [FN1]  FERC has already found that,  
subject to certain conditions, the Transaction is in the public  
interest.  The California Attorney General's opinion, based upon  
the extensive record compiled in the CPUC proceeding, concludes  
that with one possible, and quite limited exception, the  
Transaction will not adversely affect competition.  Favorable  
action by the CPUC would reflect the determination by that agency  
that the Transaction is in the public interest.  It is critical to  
reaping the substantial benefits of the Transaction for both  
shareholders and consumers that all unnecessary delays in the  
regulatory process be eliminated.  The Company believes that this  
Amendment -- by keeping the Commission apprised of the progress of 
those 
                             - 2 - 
<PAGE> 
proceedings -- will assist in expediting the Commission's final  
decision when those proceedings conclude, and thus will avoid such  
delay.  
            To this end, this Amendment will include:  
            1.    A discussion of the competitive issues raised in  
the various proceedings, and of the watchful deference doctrine. 
            2.    A discussion of the mandate of the CPUC, its  
expertise, and its proceedings in this matter; 
            3.    A description of the FERC order and matters  
remaining to be resolved in that proceeding; and 
            4.    Information concerning Enova's recent decision  
to divest SDG&E's generation assets, which bears on the  
competition issues. 
            Information provided in this Amendment will generally  
follow the format of Form U-1.  The description of the divestiture  
of generation assets will be described in Item 1: Description of  
the Parties to the Transaction.  The competition issues, the  
watchful deference doctrine, and the effects of the generation  
divestiture on competition will be addressed in Item 3: Applicable  
Statutory Provisions.  The discussion of the FERC and CPUC  
proceedings will be provided in Item 4: Regulatory Approvals.  
[FN2] 
            All capitalized terms used in this amendment will  
refer to the definitions in the Application, unless otherwise  
indicated. 
                              - 3 - 
 
 
 
<PAGE> 
 
Item 1. Description of the Parties to the Transaction 
 
               Divestiture of Generation Facilities by SDG&E 
 
               On November 24, 1997, the Board of Directors of  
SDG&E approved a proposal to auction all of its electric  
generation assets.  The auction will include SDG&E's two fossil  
power plants, its 19 combustion turbines, its 20-percent interest  
in the San Onofre Nuclear Generating Station, and its portfolio of  
long-term power contracts.  The proposed divestiture of these  
assets reflects SDG&E's long-term business strategy of  
concentrating on the distribution and transmission of electric  
power, rather than electric power generation. 
            The proposed sale of SDG&E's electric generation  
assets is subject to the prior approval of the CPUC, and SDG&E  
filed a request for such approval on December 19, 1997.  Once  
SDG&E has received approval from the CPUC, it will proceed with an  
auction of its generating assets.  The CPUC must then approve any  
transaction that results from the auction.  The disposition of  
SDG&E's interest in the San Onofre Nuclear Generating Station is  
subject to approval by the Nuclear Regulatory Commission. 
                              - 4 - 
 
 
 
 
<PAGE> 
Item 2. Applicable Statutory Provisions 
 
        A.  Vertical Market Power 
 
            Under Section 10(b)(1) of the Act, the Commission may  
disapprove a proposed acquisition if it finds that the acquisition  
"will tend towards interlocking relations or the concentration of  
control of public-utility companies, of a kind or to an extent  
detrimental to the public interest or the interest of investors or  
consumers."  Two parties seeking to intervene in this proceeding  
(the "Intervenors") have argued that the Transaction will enable  
the merged entity to exercise vertical market power in the  
California electricity market, i.e., that SoCalGas will be able to  
exercise its market power in gas transportation to benefit SDG&E's  
gas-fired electric generation assets.  The core of this attack on  
the Transaction, which the Intervenors have also made before FERC  
and the CPUC, has been the allegation that SoCalGas will raise (or  
otherwise manipulate) electricity prices in California by raising  
(or otherwise manipulating) the price of the gas that it delivers  
to gas-fired electric generators.  In this manner, the Intervenors  
contend, SoCalGas will be able to increase the profits of its  
electric affiliates, principally SDG&E. 
            The Company has submitted showings to FERC and the  
CPUC that this allegation is without basis because, inter alia:  
(1) the CPUC's pervasive regulation of gas transportation and  
storage services on the SoCalGas system precludes the kind of  
price manipulation that would be necessary for such a scheme to be  
effective; (2) SoCalGas and SDG&E account for only a small share  
of the natural gas production and interstate pipeline capacity  
that serves California; (3) the market for wholesale electric  
power in the western  
                              - 5 - 
 
 
<PAGE> 
United States is highly competitive and would discipline any  
effort to manipulate the overall market price of electricity; and  
(4) the merged entity will have a strong disincentive to increase  
the price of wholesale electric power.  [FN3]  Moreover, to  
alleviate any concerns about vertical market power and to fulfill  
the conditions imposed by FERC in its order approving the  
Transaction, discussed below, the Company has proposed stringent  
remedial measures that would govern SoCalGas' provision of service  
to SDG&E and other utility electric generators.  These measures,  
the Company has stated, preclude any possibility that SoCalGas  
could exercise vertical market power.  As described below, the  
California Attorney General found the vertical effects of the  
Transaction to be "negligible". 
            In light of the foregoing, the Commission should  
"watchfully defer" to FERC and the CPUC with respect to the claim  
that the Transaction would have an adverse vertical effect on  
competition.  FERC has already fully considered these vertical  
competition concerns, and has imposed conditions that it has found  
sufficient to allay them.  Similarly, the CPUC has committed  
extensive time and resources to addressing the vertical  
competition issue.  As further discussed in Item 4 of this  
Amendment, prior to approving the Transaction the CPUC is required  
by law to find that the Transaction will not adversely affect  
competition.  Pursuant to its express statutory mandate, the CPUC  
has requested an advisory opinion from the California Attorney  
General as to the effect of the Transaction on competition and the  
appropriate mitigation measures, and the Attorney General has  
opined that the Transaction will have no adverse effect on  
competition in the California electricity  
market.  Both FERC and the CPUC have longstanding expertise in  
this area and staff           - 6 - 
 
 
<PAGE> 
dedicated to addressing these issues; both agencies enjoy  
reputations for diligence, fairness, and a commitment to  
competitive markets. [FN4] 
            This Transaction thus presents a classic case for  
application of the doctrine of "watchful deference."  That  
doctrine was succinctly stated by the United States Court of  
Appeals for the District of Columbia Circuit:  The Commission  
should not "pretend that it is the only agency addressing the  
issue when it is not; 
            that would only lead it to conduct a  
wasteful, duplicative proceeding.  Rather,  
when the SEC and another regulatory agency  
both have jurisdiction over a particular  
transaction, the SEC may watchfully defer  
to the proceedings held before -- and the  
result reached by -- that other agency."   
[FN5] 
 
            There could hardly be a more compelling case for  
watchful deference than this one, with respect to competition  
issues.  First, at least two other agencies will resolve these  
issues.  [FN6]  Second, since the asserted market power concern  
centers on anticompetetive effects in California, the CPUC is  
especially entitled to deference on this issue.   
            FERC's expertise and competence to resolve the  
competition issues is beyond question.  Moreover, state regulation  
in this case is anything but lax, pro forma, or otherwise  
undeserving of the customary deference.  The CPUC has demonstrated  
in past proceedings under the predecessor statute to the one at  
issue here that its review of a proposed merger is exhaustive.  In  
1991, the CPUC disapproved the proposed acquisition of SDG&E by  
the parent corporation of Southern California Edison. [FN7]   
Earlier this year, the CPUC approved the merger of two Bell  
regional holding companies, Pacific Telesis Group and SBC  
Communications, Inc. [FN8]  In both instances, the CPUC rendered 
its decision on the basis  
                              - 7 - 
 
<PAGE> 
of a thoroughly developed written and oral record which included  
extensive discovery and evidentiary hearings and applied the  
statutory criteria with rigor.  If the doctrine of watchful  
deference cannot be applied here, it can never be applied at all. 
            Finally, it should be noted that the Company's showing  
on vertical market power was submitted to FERC, and the California  
Attorney General rendered his opinion, before the Company's  
announcement that it would divest its generation.  As described  
more fully below, FERC, in its June 25 order conditionally  
approving the merger, stated that such divestiture, in and of  
itself, would "eliminate" vertical market power concerns.   
                              - 8 - 
 
 
<PAGE> 
IV.    Regulatory Approvals 
 
       A.    State Regulatory Authority 
 
            1.     CPUC Proceedings 
            The CPUC's review of the proposed Transaction pursuant  
to Section 854 of the California Public Utilities Code is well  
underway.  Under that statute, the CPUC must find that the  
acquisition (1) provides short-term and long-term economic  
benefits to utility ratepayers; and (2) will not adversely affect  
competition.  The CPUC will be required to find that the business  
combination equitably allocates short-term and long-term  
forecasted economic benefits of the business combination between  
shareholders and utility ratepayers, with ratepayers receiving not  
less than 50% of the benefits from regulated operations.  In  
addition, the CPUC must find that the Transaction is, on balance,  
in the public interest upon due consideration of specified public  
interest factors, including (1) the fairness and reasonableness of  
the acquisition to affected employees and shareholders; (2) the  
overall benefits to the California and local economies and to  
communities served by the utilities; and (3) mitigation of  
significant adverse consequences arising from the merger.  The  
CPUC is also required to take into consideration an advisory  
opinion of the Attorney General of the State of California, which  
is summarized below. 
            An Administrative Law Judge has presided over a  
hearing to review the proposed merger, together with the regular  
participation of one or more assigned CPUC Commissioners.   
Throughout the proceedings, there have been over 45 submissions of  
prepared direct testimony, including supplemental and rebuttal  
testimony.  The Applicants 
                              - 9 - 
 
<PAGE> 
have responded to over 3,800 detailed interrogatories and data  
requests propounded by interested parties, and have produced over  
100,000 pages of documents.  In addition, certain intervenors took  
the oral depositions of eight of the Applicants employees,  
eliciting 12 days of testimony.  Evidentiary hearings began on  
September 17, 1997, and continued, with some recesses, through  
October 23.  The evidentiary record developed during these  
hearings includes 277 exhibits and 2,232 transcript pages of oral  
testimony taken over 16 hearing days. [FN9] 
            The Company and interested intervenors submitted  
opening briefs on November 5, and reply briefs on November 26,  
1997.  Supplemental briefs to address the proposed divestiture of  
SDG&E's generating assets were filed on December 19, 1997.  It is  
presently expected that the Administrative Law Judge will issue a  
proposed order in late February. [FN10]  Thereafter, the parties  
will have 20 days to comment on the proposed order, and five days  
to reply to those comments.  The CPUC is expected to issue a final  
order by the end of March. [FN11] 
                              - 10 - 
 
<PAGE> 
            2.    Attorney General's Opinion 
            On November 20, 1997, the Attorney General of the  
State of California submitted to the CPUC an advisory opinion as  
required by Section 854 of the California Public Utilities Code.  
[FN12]  (See Exhibit D-9.)  The Attorney General there concluded  
that the merger will not adversely affect competition within  
either the wholesale electricity or interstate gas markets.  A.G.  
Op. at 1.  The Attorney General further concluded that the merger  
of the utilities [gas] procurement operations will not adversely  
affect competition in the interstate gas market and that the  
applicants are not actual potential competitors for retail  
electricity services.  Id. 
            The only area in which the Attorney General expressed  
even limited concern was with respect to SDG&E's status as a  
potential competitor of SoCalGas in the intrastate gas  
transmission market. [FN13]  The Attorney General recommended  
that, if the CPUC were to find that SDG&E is a significant  
potential competitor of SoCalGas, the CPUC should require SoCalGas  
to auction a quantity of transmission rights over the SoCalGas  
system equal to SDG&E's average usage of the system.  (The Opinion  
expressed no view as to whether SDG&E is, in fact, a potential  
competitor of SoCalGas.)  The Attorney General made this  
recommendation with the expectation that the auctioned  
transmission rights would constitute an alternative source of  
intrastate transportation, thereby offsetting the loss of SDG&E as  
a potential competitor.  Id. at 45. 
            Lastly, the Attorney General recommended that the CPUC  
retain jurisdiction over the merger for a period of two years for  
the limited purpose of determining whether the 
                              - 11 - 
 
<PAGE> 
restructured California marketplace, now scheduled to become  
effective on March 31, 1998, will have any effect on the merged  
entity's ability to affect the price of wholesale electric power.  
 Although stating that such an outcome was unlikely, id. at 46,  
the Attorney General expressed concern that the full extent of  
competition within the restructured marketplace will not be known  
until the market is operational.  Accordingly, the Attorney  
General suggested that the CPUC retain jurisdiction over the  
merger to monitor the extent to which competition in the  
restructured marketplace imposes constraints on electric power  
prices. 
            3.    Affiliate Transaction Ruling 
            On December 19, 1997, in the context of a general  
rulemaking proceeding, the CPUC adopted certain restrictions on  
dealings between utility companies and their unregulated  
affiliates that engage in energy-related activities.  The purpose  
of these restrictions is to prevent utilities from favoring their  
affiliates in providing either services or information relevant to  
the affiliates' marketing activities, and to prevent regulated  
utility assets from being used for the benefit of unregulated  
affiliate business.   
            The CPUC's order adopting these restrictions states  
that it will be determined in the course of the CPUC's approval  
proceeding for the Transaction whether any variations in these  
restrictions are appropriate for the Company.  The ALJ has  
indicated that, unless the evidence compels a different result, he  
will recommend adoption of the pertinent generic provisions  
without variation.  The ALJ has requested submissions on this  
point, which were filed on January 23, 1998.  The Company will not  
object to application of the restrictions as  
                              - 12 - 
 
<PAGE> 
they relate to transactions between utilities on the one hand and  
unregulated entities on the other hand.  The Company expects to  
request limitations on the application of the restrictions to  
transactions between utility companies, to the extent necessary to  
maximize the synergies expected from the Transaction. 
      B.    Federal Power Act 
            On April 30, 1997, FERC issued an order stating that  
the disposition of jurisdictional facilities that would result  
from the proposed merger of Enova and Pacific was subject to  
FERC's jurisdiction and approval under Section 203 of the Federal  
Power Act.  See Enova Corporation and Pacific Enterprises, 79 FERC  
61,107 (1997).  Accordingly, the Commission proceeded to consider  
the request for authorization and approval of the Transaction that  
the Applicants in that case (the "Applicants") had filed in the  
event that FERC found the Transaction to be jurisdictional. 
            On June 25, 1997, FERC issued an order conditionally  
approving the Transaction. [FN14]  In that order, FERC found that  
Transaction raised potential concerns about vertical market power,  
in that it would bring the gas transportation and storage  
operations of SoCalGas under common ownership with the electric  
generation operations of SDG&E.  The Commission further found,  
however, that the vertical market power concerns raised by the  
merger could be adequately mitigated and that the most effective  
mitigation mechanisms are within the jurisdiction of the [CPUC].  
Id. at 62,553.  The Commission stated that while this Commission  
has the authority under [the Federal Power Act] to determine what  
remedies are necessary to mitigate market power concerns and to  
condition  
                               - 13 - 
 
<PAGE> 
our approval of a transaction on those conditions being  
implemented, in this particular case effectuation of most of the  
[required] remedies is within the jurisdiction of the [CPUC].Id.  
at 62,565.  Specifically, the Commission observed that the  
intrastate gas transmission and distribution operations of  
SoCalGas that are the source of the vertical market power concerns  
are within the regulatory jurisdiction of the CPUC.  Accordingly,  
the Commission approved the Transaction on the condition that the  
Applicants adopt specific remedial measures intended to allay  
vertical market power concerns, and that the CPUC commit to  
enforce certain of those measures with respect to SoCalGas, whose  
operations are within its exclusive jurisdiction. [FN15] 
            FERC also specifically noted that divestiture of  
SDG&E's electric generation would eliminate any concerns about  
vertical market power arising from the Transaction: 
            Another method of eliminating the vertical  
market power problems herein would be  
divestiture by SDG&E of gas fired  
generation plants.  However this remedy  
would require authorization of the  
California Commission. [FN16]   
 
Thus divestiture, independently of the conditions proposed by  
FERC, resolves the vertical competition question. 
            The remedial measures required by FERC with respect to  
SoCalGas are based largely on FERC's Order No. 497 regulations,  
which are designed to prevent abuses between natural gas pipelines  
and affiliated natural gas marketers.  In essence, the goal of  
these regulations is to place downstream affiliates on the same  
competitive basis as non-affiliated entities, and to require a  
strong measure of transparency in the pipeline's  
                               - 14 - 
 
<PAGE> 
operations.  FERC also required the Applicants to adopt additional  
remedial measures above and beyond those required by Order No.  
497. [FN17]  
            In the proceedings before the CPUC, the Applicants  
have proposed specific remedial measures to fulfill FERC's  
conditions, as well as additional remedial measures not required  
by the FERC order. [FN18]  Taken together, these commitments  
completely allay whatever concern might exist concerning the  
exercise of vertical market power by the merged entity prior to  
the divestiture of SDG&E's electric generation assets.  Moreover,  
as shown above, SDG&E's divestiture plan independently resolves  
the concerns underlying the conditions provided in FERC's order,  
by eliminating any factual basis for such concern.   
Item 6. Exhibits and Financial Statements 
        The following exhibits are filed with this Amendment:
 
Exhibit D-6       Order of FERC Conditionally Approving  
Disposition of Facilities, Dismissing Complaint  
as Moot, and Denying Request for Consolidation,  
issued June 25, 1997. 
 
Exhibit D-8       Chart of Testimony Before the CPUC. 
 
Exhibit D-9       Opinion of the Attorney General on Competitive  
Effects of Proposed Merger Between Pacific  
Enterprises and Enova Corporation, submitted to  
the CPUC on November 20, 1997. 
                              - 15 - 
 
 
<PAGE> 
 
                             SIGNATURE 
 
            Pursuant to the requirements of the Public Utility  
Holding Company Act of 1935, the undersigned company has duly  
caused this Amendment to the Application to be signed on its  
behalf by the undersigned thereunto duly authorized. 
                                MINERAL ENERGY COMPANY 
 
Date:  January 26, 1998         By: __________________________ 
                                    Stephen L. Baum 
 
 
                              - 16 - 
 
 
<PAGE> 
 
[FN1] The Company has requested the Commission to issue a  
conditional order approving the Transaction, upon completion of  
the Commission's consideration of all issues within its expertise,  
without waiting for the conclusion of either the FERC or CPUC  
proceedings.  This order would be contingent on satisfactory  
approvals from both of those agencies.  See Reply of Mineral  
Energy Company to Motion to Intervene of Southern California  
Edison Company (June 4, 1997). 
[FN2] Recent financial and other information relating to Enova,  
Pacific and their subsidiaries is included in the periodic and  
current reports of those companies filed with the Commission under  
Section 13(a) of the Securities Exchange Act of 1934.  To the  
extent relevant to this Application, such reports are incorporated  
herein by reference. 
[FN3] SDG&E's retail electricity rates are subject to a four-year  
freeze.  Within the "headroom" allowed by this cap on its rates,  
SDG&E must recover not only its costs for distribution,  
transmission, and generation, but also any recovery it seeks for  
stranded asset costs.  Thus, to the extent that the wholesale  
price for electricity goes up, SDG&E's opportunity for stranded  
cost recovery is diminished.  
[FN4] A third agency expert in competitive issues, the Antitrust  
Division of the U.S. Justice Department, is also reviewing the  
Transaction.  Under the Hart-Scott-Rodino Act, the Transaction may  
not be consummated until Pacific and Enova have given formal  
notification and submitted certain information, and the applicable  
waiting period has terminated.  Such notification was given on  
January 9, 1998. 
[FN5] City of Holyoke Gas & Electric Dept. v. SEC, 972 F.2d 358,  
363-364 (D.C. Cir. 1992) (citing Wisconsin's Environmental Decade  
v. SEC, 882 F.2d 523, 527 (D.C. Cir. 1989). 
[FN6] The doctrine clearly applies both to state as well as  
federal agency action.  See Wisconsin's Environmental Decade,  
Inc., v. SEC, 882 F.2d 523 (D.C. Cir. 1989). 
[FN7] Re SCEcorp, 122 P.U.R.4th 225 (1991).   
[FN8] Re Pacific Telesis Group, 177 P.U.R.4th 462 (1997).   
[FN9] A list of witnesses and the subject matter of this testimony  
is included as Exhibit D-8, filed with this amendment. 
[FN10] Based on a scheduling order dated July 1, 1997, the  
proposed decision of the Administrative Law Judge (the "ALJ") was  
previously expected in January.  In an order dated December 24,  
1997, the ALJ modified that date, stating that he expected his  
proposed decision to issue on February 25, 1998, although he would  
strive for an earlier date.  This extension will provide the ALJ  
with time to consider submissions relating to affiliate 
                              - 17 - 
 
<PAGE> 
transaction restrictions and synergies, discussed below, which  
were filed on January 23, 1998. 
[FN11] By order dated December 30, 1997, the ALJ stated his  
preliminary recommendation with respect to scheduling and  
allocation of savings to be realized by the Transaction, and  
directed the parties to provide certain related information.   
Those submissions were filed on January 23, 1998. 
[FN12] As noted above, the Attorney General issued his opinion  
shortly before SDG&E announced the proposed divestiture of its  
generation assets.  Accordingly, the opinion does not take into  
account the effect that the divestiture will have on allegations  
of vertical market power. 
[FN13] Significantly, this is not a concern raised by the  
Intervenors in this proceeding. 
[FN14] San Diego Gas & Electric Company, 79 FERC 61,372 (1997).  A  
copy of the FERC's order is included as Exhibit D-6.  The Company  
has previously described FERC's June 25 order in the Reply of  
Mineral Energy Company to Supplement to Motion to Intervene of  
Southern California Edison Company, filed in this docket on  
October 1, 1997. 
[FN15] FERC further conditioned its approval of the Transaction on  
the adoption of certain remedial measures that are within its own  
jurisdiction.  Specifically, the Commission required that SDG&E  
file a code of conduct and Enova Energy file a revised code of  
conduct that comports with FERC's requirements for codes of  
conduct for utilities or marketers with market-based rate  
authority.  Both SDG&E and Enova Energy have made these filings  
with FERC.   
[FN16] 79 FERC 61,372 at 62,565 n.58. 
[FN17] FERC's specific conditions were as follows: 
 
       1.  SoCalGas must commit to the affiliate dealing  
restrictions set forth in Order No. 497 and apply them to its  
dealings with all members of the Pacific-Enova corporate family. 
 
       2.  SoCalGas must operate its GasSelect electronic bulletin  
board as an interactive, same-day reservation and information  
system. 
 
       3.  SDG&E and Enova Energy must separate their purchases of  
transportation by SoCalGas as between (a) electric generation  
volumes, and (b) other volumes, and make purchases of  
transportation for electric generation volumes on the SoCalGas  
GasSelect bulletin board under terms and conditions comparable to  
non-affiliated electric generation shippers. 
                                  
                              - 18 - 
 
<PAGE> 
       4.  SoCalGas must publicize in advance on GasSelect its  
planned use of pipeline capacity to fill storage. 
[FN18] The additional remedial measures proposed by the applicants  
are as follows: 
 
       1.  SoCalGas will further separate its Gas Operations and  
Gas Acquisitions functions; 
 
       2.  SoCalGas will restrict information flow with regard to  
financial positions in futures markets; 
 
       3.  SoCalGas will seek prior CPUC approval of  
transportation rate discounts or rate designs offered to any  
affiliated shipper; and 
 
       4.  SoCalGas will post an unprecedented volume of  
information regarding the operation of the SoCalGas system so that  
all parties may be satisfied that SoCalGas is not attempting to  
manipulate the operation of its system to benefit affiliates. 
                              - 19 -                               
  
  
 
(..continued) 
 
 
 
  
 
  
 



     San Diego Gas & Electric Company and Enova Energy, Inc.

            Enova Corporation and Pacific Enterprises

                Southern California Edison Company

                                V.

San Diego Gas & Electric Company, Enova Energy, Inc., and 
Ensource Corp.,

                     Docket No. EC97-12-000

                     Docket No. EL97-15-001

                     Docket No. EL97-21-000

Order Conditionally Approving Disposition of Facilities, 
Dismissing Complaint as Moot, and Denying Request for 
Consolidation

                        (Issued June 25, 1997)

Before Commissioners: James J. Hoecker, Chairman; Vicky A. Bailey, 
William L. Massey, and Donald F. Santa, Jr.

      On January 27, 1997, San Diego Gas & Electric Company 
(SDG&E) and Enova Energy, Inc. (Enova Energy) (collectively, 
Applicants) filed an application in Docket No. EC97-12-000 
pursuant to section 203 of the Federal Power Act (FPA) [FN1] for 
an order approving the merger of Enova Corporation (Enova) and 
Pacific Enterprises (Pacific). Enova and Pacific are both exempt 
public utility holding companies under section 3(a)(1) of the 
Public Utility Holding Company Act (PUHCA) of 1935. [FN2] Enova is 
the parent of SDG&E, a traditional utility, and Enova Energy, a 
power marketer authorized to sell power at market-based rates. 
[FN3] Pacific is the parent of Southern California Gas Company 
(SoCalGas), a natural gas distribution company.
      As discussed below, on April 30, 1997, the Commission issued 
an order in Docket No. EL97-15-000 asserting jurisdiction over the 
disposition of the jurisdictional facilities of SDG&E and Enova 
Energy that would occur as a consequence of the merger of Enova 
and Pacific. However, the Commission did not assert jurisdiction 
over the merger of Enova and Pacific. [FN4] Therefore, we will 
consider the application for section 203 merger approval in Docket 
No. EC97-12-000 as a section 203 application for approval of the 
disposition of SDG&E's and Enova Energy's jurisdictional 
facilities occurring in conjunction with the merger of Enova and 
Pacific.
     The April 30 order addressed only the question of whether the 
Commission's section 203 jurisdiction is applicable to the instant 
corporate realignment, or any aspect thereof. Some intervenors in 
that docket raised additional issues and concerns relating to the 
propriety of approving the proposed transaction and/or requested 
evidentiary hearing on certain matters. The April 30 order 
deferred addressing those additional concerns until after the 
matter of jurisdiction was established. Therefore, we will address 
those concerns in the context of our review of the
                              - 1 -


<PAGE>
application for section 203 approval filed in Docket No. EC97-12-
000.
	On January 10, 1997, Southern California Edison Company 
(SoCal Edison) filed a complaint against SDG&E, Enova Energy, and 
Ensource Corporation, a subsidiary of Pacific, in Docket No. 
EL97-21-000 requesting that the Commission find the merger of 
Enova and Pacific subject to the Commission's jurisdiction under 
section 203. Since the jurisdictional status of the merger of 
Enova and Pacific and the consequential disposition of the 
jurisdictional facilities of SDG&E and Enova Energy were 
established in the April 30 order, we will dismiss SoCal Edison's 
complaint as moot. [FN5]
	As discussed more fully below, the Commission concludes that 
the proposed disposition of facilities raises vertical market 
power concerns and the potential for the merged entity to exercise 
market power that could adversely affect wholesale power markets. 
However, we believe that these market power concerns could be 
mitigated. In particular, the most effective mitigation mechanisms 
are within the jurisdiction of the California Commission. 
Therefore, we will conditionally approve the proposed disposition 
conditioned upon the adoption of market power mitigation remedies, 
as discussed below.

I. Description of the Corporate Realignment, Participants, and 
Contents of the
Application

A. Description of Corporate Realignment Participants

1. Enova, SDG&E, and Enova Energy

	As indicated above, Enova is an exempt public utility 
holding company [FN6] and the parent of two public utilities: 
SDG&E, an electric utility, and Enova Energy, a power marketer. 
SDG&E owns and operates electric generation, transmission, and 
distribution facilities, and serves electric and natural gas 
customers at retail in California. Enova Energy is a power 
marketer with market-based power sales rate authority. [FN7]

2. Pacific and Subsidiaries

	Pacific is also an exempt public utility holding company and 
the parent of, among others, SoCalGas. [FN8] SoCalGas provides gas 
service to customers in California and owns certain qualifying 
facilities (QFs) with a total of 1.6 megawatts (MW) of capacity. 
Pacific's subsidiaries also include various natural gas pipelines, 
specifically: Pacific Interstate Transmission Company, Pacific 
Interstate Offshore Pipeline Company, and Pacific Offshore 
Pipeline Company. Pacific's subsidiary, Pacific Energy, has direct 
and indirect ownership interests in certain QFs totaling 182 MW of 
capacity. However, the Applicants state that Pacific Energy 
intends to divest itself of 88.5 MW of QF capacity in order to 
maintain QF status under the Public Utility Regulatory Policies 
Act.

B. Description of the Corporate Realignment

	The application states that the two holding companies, Enova 
and Pacific, would be combined under a newly created holding 
company, NewCo. [FN9] NewCo would own all of the
                              - 2 -

<PAGE>
stock of Enova and Pacific and would be owned by Enova's and 
Pacific's stockholders. NewCo Enova Sub, a subsidiary of NewCo, 
would merge into Enova, with Enova as the surviving corporation. 
NewCo Pacific Sub, also a subsidiary of NewCo, would merge into 
Pacific, with Pacific surviving. All Enova and Pacific common 
stock would be converted into the right to receive NewCo common 
stock. Upon consummation of this transaction, Enova and Pacific 
would be wholly owned subsidiaries of NewCo. Enova, Pacific, 
SDG&E, and SoCalGas would continue their separate corporate 
existence and would continue to operate under their existing 
names.
	The application further explains that Enova and Pacific have 
formed a joint venture that would engage in marketing natural gas 
and electricity. The application states that the joint venture 
would not make jurisdictional power sales until after consummation 
of the merger and after filing a separate application for, and 
receiving, sales authorization from the Commission.

C. Application for Approval under Section 203

	The Applicants state that the proposed transaction satisfies 
the criteria set forth in the Merger Policy Statement. The 
Applicants state that the competitive screen analysis established 
in the Merger Policy Statement is not required in this case 
because the parties to the corporate realignment do not have 
facilities or sell relevant products in common geographic markets.
	The Applicants further state that Pacific's role in sales 
and transportation of natural gas does not give rise to concerns 
related to the sale of electricity. The Applicants state that the 
Public Utilities Commission of the State of California (California 
Commission) imposes restrictions that prevent SoCalGas from 
operating in a discriminatory manner by either favoring SDG&E over 
competing generators in terms of service or pricing, or by 
providing market information to its affiliates that is not also 
provided to competing power sellers. Further, the Applicants state 
that SoCalGas has undertaken to post contemporaneously, and to 
offer to other similarly-situated non-affiliated shippers, any 
discounts it offers to SDG&E, and that Pacific and Enova have 
adopted a code of conduct that would forbid SoCalGas from 
providing sensitive market information to any marketing affiliate 
unless it simultaneously makes the information available to 
unaffiliated electric marketers.
	The Applicants also assert that the corporate realignment 
will have no adverse effects upon competition in transmission 
since Pacific owns no electric transmission and SDG&E has an open 
access tariff. The Applicants also point out that SDG&E will turn 
over operational control of its transmission system to an 
Independent System Operator (ISO) under the California 
restructuring. The Applicants further assert that any effects on 
the retail market resulting from the corporate realignment would 
be reviewed by the California Commission. Nevertheless, the 
Applicants prepared an analysis of the competitive effects of the 
proposed corporate realignment in a portion of Orange County, 
California, where SDG&E's and SoCalGas' service territories 
overlap. The Applicants state that there is "scant fuel 
substitutability and little competition between the two fuels." 
Also, the Applicants assert that, with the advent of retail 
customer choice resulting from the current restructuring of the 
electric industry in California, "intrafuel competition will 
discipline the market more effectively than interfuel competition 
could."
	The Applicants state that the proposed corporate realignment 
would have no effect on competition in electric generation 
markets. The Applicants state that the only generation owned by 
Pacific is an ownership interest in 182 MW of QFs. The Applicants 
state that Pacific will divest itself of some or all of its 
interests prior to consummation of the corporate realignment to 
the
                              - 3 -

<PAGE>                        

extent necessary to maintain QF status under the Public Utility 
Regulatory Policies Act. Nevertheless, the Applicants assert that 
application of the competitive screen analysis to this aspect of 
the transaction indicates that there would be no increase of more 
than 16 points in the Herfindahl-Hirschman Index (HHI) for any 
destination market. The Applicants state that this shows there is 
no basis for concern in this regard.
	The Applicants further explain that SDG&E is able to 
exercise horizontal market power within the San Diego Basin 
because its own units are needed to meet load under certain 
conditions due to transmission constraints into the Basin. 
However, the Applicants argue that the Commission need not be 
concerned about this matter for two reasons: (1) SDG&E has no 
wholesale customers within the San Diego Basin; and (2) this 
existing situation would not be affected by the proposed corporate 
realignment.
	The Applicants also state that the proposed corporate 
realignment would have no adverse effect on rates because neither 
SDG&E nor Enova Energy has firm wholesale customers. The 
Applicants state that SDG&E's only wholesale sales are economy 
energy sales and short-term sales of capacity. Further, the 
Applicants state that SDG&E will be obligated, after commencement 
of the proposed California Power Exchange (PX or California PX), 
to bid all of the output of its fossil generation into the PX for 
a five-year period at variable costs and to rebate to customers 
any PX revenues for such generation exceeding variable costs. 
Since SDG&E's variable costs would not be affected by the proposed 
corporate realignment, the Applicants opine that the transaction 
would have no adverse effect on wholesale rates.
	The Applicants also state that SDG&E has no firm 
transmission contracts for service through its system other than 
for short-term as- available service and mutual assistance 
short-term back-up transmission assignments. Any other 
transmission commitments involve interchange contracts, Western 
System Power Pool as-available commitments, or transmission under 
SDG&E's open access tariff. Nevertheless, the Applicants state 
that SDG&E will hold its future wholesale and transmission 
customers harmless from any increase in jurisdictional costs 
arising out of the transaction for at least five years after the 
corporate realignment is consummated. Also, the Applicants state 
that SDG&E would undertake the burden in any Commission rate case 
it files within five years after the consummation of the corporate 
realignment to show that its rates are not higher than they 
otherwise would have been absent the merger.
	The Applicants assert that the proposed corporate 
realignment would have no effect on regulation since the 
transaction is subject to approval by the California Commission, 
and since a registered holding company would not be created as a 
result of the transaction.

II. Notice of Application, Interventions, Protests, and Answer

	Notice of the Applicants' application in Docket No. 
EC97-12-000 was published in the Federal Register, with comments, 
protests, and interventions due on or before March 28, 1997. 
[FN10] Timely motions to intervene were filed by the California 
Industrial Group and the California Manufacturers Association, 
jointly; Electric Clearinghouse, Inc.; El Paso Natural Gas Company 
and Mojave Pipeline Company, jointly; International Brotherhood of 
Electrical Workers, Locals 18 and 47; KN Marketing, Inc.; Nutra 
Sweet Kelco Company; and Pan- Alberta Gas Ltd. The California 
Commission filed a notice of intervention. The above-listed 
motions and notice raise no substantive issues.
	Pacific Gas and Electric Company (PG&E) and the City of San 
Diego (San Diego) filed
                              - 4 -

<PAGE>

timely motions to intervene which take no position on whether the 
proposed disposition of facilities should be approved. However, 
San Diego raises certain issues for consideration which are noted 
in the following discussion. PG&E, while not stating a position 
regarding the requested approval, states that the Commission 
should consider the impact of the proposed corporate realignment 
on: (1) the competitiveness of electricity markets; (2) electric 
industry restructuring; (3) possible affiliate transaction issues 
that may arise; (4) existing transmission contracts, including the 
Pacific Intertie agreements; and (5) how the merged entity will 
interact with the ISO being proposed for California.
	U.S. Generating Company (USGen), Imperial Irrigation 
District (Imperial Irrigation), Kern River Gas Transmission 
Company (Kern River), SoCal Edison, the Southern California 
Utility Power Pool (the Power Pool) [FN11] and the City of Vernon 
(Vernon) filed timely motions to intervene and requests for 
hearing regarding the competitive effect of the propose corporate 
realignment. The Southern California Public Power Authority 
(Public Power Authority) [FN12] filed a timely motion to intervene 
and a motion to consolidate the instant docket with Docket Nos. 
EL97-15-000 and EL97-21-000, stating that the three proceedings 
are integrated in issues and concerns such that their disposition 
must be consolidated to avoid redundant proceedings and 
litigation. Imperial, Kern River, the Power Pool, Public Power 
Authority, SoCal Edison, and Vernon also protest the application.
	Intervenors [FN13] assert that the proposed corporate 
realignment would combine a company with monopoly power over 
interstate gas transportation release capacity to southern 
California and a monopoly in intrastate natural gas transportation 
and storage capacity in southern California, [FN14] with an 
electric utility in a position to exploit the opportunity to 
control the market-based price of electricity to be traded in the 
California PX. [FN15] Intervenors assert that the Applicants' 
control of essentially all natural gas pipelines in southern 
California, and the Applicants' control of interstate gas pipeline 
capacity entering southern California through the pipeline's 
capacity release mechanism, would allow the Applicants to 
manipulate the delivered price of natural gas to SDG&E's gas-fired 
generators and other competing gas-fired generators. Through such 
manipulations, the Applicants could: (1) force SDG&E's competitors 
to charge higher, anticompetitive prices for generation; [FN16] 
(2) discriminate in the degree of convenience, reliability, or 
flexibility of gas supply to SDG&E to the detriment of its 
competitors; [FN17] (3) act as a barrier to entry for competing 
electric generators; [FN18] and (4) raise the PX spot market 
price. [FN19]
	Regarding the PX, Intervenors assert that a relevant market 
for the analysis of the potential anticompetitive effects of the 
proposed corporate transaction is the market for gas-fired 
generation in southern California, since gas-fired generation 
within the state is expected to set the California PX hourly spot 
price during the majority of hours. Intervenors assert that since 
the PX hourly spot bids would reflect the higher delivered gas 
costs paid by SDG&E's competitors (assuming SoCalGas favored SDG&E 
over other customers), the spot price would be artificially 
increased. Since SDG&E arguably would not have to pay the higher 
gas costs, the Intervenors assert that SDG&E's bid into the PX 
would be lower than that of its competitors, and thus SDG&E would 
profit from the higher spot price resulting from SoCalGas' 
manipulations of delivered gas prices to SDG&E's competitors. 
[FN20]
	Intervenors state that the Merger Policy Statement is 
directed primarily toward horizontal mergers (or other forms of 
corporate realignment) and that the Merger Policy Statement 
adopted the Department of Justice and Federal Trade Commission 
Horizontal Merger Guidelines [FN21]
                              - 5 -

<PAGE>
as the analytical framework for evaluating proposed corporate 
realignments. Intervenors state that the instant proposal raises 
vertical merger issues (i.e., the merged entities' ability to 
manipulate delivered gas costs to gas-fired generators that 
compete with SDG&E's gas-fired generators), in addition to 
horizontal issues, and suggest that the vertical analytical 
framework outlined in the Department of Justice 1984 Merger 
Guidelines, [FN22] should be applied rather than the 1992 
Horizontal Merger Guidelines adopted in the Merger Policy 
Statement as the basis for analyzing the proposed corporate 
realignment. [FN23] San Diego suggests that the Applicants be 
required to submit a competitive screen analysis in the form of 
computer simulations.
	Intervenors also express concern that the SoCalGas could 
share real-time knowledge of the gas usage and costs of SDG&E's 
generation competitors, as well as other types of customer 
information, that SDG&E would be able to use to its competitive 
advantage. Public Power Authority suggests imposition of standards 
of conduct and restrictions on affiliate abuse to alleviate this 
concern. [FN24] Similarly, the combination of managerial control 
over electric and gas subsidiaries operating in the same 
geographic market region has been raised as a concern. [FN25]
	Further, Intervenors argue that the Applicants will be able 
to manipulate gas supply in order to evade rate regulation. [FN26] 
Intervenors state that by "assigning" higher priced gas to SDG&E 
for retail ratemaking purposes, the Applicants could pass these 
increases through to downstream ratepayers, collecting the 
increased profits despite retail rate regulation.
	Intervenors also raise concerns regarding the Applicants' 
ability to use SoCalGas' natural gas transportation and storage 
services to adversely affect natural gas competition in southern 
California. For example, Intervenors argue that the Applicants 
will be able to impose short-term and long-term adverse effects on 
competition in the transportation of natural gas in southern 
California, and limit expansion of current pipeline capacity into 
southern California. [FN27] Kern River and Power Pool state that 
this situation would be alleviated to some extent if the 
Commission required termination of SoCalGas' existing option to 
acquire Kern Rivers' interstate pipeline facilities located in 
California. Intervenors also assert that the proposed transaction 
would serve to eliminate SDG&E as a potential competitor of 
SoCalGas, or, alternatively, as a direct customer and anchor 
tenant of any other pipeline that might seek to enter the San 
Diego market. [FN28]
	USGen also states that SDG&E holds the only available 
pollution allowances under the regulations of the San Diego Air 
Pollution Control District for oxides of nitrogen (NO/x\) in the 
San Diego Basin for boilers and gas turbines used for the 
generation of electric power in the San Diego area. USGen states 
that any new entrant into the electric generating market, such as 
USGen, must obtain NO/x\ allowances from SDG&E, and that SDG&E is 
under no requirement to make these allowances available to others; 
USGen concludes that this creates a barrier to entry that, along 
with control of fuel access, should be investigated through 
hearing.
	Intervenors raise concerns regarding Energy Pacific, the 
joint venture created by Enova and Pacific. [FN29] Intervenors 
state that the creation of Energy Pacific encompasses a de facto 
merger within the Commission's section 203 jurisdiction. Further, 
Intervenors intimate that Energy Pacific is engaging in 
jurisdictional activities (i.e., wholesale power sales) without 
proper authorization from the Commission. Intervenors request that 
the Commission impose restrictions on the activities of Energy 
Pacific. Intervenors also argue that Energy Pacific should be 
precluded from having a financial interest in any gas-fired unit 
served by SoCalGas or own or contract to supply gas to any such 
unit, and that Energy Pacific should be precluded from 
participating in any
                              - 6 -

<PAGE>
futures markets that involve southern California power generation.
	Intervenors assert that an important product market that 
would be affected by the proposed corporate realignment is the 
energy services market, and that the Commission should either 
include the energy services market in its market power evaluations 
or investigate this issue at hearing. [FN30]
	Intervenors request that the Commission impose conditions 
that would: (1) ensure that the merged company and its 
subsidiaries cannot favor their own gas transportation 
requirements over the gas transportation requirements of 
competitors; (2) provide transparency with respect to supply, 
availability, and price of gas transportation services; and (3) 
increase available interstate gas transportation capacity that is 
not controlled by SoCalGas. [FN31]
	Intervenors also ask that the merging entities be required 
to offer discounts, capacity, contracts, or other information for 
interstate gas transportation on a non-discriminatory basis. Power 
Pool states that the Applicants' commitment to offer gas 
transportation capacity discounts to all "similarly situated" 
customers should not be used to discriminate between wholesale 
customers (such as SDG&E) and gas-fired generators (retail 
customers). Further, it is suggested that the Commission require 
that the merging entities offer for sale at cost any gas 
transportation capacity that is not required to meet their own 
retail native gas distribution load. [FN32] Vernon asks that the 
Commission condition any approval of the proposed transaction on a 
requirement that competition in gas transmission in southern 
California not be diminished.
	Power Pool states that SDG&E's gas operations should be 
merged into SoCalGas so that all California generators would be 
served under uniform tariff provisions, cost allocation 
principles, and rates. Power Pool also states that SoCalGas should 
be required to hold an open season permitting customers, and 
possibly others, to acquire an undivided interest in SoCalGas 
transmission and associated storage facilities.
	Power Pool also suggests that the Commission order the 
merging entities to separate their interstate gas transportation 
and gas marketing operations to ensure that the Applicants have no 
opportunity to favor their own gas marketing efforts over those of 
their competitors, and impose standards of conduct which would 
preclude any communications regarding the availability, or price, 
terms, or conditions of gas transportation services between the 
merging parties and their affiliates' gas transportation 
operations and marketing personnel.
	Intervenors also request that SoCalGas be required to divest 
itself of its gas transmission and storage facilities and that 
SDG&E be required to divest itself of its gas distribution 
facilities, or that SDG&E and SoCalGas be required to divest 
themselves of all of their gas-fired generators and SoCalGas be 
required to divest itself of all of its contract and other rights 
in interstate pipelines. [FN33] Intervenors assert that such 
divestiture would increase competition by providing access to 
facilities necessary for marketers or new market entrants to 
provide competitive services, and that barring such divestiture, 
new entrants would be unable to enter the market. Intervenors also 
argue that SoCalGas' control of interstate gas transportation 
facilities and related capacity rights on interstate pipelines 
serving the relevant markets is sufficient to require the 
suggested divestiture of facilities.
	On April 14, 1997, the Applicants filed an answer to various 
motions, arguing (1) that the Intervenors fail to state adequate 
grounds for an evidentiary hearing; (2) that the claims that 
Energy Pacific represents a de facto merger are baseless; and (3) 
that the Intervenors' requests for consolidation, a revised market 
power analysis, and a hearing on NO/x\ issues should be denied.
	The Applicants assert that Intervenors have failed to state 
adequate grounds for setting
                              - 7 -

<PAGE>
this application for hearing to investigate the proposed corporate 
realignment's potential adverse effects on competition. The 
Applicants state that any discounts in transportation rates to 
SDG&E could not be targeted to SDG&E's electric generation 
function, as distinct from SDG&E's own core and noncore customers, 
absent specific approval from the California Commission; that 
SoCalGas has committed in a California Commission proceeding to 
abide by the Commission's order No. 497 [FN34] restrictions on 
transportation discounts to affiliates; that SoCalGas had proposed 
to the California Commission strict limitations on the transfer of 
valuable customer information to affiliated entities; and that 
SoCalGas would apply the same strictures to conveyance of customer 
information to SDG&E's electric-merchant function. The Applicants 
also state that with the price cap imposed by the California 
Legislature in Assembly Bill 1890 any increases in the PX price 
for electricity would diminish SDG&E's ability to recover stranded 
costs; therefore, the Applicants state that there would be a 
strong disincentive to increase PX prices as long as the price cap 
is in effect.
	The Applicants further assert that all of SDG&E's fossil 
generators are must run, and that the Applicants are seeking ISO 
concurrence on that issue. The Applicants also state that any of 
SDG&E's gas-fired capacity not covered by a must-run contract that 
assures recovery of fixed operating and maintenance costs would be 
unprofitable at PX prices and would be shut down. Therefore, the 
Applicants state that any generation deemed to be must run would 
almost certainly be placed under one of the two versions of the 
ISO's must-run contract (the "B" or "C" contract) under which the 
Applicants could not benefit from a higher PX price. [FN35]
	The Applicants assert that the vertical arguments made by 
Intervenors relate to matters within the California Commission's 
jurisdiction, and that these issues are currently being addressed 
by the California Commission. Aside from their filing with the 
California Commission, the Applicants report that the California 
Commission has recently instituted a rulemaking and companion 
investigation "to establish standards of conduct governing 
relationships between California's natural gas local distribution 
companies and electric utilities and their affiliated, unregulated 
entities providing energy and energy-related services, and to 
determine whether the utilities should be required to have their 
nonregulated or potentially competitive activities conducted by 
their affiliate companies." [FN36] The Applicants also relate that 
the California Commission intends to "coordinate our consideration 
of any affiliate transaction rules in the PE/Enova [California 
Commission] docket." [FN37] The Applicants also state that in its 
1997 Business Plan, the California Commission has indicated its 
intention to take actions to "remove alleged market distortion in 
transportation and to ensure, equal, adequate access to market 
information." [FN38]
	The Applicants also refute the allegations that the merged 
company can increase the border price of gas flowing into 
California by manipulating capacity release practices on an 
interstate pipeline. The Applicants state that this issue is 
before the Commission in a complaint proceeding in Docket No. 
RP97-284-000. [FN39] The Applicants further state that the 
Interstate Transition Cost Surcharge, which is the means through 
which it is alleged that the Applicants could recover from 
SoCalGas' customers the demand charges for any unused pipeline 
capacity that is not recovered in the capacity release market is a 
matter of state regulation, specifically the manner in which the 
California Commission allocates excess capacity costs between core 
and noncore classes.

III. Discussion
                              - 8 -

<PAGE>
A. Procedural Matters

	Pursuant to Rule 214 of the Commission's Rules of Practice 
and Procedure,  [FN40] the timely, unopposed motions to intervene 
and notice of intervention serve to make the following parties in 
Docket No. EC97-12-000: the California Industrial Group and the 
California Manufacturers Association, jointly; Electric 
Clearinghouse, Inc.; El Paso Natural Gas Company and Mojave 
Pipeline Company, jointly; International Brotherhood of Electrical 
Workers; KN Marketing, Inc.; Nutra Sweet Kelco Company; 
Pan-Alberta Gas Ltd.; the California Commission; PG&E; San Diego; 
USGen; Imperial Irrigation; Kern River; SoCal Edison; Public Power 
Authority; the Power Pool; and Vernon. Pursuant to Rule 213(a)(2), 
[FN41] the Commission will not consider those aspects of the 
answer filed by the Applicants that respond to protests.
	Public Power Authority filed a motion to consolidate the 
instant docket with Docket Nos. EL97-15-000 and EL97-21-000, 
stating that the three proceedings are integrated in issues and 
concerns such that their disposition must be consolidated to avoid 
redundant proceedings and litigation. However, in light of the 
fact that Docket No. EL97-21-000 is being dismissed as moot, and 
that any remaining issues raised in Docket No. EL97-15-000 (that 
were not address in the April 30 order) are being addressed in the 
context of Docket No. EC97-12- 000, consolidation is not required.

B. Background

1. Statutory Criteria

	As noted, on April 30, 1997, the Commission issued an order 
which determined that the corporate realignment of Enova and 
Pacific would result in the disposition (via a transfer of 
control) of the jurisdictional facilities of SDG&E and Enova 
Energy which requires Commission authorization under section 203 
of the FPA. Section 203 reads in pertinent part:
	(a) No utility shall sell, lease, or otherwise  dispose of . 
 . . its facilities subject to the jurisdiction of the Commission . 
 . . or by any means whatsoever, directly or indirectly, merge or 
consolidate such facilities or any part thereof with those of any 
other person, or purchase, acquire, or take any security of any 
other public utility, without first having secured an order of the 
Commission authorizing it to do so. . . . After notice and 
opportunity for hearing, if the Commission finds that the proposed 
disposition, consolidation, acquisition, or control will be 
consistent with the public interest, it shall approve the same.
	(b) The Commission may grant any application for an order 
under this section in whole or in part and upon such terms and 
conditions as it finds necessary or appropriate to secure the 
maintenance of adequate service and the coordination in the public 
interest of facilities subject to the jurisdiction of the 
Commission. The Commission may from time to time for good cause 
shown make such orders supplemental to any order made under this 
section as it may find necessary or appropriate.

2. Merger Policy Statement

	The Commission's Merger Policy Statement sets forth the 
criteria and considerations for
                              - 9 -

<PAGE>
evaluating applications under section 203. [FN42] The Commission 
examines three factors in analyzing whether a proposed transaction 
is consistent with the public interest: the effect on competition, 
the effect on rates, and the effect on regulation. The Commission 
also recognized:
	[A]s the industry evolves to meet the challenges of a more 
competitive marketplace, new types of mergers and consolidations 
will be proposed. For example, in addition to mergers between 
public utilities, market participants already are considering 
restructuring options that include mergers between public 
utilities and natural gas distributors and pipelines, 
consolidations of electric power marketer businesses with other 
electric or gas marketer businesses, and combinations of 
jurisdictional electric operations with other energy services. 
(Footnote omitted.) As a consequence, our merger policy must be 
sufficiently flexible to accommodate the review of these new and 
innovative business combinations that are subject to our 
jurisdiction under section 203 and to determine their implications 
on competitive markets. We believe that the analytical framework 
articulated in this Policy Statement provides a suitable 
methodology for determining whether such mergers will be 
consistent with the public interest. [FN43]

C. Evaluation of the Proposed Disposition of Facilities

1. The Effect on Competition: Vertical Market Power

	Unlike horizontal mergers, which eliminate a seller in the 
market and therefore increase concentration, vertical mergers do 
not involve firms competing in the same product market and 
therefore do not increase concentration in a single product 
market. While vertical mergers can result in efficiencies from 
integrating input and output operations, they can also increase 
the merged firm's incentives to use its market position in one 
segment of its vertically integrated business to adversely affect 
competition in a related segment of its business. Any benefits 
arising from a vertical merger are necessarily weighed against the 
competitive harm the merger is likely to cause. As discussed 
below, the proposed transaction before us raises vertical market 
power concerns because it would consolidate the intrastate gas 
operations of SoCalGas [FN44] with the electric operations of 
SDG&E. SoCalGas delivers natural gas not only to SDG&E's gas-fired 
generators but to virtually all gas-fired generators in southern 
California that compete with SDG&E in the wholesale electricity 
market.
	The Commission has evaluated the competitive concerns raised 
by the proposed transaction within the context of a framework that 
is consistent with our Merger Policy Statement. This framework is 
informed by the Department of Justice's (DOJ's) approach to 
evaluating the competitive effects of vertical mergers. [FN45] 
However, although the same general factors that govern our 
analysis under the Merger Policy Statement apply here, the Merger 
Policy Statement originally was crafted to apply primarily to 
horizontal mergers. The Commission's approach to evaluating the 
competitive effects of vertical mergers is evolving as the 
Commission gains more experience with the convergence of gas and 
electric utilities. Additional experience will undoubtedly bring 
new insights to bear in refining our analysis.
	Vertical mergers raise three types of general competitive 
concerns: (1) denying rival firms access to inputs or raising 
their input costs; [FN46] (2) increased anticompetitive 
coordination; and (3) regulatory evasion. These potential actions 
can adversely affect competition through higher prices or reduced 
output in the downstream output market.
	Applicants performed no analysis of the vertical effects of 
the proposed transaction.
                              - 10 -

<PAGE>

However, based on our own evaluation of vertical concerns, we 
believe that the proposed transaction poses the first two of the 
competitive problems discussed above: (1) foreclosure/raising 
rivals' costs; and (2) increased anticompetitive coordination. On 
the facts of this particular case, the Commission views regulatory 
evasion as largely a retail issue that does not require additional 
investigation by this Commission. [FN47]
	For a vertical merger to have a potentially adverse effect 
on competition in the wholesale electricity market, resulting in 
lower output or higher prices, it is necessary for the upstream 
delivered gas and downstream wholesale power markets to be 
conducive to the exercise of market power after the merger. A 
vertical merger is unlikely to have an adverse effect on 
competition unless the merged company has the incentive and 
ability to affect prices or quantities in the upstream and 
downstream markets.
	As a starting point to evaluating the competitive effects of 
the proposed transaction, we have used the basic principles laid 
out in the 1992 Horizontal Merger Guidelines and adopted in the 
Commission's Merger Policy Statement, applied to both the upstream 
delivered gas and downstream wholesale power markets to determine 
whether those markets are conducive to the exercise of market 
power after the merger. The Commission views this approach as the 
correct framework in which to evaluate the competitive effects of 
vertical mergers. As such, we have: (1) defined relevant product 
and geographic markets; (2) examined the competitive circumstances 
in the upstream market (here, delivered gas) and the effect of 
entry into that market; (3) examined the competitive circumstances 
in the downstream market (here, wholesale electricity) and the 
effect of entry into that market; and (4) considered, based on the 
circumstances in the upstream delivered gas market and downstream 
wholesale electricity market, whether the net effect of the merger 
would likely be significantly higher wholesale electricity prices.
	Both the Applicants and Intervenors address the effects of 
the proposed transaction assuming that the California PX defines 
the wholesale power market. However, our concerns are not limited 
to a market arrangement consisting of a PX in California. In large 
part, our analysis regarding the competitive effects of the 
proposed transaction applies equally to a bilateral or PX market 
arrangement. Where our analysis here differs depending on whether 
a PX or bilateral market arrangement is assumed, we specifically 
note that fact.

a. Relevant Markets

i. Product Market

	As a first step, it is necessary to define relevant product 
and geographic markets. In the upstream (or input) market, the 
product is delivered gas.
	With respect to the downstream market, the Applicants point 
out that SDG&E is capacity-short at least through the rest of the 
decade and, as such, only participates in the energy markets. The 
Commission agrees that it is reasonable to consider energy the 
relevant product for the purposes of analyzing the competitive 
effects of the proposed transaction in the downstream wholesale 
power market. As discussed below, this conclusion applies under 
any market arrangement, i.e., either the current, bilateral 
trading arrangement or the planned PX auction for spot energy into 
which SDG&E will sell all its generation.

ii. Geographic Market
                              - 11 -

<PAGE>
	We conclude that southern California is the relevant 
geographic market in both the upstream and downstream markets. 
SDG&E and SoCalGas have operations in a common geographic area - 
southern California. This area contains many of the potential 
wholesale customers who may be affected by the proposed merger, 
i.e., those customers who can purchase from the merged company and 
its competitors. Under the proposed PX electricity market 
arrangement, the relevant geographic market is defined as 
California, since SDG&E, SoCal Edison and PG&E are required to bid 
all of their generation into the PX. However, Intervenors argue 
that transmission constraints between northern and southern 
California define southern California as the relevant market for 
some of the year. Together, these factors suggest that southern 
California, therefore, is a reasonable starting point for defining 
the relevant geographic market.
	Wholesale power customers in the relevant geographic market, 
however, could potentially purchase from entities outside southern 
California, if it were physically possible and economic to do so. 
Entities outside California may also bid into the proposed PX. As 
discussed more fully in the Merger Policy Statement, transmission 
rates and transmission constraints play an important role in 
determining whether such energy would be economic under the 
delivered price test. Applicants have not performed a delivered 
price test. Nevertheless, the Commission notes that while southern 
California utilities historically have purchased from regions 
outside California, including the desert Southwest, Nevada, 
Utah/Colorado, the Pacific Northwest and northern California, such 
imports are limited by available transfer capability on the 
associated transmission ties and transmission constraints.

b. Upstream Delivered Gas Market

i. Competitive Conditions

	In southern California, SoCalGas is the dominant supplier of 
delivered gas services to gas-fired generators. These services are 
regulated by the California Commission. Intervenor City of Vernon 
estimates, and applicants do not refute, that SoCalGas delivers 
gas to 96% of gas-fired steam and combined cycle generators 
(excluding qualifying facilities) in southern California. As a 
result, gas-fired generators competing with the merged company 
have few, if any, alternatives to SoCalGas for delivered gas 
services. Additionally, SoCalGas' near-monopoly on delivered gas 
services in southern California means that it transacts with 
virtually all gas-fired generators in southern California and has 
access to potentially sensitive market information regarding those 
competing generators' costs and fuel usage.
	Under these circumstances in the delivered gas market, the 
Commission concludes that the merged company may use its market 
power to restrict competing generators' access to delivered gas 
services and to raise such generators' input costs, as discussed 
below and further summarized in section e.

ii. Entry

	The Merger Policy Statement discusses the importance of 
entry into markets affected by potential mergers. If entry by 
competitors is timely, likely, and sufficient, this can 
effectively
                              - 12 -

<PAGE>

discourage the merged company's strategy of raising competing 
generators' input costs. There is nothing in this record to 
support a conclusion that entry is easy in the upstream delivered 
gas market. For example, Intervenors argue that the merger may 
reduce potential competition, and therefore entry, in the 
delivered gas market by eliminating SDG&E as a potential "anchor 
tenant" of a new pipeline entrant. Perhaps more important, 
SoCalGas is the single, largest regulated gas distributor in 
southern California. By virtue of its regulated franchise, it 
controls the distribution and storage infrastructure in southern 
California. Moreover, a competing distributor or bypass pipeline 
would have to be approved by the California Commission. In the 
Commission's view, this would not occur, if at all, in a time 
frame which would effectively discourage the merged company from 
raising competing generator's input costs.

c. Downstream Wholesale Electricity Market

i. Competitive Conditions and Effects of Imports

	As discussed earlier, the Commission recognizes that a 
broader definition of the relevant geographic market would include 
imports from various regions outside southern California. However, 
a precise definition of the geographic market is not possible on 
this record because the Applicants did not prepare a delivered 
price analysis. Nevertheless, in assessing the effect of the 
merger on competition in the downstream wholesale power market, 
the Commission has considered two cases, one with maximum imports 
and one without any imports. We believe that the actual effect on 
competition likely will be between these two extremes and note 
that even under the "import" case generators served by SoCalGas 
still represent a significant share of the market.
	Presently, gas-fired steam and combined cycle generation 
account for the preponderance of generation on SDG&E's system and 
the systems of other southern California utilities. [FN48] As 
such, this generation=particularly gas-fired steam generation =is 
a major determinant of the market price for energy. The Commission 
notes that under the proposed PX market arrangement, gas-fired 
generation in southern California is more likely than not to set 
the market price for spot energy in the PX for much of the year. 
As suggested in our Merger Policy Statement, a reasonable measure 
to evaluate conditions in energy markets is economic capacity, 
that is, all capacity whose variable costs are no more than 5% 
above the market price.
	Under a bilateral market arrangement, wholesale power 
customers' range of alternative economic suppliers in the southern 
California geographic market is largely limited to energy from 
generating capacity competitive with gas-fired steam capacity. 
Included in this economic capacity would be capacity whose 
variable cost is equal to or less than 5% above the cost of 
gas-fired steam generation. The Commission's analysis shows that 
almost 60% of generating capacity that can potentially supply 
energy from economic capacity is served by SoCalGas. Generation 
served by SoCalGas, therefore, has a significant presence in the 
wholesale electricity market in southern California.
	An indicator of the ability of wholesale power  purchasers 
to turn to capacity not served by SoCalGas would be a statistic 
analogous to an HHI. Ideally, such a statistic would be calculated 
on the basis of economic capacity served by SoCalGas and economic 
capacity not served by SoCalGas. However, given the absence of a 
delivered price analysis, we have relied upon installed gas- fired 
capacity in our analysis. Assuming no imports, the southern 
California
                              - 13 -

<PAGE>

wholesale electricity market would be characterized as "highly" 
concentrated (i.e., a concentration statistic substantially above 
1800). [FN49] This statistic indicates that before and after the 
merger, wholesale power customers would have relatively few 
alternatives within southern California to capacity served by 
SoCalGas. Under these circumstances, higher delivered gas costs to 
generators served by SoCalGas would likely result in higher 
wholesale electricity prices.
	Similarly, under a PX market arrangement, since gas-fired 
steam generation is expected to set the market price and SoCalGas 
controls gas deliveries to almost all such generation, there is 
the potential for higher wholesale electricity prices.
	Under a bilateral market arrangement, the only effective 
discipline on higher wholesale electricity prices resulting from 
the merger would come from energy from economic capacity not 
served by SoCalGas. This energy could be imported from outside 
southern California. Similarly, the only effective discipline on 
wholesale electricity prices under a PX market arrangement would 
come from economic capacity bidding into the PX from outside 
southern California. In both the bilateral and PX cases, 
transmission prices, simultaneous import limitations and 
transmission constraints would all materially affect the amount of 
capacity that could supply energy into southern California. If 
this energy is not available at prices close to the market price 
for energy in southern California, those suppliers could not 
discipline a potential price increase brought about by the merged 
company.
	Even assuming maximum imports into southern California, 
generation served by SoCalGas still accounts for over 30% of all 
capacity in the market. Under this assumption, the relevant market 
would be characterized as "moderately" concentrated (i.e., 
concentration statistic above 1000 and below 1800).
	Based on the foregoing, the Commission believes that even 
after accounting for imports into the relevant geographic market, 
wholesale power customers would still be limited in their ability 
to switch to suppliers with capacity not served by SoCalGas. As 
such, the effect of the merger would be the potential increase in 
wholesale electricity prices.

ii. Entry

	As noted earlier, the Merger Policy Statement discusses the 
role of entry in discouraging price increases in markets affected 
by potential mergers. If entry into the downstream market were 
timely, likely, and sufficient, it could effectively discourage 
higher wholesale power prices resulting from the merger. However, 
such entry does not appear to be likely in this case. The effect 
of the proposed merger could be to discourage competitive entry 
into the wholesale power market in southern California, since 
higher delivered gas costs would make new entry in that market 
difficult and unattractive. In particular, economic capacity, 
i.e.,  gas-fired steam and combined cycle plants, could be 
discouraged from entering the market. As aesult of these factors, 
the Commission believes that the effect of the merger would be to 
potentially increase wholesale electricity prices.

d. Net Effect of the Merger

	On the whole, circumstances in the upstream delivered gas 
and downstream wholesale electricity markets indicate that the 
merged company could potentially raise input costs to competing 
generators, therefore resulting in higher wholesale electric 
prices. Under the
                              - 14 -

<PAGE>

circumstances of this case, the Commission believes that the 
proportion of economic capacity (not including SDG&E) served by 
SoCalGas is still high enough to effectively limit wholesale power 
customers' alternatives to economic capacity not served by 
SoCalGas.

e. Mitigation Remedies

	Based on the above analysis, we have determined that, 
without appropriate regulatory safeguards, SDG&E and SoCalGas 
could impair the marketability of power that is produced by 
competing gas-fired generators and sold in interstate wholesale 
power markets. In summary, we have determined that SoCalGas could 
potentially:
	(1) use competitive market information (such as gas usage, 
service requirements of competing generators, advance knowledge of 
competitors' projected fuel consumption, patterns, and costs) to 
manipulate costs and service to SDG&E's advantage;
	(2) offer transportation discounts to SDG&E that are not 
offered or made available to competing generators;
	(3) withhold or deny access to pipeline capacity to 
competing generators;
	(4) offer service contracts providing SoCalGas with 
unilateral and arbitrary control over pipeline access, delivery 
points, etc.;
	(5) manipulate storage injection schedules to effectively 
withhold pipeline capacity from competing generators at strategic 
times and thereby drive up wholesale electricity prices;
	(6) force competing generators to renominate volumes to 
other delivery points or purchase additional firm pipeline 
capacity by citing the existence of difficult to verify 
operational constraints on SoCalGas' system; and/or
	(7) manipulate the terms and conditions of intrastate gas 
tariffs to SDG&E's advantage by, for example, enforcing the letter 
of SoCalGas' tariff when dealing with competing generators while 
enforcing the terms of the tariff less rigorously when dealing 
with SDG&E.
	Such actions could discourage entry and raise competing 
generators' costs and/or limit their generation output, and, 
consequently, raise electricity prices in interstate wholesale 
power markets.
	According to the Applicants, regulation over intrastate 
pipelines by the California Commission combined with the 
additional commitments made by the Applicants to the California 
Commission provide sufficient safeguards to alleviate any vertical 
market power concerns. For example, the Applicants have committed 
to comply with the requirements of this Commission's Order No. 497 
with respect to SoCalGas' sales of transportation in intrastate 
gas markets. [FN50] The regulations promulgated under Order No. 
497 [FN51] require that any interstate natural gas pipeline that 
has gas marketing or brokering affiliates and that transports 
[FN52] gas for others conform to a code of conduct that requires 
non-discriminatory treatment of the same or similarly situated 
persons, as set out in 18 C.F.R. s 161.3(a) through (k).
	The Applicants also state that the California Public 
Utilities Code prohibits public utilities from granting any 
preference or advantage to any corporation or person or subjecting 
any corporation or person to any prejudice or disadvantage, and 
that the transportation tariffs for California gas utilities 
prohibit "unduly discriminatory" transportation rates to any 
particular transportation customer. [FN53] The Applicants also 
state that SoCalGas has an electronic bulletin board, called 
"GasSelect," and that SoCalGas would provide the type of posting 
required by Order No. 497 if it provided any discount to SDG&E. 
[FN54]
                              - 15 -

<PAGE>

	The Applicants also state that, in connection with any power 
marketing affiliate of either SDG&E or SoCalGas, a standard of 
conduct has been proposed to the California Commission which 
provides as follows:
	Valuable customer information, such as customer lists, 
billing records, or usage patterns transferred, directly or 
indirectly, from Utilities to any non-utility affiliate shall be 
made available to the public subject to the terms and conditions 
under which such data was (sic) made available to the non-utility 
affiliate. This condition will not apply to such information that 
is proprietary to and in the possession of a business unit of 
Utilities at the time it is initially separated as a non-utility 
affiliate.
	The Applicants state that this standard of conduct would 
ensure that any power marketing affiliate of SoCalGas would not 
receive confidential, market-sensitive information obtained by 
SoCalGas by virtue of its position as a gas transporter, unless 
such information is shared with unaffiliated power marketers.  The 
Applicants further state that this same restriction would apply to 
any employee or group of employees employed by SDG&E, or any other 
subsidiary of the merged entity, that engages in a merchant sales 
function with respect to electricity.  The Applicants add that 
this would allow Enova and Pacific to consolidate functions such 
as information systems in general and billing in particular, while 
ensuring that any employees of SDG&E who are involved in the sale 
or trading of power do not obtain access to information from 
SoCalGas that could provide an advantage in 
electricmarkets. [FN55]
	We believe that the most direct and effective way to address 
the potential that SoCalGas will unduly discriminate in favor of 
downstream affiliates, and thereby put SDG&E's competitors at a 
disadvantage, is through specific mitigation requirements that 
would: preclude discriminatory conduct by SoCalGas; ensure 
transparency of transactions involving sales and purchase of gas 
transportation services; and require separation of SDG&E's 
purchases of transportation service from SoCalGas for gas that 
would be used for its electric generators. We discuss specific 
mitigation requirements in detail below.
	While this Commission has the authority under FPA section 
203 to determine what remedies are necessary to mitigate market 
power concerns and to condition our approval of a transaction on 
those conditions being implemented, in this particular case 
effectuation of most of the remedies discussed below is within the 
jurisdiction of the California Commission. Specifically, 
acceptance and enforcement of the Applicants' commitments to 
non-discriminatory treatment by SoCalGas and transparency of 
SoCalGas transactions are matters within the jurisdiction of the 
California Commission. As a natural gas distribution company, as 
well as a Hinshaw pipeline, SoCalGas falls within the regulatory 
oversight of the California Commission, and matters relating to 
the terms and conditions of SoCalGas' intrastate gas 
transportation service must be addressed and enforced by that 
commission. On the other hand, other remedies discussed below 
(those imposed directly on the public utilities in the proposed 
transaction, SDG&E and Enova Energy) are within this Commission's 
jurisdiction to effectuate. [FN56]
	We conclude that if the Applicants commit to the remedial 
mechanisms discussed below, and if the California Commission in 
its ongoing merger proceeding accepts those remedial mechanisms 
discussed below that are within its jurisdiction, the proposed 
transaction will be consistent with the public interest. We 
therefore will approve the proposed disposition of facilities on 
the condition that the following remedies are adopted. In the 
interest of comity, we will defer to the California Commission in 
specifying the terms by which remedies within its jurisdiction are 
to be accomplished.
                              - 16 -

<PAGE>

	First, it will be necessary to ensure that SoCalGas and 
SDG&E do not inappropriately share market information. We have 
frequently discussed our concerns regarding the sharing of market 
information in market-based rate cases, and have routinely imposed 
related restrictions through the pertinent public utility's code 
of conduct. [FN57] The same concerns arise here. Therefore, to 
satisfy our concerns in this regard, SDG&E would need to file a 
code of conduct, and Enova Energy would need to revise its code of 
conduct, to comport with the restrictions we require in codes of 
conduct for market-based rate schedules.
	Second, with regard to the commitments offered to the 
California Commission by the Applicants, we conclude that if the 
Order No. 497 restrictions were applied to SoCalGas, and if the 
focus of the restrictions were expanded, this would alleviate 
several concerns. The Order No. 497 regulations are directed 
toward abuses between natural gas pipelines and their affiliated 
marketers. Here, we are concerned not just with the potential for 
abuse between SoCalGas and affiliated marketers (such as Enova 
Energy), but also with the potential for abuse between any 
combination of the energy companies that would be affiliated under 
the proposed transaction=particularly abuse between SoCalGas and 
SDG&E (a non-marketer). Therefore, the Applicants would need to 
revise their commitment so that the restrictions and requirements 
would be applicable to the corporate family as a whole, and the 
California Commission would need to accept and enforce application 
of the requirements to SoCalGas.
	Third, in order to safeguard against discriminatory 
treatment, SoCalGas' GasSelect EBB must be an interactive 
same-time reservation and information system for its gas 
transportation service, especially with respect to service for 
gas-fired generation, and the California Commission would need to 
accept and enforce application of this requirement to SoCalGas. 
Additionally, SDG&E and Enova Energy must separate the purchases 
they make from SoCalGas (or any affiliate of SoCalGas) of 
transportation of gas that is used in electric gas- fired 
facilities used for wholesale sales; in other words, they must 
make such purchases separate from other delivered gas purchases 
(e.g., gas that is resold to retail customers) and they must make 
such purchases on SoCalGas' GasSelect EBB under the same terms and 
conditions as SoCalGas' non-affiliated gas-fired generation 
customers. Also, SoCalGas must publicize in advance on the 
GasSelect EBB its planned use of pipeline capacity to fill 
storage.
	As discussed above, acceptance and enforcement by the 
California Commission of remedies within its jurisdiction are of 
paramount importance. We expect that the California Commission 
will at a minimum adopt the mechanisms discussed above to preclude 
SoCalGas from manipulating wholesale power markets through 
discriminatory treatment of other competitors. [FN58] We direct 
the Applicants to file proposed mitigation measures with us no 
later than 30 days after the California Commission issues its 
merger decision in Application 96- 10-038. If there is any 
material deviation from the remedies described above, we will 
determine if the deviations are acceptable. [FN59] We note that 
the California Commission's current anticipated decision date is 
March 1998. If this timetable is delayed, the Applicants should 
inform us of the status of the California proceeding as soon as 
possible, and we will at that time determine whether other action, 
if any, is appropriate.

2. The Effect on Competition: Horizontal Market Power

	The proposed merger would potentially eliminate an electric 
generation competitor by consolidating generation owned and 
operated by SDG&E with ownership interests in QFs held by 
                              - 17 -

<PAGE>

Pacific. The Applicants contend that the consolidation of 
generation would have no adverse impact on competition. The 
application shows that change in concentration in the smallest 
possible geographic market=southern California=resulting from the 
consolidation of Pacific's QF generation and SDG&E's generation is 
de minimis. [FN60] We agree, and note that no intervenor has 
raised concerns to the contrary.
	The proposed merger would also consolidate retail gas 
service provided by SoCalGas and retail electricity service 
provided by SDG&E in the southern part of Orange County, 
California, where SoCalGas' and SDG&E's service territories 
overlap. This could potentially eliminate a competitor to the 
extent that gas and electricity compete in end-use energy 
services. Several intervenors voice concern about this possible 
effect of the proposed merger. We note that the California 
Commission, which also has jurisdiction over this transaction, can 
adequately address this issue and has not requested our assistance 
in this regard. [FN61]

3. The Effect on Rates

	The Merger Policy Statement explains that the protection of 
wholesale ratepayers and transmission customers is the 
Commission's primary concern regarding the effects of a section 
203 proposal on rates. [FN62] As stated earlier, the Applicants 
state that the proposed corporate realignment would have no 
adverse effect on rates because neither SDG&E nor Enova Energy has 
firm wholesale customers; instead, SDG&E's only wholesale sales 
are economy energy sales and short-term sales of capacity. The 
Applicants also state that SDG&E has no firm transmission 
contracts for service through its system other than for short-term 
as-available service and mutual assistance short-term back-up 
transmission assignments. The Applicants state that any other 
transmission commitments involve interchange contracts, Western 
System Power Pool as- available commitments, or transmission under 
SDG&E's open access tariff. In any event, the Applicants state 
that SDG&E will hold its future wholesale and transmission 
customers harmless from any increase in jurisdictional costs 
arising out of the proposed transaction for at least five years 
after the corporate realignment is consummated. The Applicants 
also state that SDG&E would undertake the burden, in any 
Commission rate case it files within five years after the 
consummation of the corporate realignment, to show that its rates 
are not higher than they otherwise would have been absent the 
merger. The Applicants' hold harmless provision and commitment to 
accept the burden of proof in any future related rate case should 
adequately protect ratepayers from the recovery of merger-related 
costs, particularly given the types of wholesale transactions in 
which SDG&E engages.
	Intervenors contend that the Applicants' plan to consolidate 
the gas purchase portfolios of SoCalGas' sales customers and 
SDG&E's customers would provide SoCalGas the opportunity to 
"assign" higher priced gas supplies to SDG&E; the Applicants then 
could pass these increases through to retail ratepayers, 
collecting the increased profits and evading rate regulation. 
Except as this issue affects competition in wholesale power 
markets, which is being considered as discussed above, this issue 
is squarely a retail ratemaking matter more appropriately 
addressed by the California Commission. Therefore, we will not 
pursue the issue further.

4. The Effect on Regulation

	The Merger Policy Statement discusses the Commission's 
concerns relating to  (1)
                              - 18 -

<PAGE>

creation of a regulatory gap as a consequence of a corporate 
realignment, or (2) shifts of regulatory authority between the 
Commission and state commissions or the Securities and Exchange 
Commission (SEC). [FN63] However, since it is anticipated that the 
newly-formed holding company will be granted an exemption under 
section 3(c) of PUHCA, the corporate realignment will not affect 
the Commission's jurisdiction vis-a-vis the SEC. Also, the 
California Commission has not raised concerns regarding impairment 
of its regulatory authority and will be able to approve or 
disapprove the merger. Therefore, regulatory authority would not 
be impaired by virtue of the proposed disposition of facilities.

The Commission orders:

	(A) SoCal Edison's complaint in Docket No. EL97-21-000 is 
hereby dismissed as moot.
	(B) The motion to consolidate filed by Public Power 
Authority in Docket No. EC97-12-000 is denied.
	(C) The Applicants' proposed disposition of facilities is 
conditionally approved, as discussed in the body of this order.

  FN1      16 U.S.C. s 824b (1994).

  FN2      15 U.S.C. s 79c(a)(1) (1994).

  FN3      Enova Energy, Inc., 76 FERC P 61,242 (1996).

  FN4      Enova Corporation and Pacific Enterprises, 79 FERC P 
61,107 (1997).

  FN5      SoCal Edison raised various anticompetitive concerns in 
its complaint that are repeated in its intervention in Docket No. 
EC97-12-000, and, thus, are addressed in this proceeding.

  FN6      The creation of Enova was approved by the Commission 
two years ago, whereupon Enova became the holder of all of SDG&E's 
common stock and SDG&E's common stockholders became the 
stockholders of Enova. San Diego Gas & Electric Company, 70 FERC P 
62,118 (1995).

  FN7      76 FERC P 61,242 (1996).

  FN8      As noted in the April 30 order, Pacific has another 
subsidiary, Ensource, that was a power marketer authorized to sell 
power at market-based rates. However, on December 6, 1996, 
Ensource filed a notice of cancellation of its market-based rate 
schedule, which was accepted for filing by order issued January 
29, 1997. See Ensource, 78 FERC P 61,064 (1997).

  FN9      The Agreement and Plan of Merger and Reorganization 
submitted with the application does not refer to NewCo, but 
instead refers to the new holding company as Mineral Energy 
Company. NewCo Enova Sub and NewCo Pacific Sub are referred to as 
G Mineral Energy Sub and B Mineral Energy Sub, respectively.
                              - 19 -

<PAGE>

  FN10     62 Fed. Reg. 4993 (1997).

  FN11     Power Pool states that its members are the Los Angeles 
Department of Water and Power, and the Cities of Burbank, 
Glendale, and Pasadena, California. Power Pool states that its 
members own and operate gas-fired generation resources in the Los 
Angeles Basin, and that SoCalGas is the sole provider of gas 
transmission service to their facilities.

  FN12     Public Power Authority states that it is a joint powers 
agency under California law and a "municipality" as defined by 
section 3(7) of the FPA. Public Power Authority's members are: the 
Cities of Anaheim, Banning, Burbank, Colton, Glendale, Pasadena, 
Riverside, and Vernon, California; the Los Angeles Department of 
Water and Power; and the Imperial Irrigation District. Each of the 
members is engaged in the generation, transmission, and 
distribution of electric energy and provide electric service 
tocustomers in California.

  FN13     Imperial Irrigation, Kern River, Public Power 
Authority, the Power Pool, SoCal Edison, and USGen.

  FN14     For example, Vernon asserts that, if the corporate 
realignment is approved, the merged entity would: (1) provide 
natural gas transportation to 96% of the gas-fired, steam, or 
combined cycle plants in southern California; (2) provide retail 
or wholesale transportation service to 85% of the southern 
California natural gas market; and (3) directly control 72% of all 
gas storage capacity in southern California. Vernon asserts that 
SoCalGas and SDG&E together purchase 39% of the California gas 
commodity market (SoCalGas purchases 29%, while SDG&E purchases 
10%).

  FN15     See Pacific Gas and Electric Company, 77 FERC P 61,204 
(1996) and 77 FERC P 61,265 (1996) for descriptions and 
discussions of the California PX, which is one aspect of the 
current restructuring of theelectric utility industry in 
California. The related proceeding before this Commission is often 
referred to as the WEPEX proceeding; WEPEX is an acronym for the 
Western Power Exchange, which was established to implement the 
California Commission's restructuring objectives.

  FN16     Imperial Irrigation, Kern River, the Power Pool, San 
Diego, and SoCal Edison.

  FN17     SoCal Edison.

  FN18     Imperial Irrigation, Kern River, Public Power 
Authority, SoCal Edison, and Vernon.

  FN19     Imperial Irrigation, the Power Pool, San Diego, SoCal 
Edison, and Vernon.

  FN20     Imperial Irrigation, the Power Pool, San Diego, SoCal 
Edison, and Vernon.

  FN21     57 Fed. Reg. 41,533 (1992).

  FN22     49 Fed. Reg. 26,823 (1984).
                              - 20 -

<PAGE>

  FN23     Imperial Irrigation, Public Power Authority, and SoCal 
Edison.

  FN24     Kern River, Public Power Authority, SoCal Edison, and 
Vernon.

  FN25     SoCal Edison and Vernon.

  FN26     Imperial Irrigation and SoCal Edison.

  FN27     Kern River and the Power Pool.

  FN28     Imperial Irrigation, Kern River, the Power Pool, Public 
Power Authority, San Diego, and Vernon.

  FN29     Public Power Authority and SoCal Edison.

  FN30     Power Pool and Public Power Authority.

  FN31     For example, see Public Power Authority's motion to 
intervene.

  FN32     Public Power Authority.

  FN33     SoCal Edison and Public Power Authority

  FN34     Inquiry Into Alleged Anticompetitive Practices Related 
to Marketing Affiliates of Interstate Pipelines, Order No. 497, 53 
Fed. Reg. 22139 (1988), FERC Statutes and Regulations, Regulations 
Preambles 1986-1990 P 30,820 (1988), order on rehearing, Order No. 
497-A, 54 Fed. Reg. 52781 (1989), FERC Statutes and Regulations, 
Regulations Preambles 1986-1990 P 30,868 (1989), order extending 
sunset date, Order No. 497-B, 55 Fed. Reg. 53291 (1990), FERC 
Statutes and Regulations, Regulations Preambles 1986-1990 P 30,908 
(1990), order extending sunset date and amending final rule, Order 
No. 497-C, 57 Fed. Reg. 9 (1992), FERC Statutes and RegulationsP 
30,934 (1991), reh'g denied, 57 Fed. Reg. 5815, 58 FERC P 
61,139(1992), aff'd in part and remanded in part, Tenneco Gas v. 
Federal Energy Regulatory Commission, 969 F.2d 1187 (D.C. Cir. 
1992), order on remand, Order No. 497-D, 57 Fed. Reg. 58978 
(1992), FERC Statutes and Regulations P 30,958 (1992), order on 
reh'g and extending sunset date, Order No. 497-E, 59 Fed. Reg. 243 
(1994), FERC Statutes and Regulations P 30,987 (1994), order on 
reh'g, Order No. 497-F, 59 Fed. Reg. 15336 (1994), 66 FERC P 
61,347 (1994).

  FN35     Under the "B" contract, any revenues from the PX in 
excess of variable costs must be rebated back to the ISO as a 
credit against availability charges. Under the contract "C", the 
unit may not bid into thePX.

  FN36     See Applicants' answer, appendix A, p. 1.

  FN37     See Applicants' answer, appendix B, p. 6.
                              - 21 -

<PAGE>

  FN38     See Applicants' answer, pp. 7-8.

  FN39     Subsequent to the filing of the Applicants' answer, the 
Commission issued an order in Docket No. RP97-284-000, finding 
that SoCalGas has not violated the Commission's capacity release 
regulations or policies. Southern California Edison Company v. 
Southern California Gas Company, 79 FERC P 61,157 (1997).

  FN40     18 C.F.R. s 385.214 (1996).

  FN41     18 C.F.R. s 385.213(a)(2) (1996).

  FN42     See Inquiry Concerning the Commission's Merger Policy 
Under the Federal Power Act: Policy Statement, Order No. 592, 61 
Fed. Reg. 68,595 (1996), FERC Statutes and Regulations P 31,044 
(1996) (Merger Policy Statement).

  FN43     Merger Policy Statement at p. 30,113 (footnote 
omitted).

  FN44     SoCalGas is an intrastate pipeline by virtue of the 
Hinshaw provision in section 1(c) of the Natural Gas Act (NGA). A 
Hinshaw pipeline is exempt from the provisions of the NGA and is 
defined by section 1(c) of that act as:
    any person engaged in or legally authorized to engage in the 
transportation in interstate commerce or the sale in interstate 
commerce for resale, of natural gas received by such person from 
another person within or at the boundary of a State if all the 
natural gas so received is ultimately consumed within such State, 
or to any facilities used by such person for such transportation 
or sale, provided that the rates and service of such person and 
facilities be subject to regulation by a State commission.
15 U.S.C. s 717 (1994).

  FNIn this case, we do not reach the question of whether the 
Hinshaw exemption properly applies to SoCalGas.

  FN45     The 1984 Guidelines, which are incorporated by 
reference in the 1992 Horizontal Merger Guidelines discussed at 
length in the Merger Policy Statement, describe four concerns 
raised by vertical mergers and the corresponding basis upon which 
DOJ would challenge a merger. Those four concerns are: elimination 
of potential entrants, barriers to entry, facilitating collusion, 
and evasion of rate regulation.As we discuss later, the first two 
of these concerns can be restated as foreclosure/raising rivals 
costs. The third and fourth concerns can be restated as increased 
anticompetitive coordination and regulatory evasion, respectively. 
See, e.g., Michael H. Riordan and Steven C. Salop, "Evaluating 
Vertical Mergers: A Post- Chicago Approach," 63 Antitrust Law 
Journal 513 (1995).

  FN46     A related concern is denying or giving rivals limited 
access to downstream customers.

  FN47     Regulatory evasion can result from passing higher input 
prices through to the retail
                              - 22 -

<PAGE>

customers of a regulated affiliate. In this case, the California 
Commission has jurisdiction over both SoCalGas and over the 
proposed transaction and therefore can address this issue.

  FN48     According to San Diego, gas-fired capacity accounts for 
68% of installed generating capacity of southern California 
utilities.

  FN49     See Prepared Testimony of John R. Morris on behalf of 
the City of San Diego, exhibit No. <<< (JRM-3), Schedule 1. 
Witness Morris' analysis overstates concentration because his 
analysis: (1) includescertain peaking capacity that may not be 
competitive; and (2) assumes that all utilities not served by 
SoCalGas are one seller when that obviously is not the case. 
However, correction for these deficiencies still results in an HHI 
well over 1800.

  FN50     See n.4.

  FN51     See 18 C.F.R. Part 161 and s 250.16 (1996).

  FN52     "Transportation . . . includes storage, exchange, 
backhaul, displacement, or other methods of transportation." 18 
C.F.R. s 161.2(e) (1996).

  FN53     See Application for Approval and Authorization of 
Merger, Vol. I, Prepared Direct Testimony ofJeffrey K. Hartman, p. 
5.

  FN54     We note that Order No. 497 and the regulations 
promulgated thereunder address business practices between 
interstate gas pipelines and their affiliated marketers or 
brokers. Our concern in this case is how business is conducted 
between SoCalGas and SDG&E, which is not a marketer or broker as 
those terms are used in Order No. 497.

  FN55     Application for Approval and Authorization of Merger, 
Vol. I, Prepared Direct Testimony of JeffreyK. Hartman, pp. 7-9.

  FN56     Specifically, the Commission has the authority to 
impose requirements on the public utilities regarding the sharing 
of market information between the public utilities and SoCalGas, 
and the separation and transparency of SDG&E's and Enova Energy's 
gas transportation purchases from SoCalGas.

  FN57     See, e.g., Heartland Energy Services, Inc., 68 FERC P 
61,223 at p. 62,063 (1994); Wholesale Power Services, Inc., 72 
FERC P 61,284 at p. 62,227 (1995); USGen Power Services, L.P., 73 
FERC P 61,302 at p. 61,845 (1995).

  FN58     Another method of eliminating the vertical market power 
problems discussed herein would be divestiture by SDG&E of 
gas-fired generation plants. However, this remedy also would 
require the authorization of the California Commission.

  FN59     Our concern would be over deviations that weaken the 
remedial terms outlined above.
                              - 23 -

<PAGE>

  FN60     The Applicants' analysis evaluates concentration under 
a number of load conditions and shows that the largest HHI change 
is 8 points. This is well under the DOJ Guideline's threshold for 
concern for either moderately or highly concentrated markets.

  FN61     See, e.g., Baltimore Gas and Electric Company and 
Potomac Electric Power Company, 79 FERC P 61,027 at pp. 61,115-16 
(1997); Merger Policy Statement at pp. 30,127-28.

  FN62     Merger Policy Statement at p. 30,123.

  FN63     Merger Policy Statement at pp. 30,124-25.
                               - 24 -



               SUMMARY OF TESTIMONY RECEIVED BY CPUC TO DATE

                                WITNESS(ES)
                               ON BEHALF OF
                           GENERAL SUBJECT MATTER

S.L. Baum and R.D. Farman
Enova/Pacific
Corporate policy issues related to merger

W.L. Hieronymus
Enova/Pacific
Market power; impacts of the merger on the competitiveness of 
electricity markets and retail gas markets.

T.J. Flaherty, F.H. Ault, and D.L. Reed
Enova/Pacific
Merger synergies

F.H. Ault and R. Todaro
Enova/Pacific
Allocation of merger synergies

F.H. Ault and R. Todaro
Enova/Pacific
Affiliate relationships

D.L. Reed, R. Todaro, and F.H. Ault
Enova/Pacific
Fairness to stakeholders

D.L. Reed, R. Todaro, and F.H. Ault (supplemental testimony)
Enova/Pacific
Effect of CPUC Performance-Based Ratemaking decision

S.L. Baum, R.D. Farman, and J.J. Leitzinger (supplemental testimony)
Enova/Pacific
Effect of FERC order conditionally approving merger; effect of proposed 
acquisition of AIG Trading Corp.

F.H. Ault, D.L. Reed, R. Todaro, and T.J. Flaherty (supplemental 
testimony)
Enova/Pacific
Impact of affiliate transaction rules and FERC conditions on merger 
approval

T.J. Flaherty, D.L. Reed, and R. Todaro (rebuttal testimony)


                                     1


<PAGE>


Enova/Pacific
Merger synergies

F.H. Ault and R. Todaro (rebuttal testimony)
Enova/Pacific
Affiliate relationship

D.L. Reed and F.H. Ault (rebuttal testimony)
Enova/Pacific
Fairness to stakeholders

W.H. Hieronymus, J.J. Leitzinger, L.M. Stewart, and D.S. Penney 
(rebuttal testimony)
Enova/Pacific
Market power

Office of Ratepayer Advocates
Office of Ratepayer Advocates
Affiliate relationship; cost allocation; market power

G.T.C. Taylor
Imperial Irrigation District
Market power; effect on competition in electric and gas markets.

C.E. Yap
Southern California Utility Power Pool
Market power; effect on competition in electric and gas markets.

K. Harper
Southern California Public Power Authority
Affiliate relationship

R. Sinclair
Southern California Public Power Authority
Market power; effect on competition in electric and gas markets.

R.T. Beach
City of Vernon
Market power; effect on competition in electric and gas markets.

C.J. Garner
City of Long Beach
Affiliate relationship; market power

T.F. Daniels
Watson Cogeneration


                                    2


<PAGE>


Effect of SoCalGas option to purchase Mojave Pipeline

P.J. Muller
California Cogeneration Council & Watson Cogeneration
Market power

L. Larsen and C. Wadlington
Kern River Gas Transmission Co.
Effect of SDG&E option to acquire Kern River

C. Roach
Kern River Gas Transmission Co.
Market power; effect on competition in electric and gas markets; 
affiliate relationship

W.B. Marcus
Toward Utility Rate Normalization/Utility Consumer Action Network 
("TURN/UCAN")
Affiliate relationship; cost-sharing issues

M.P. Florio
TURN/UCAN
Market power

G. Shilberg
TURN/UCAN
Customer service issues

M. Shames
UCAN
Customer service, community impact, and allocation of cost savings

G. Rodriguez
Latino Issues Forum
Customer service issues

J. Gamboa
Greenlining Institute
Labor issues

S. Carter
Natural Resources Defense Council
Effect on environment and public purpose programs

P. Carpenter
Southern California Edison Company ("SCE")
Vertical market power; affiliate relationship


                                     3


<PAGE>


R. Graves
SCE
Vertical market power; effect on competition in electric and gas markets

J. Kelly
SCE
Affiliate relationship

Office of Ratepayer Advocates (rebuttal testimony)
Office of Ratepayer Advocates (ORA)
Market power; affiliate relationship

C. Roach (rebuttal testimony)
Kern River Gas Transmission Co.
Market power; affiliate relationship

C.E. Yap (rebuttal testimony)
Southern California Utility Power Pool
Market power

G.T.C. Taylor (rebuttal testimony)
Imperial Irrigation District
Market power

M.P. Florio (rebuttal testimony)
TURN/UCAN
Market power

W.B. Marcus (rebuttal testimony)
TURN/UCAN
Impact of SoCalGas Performance-Based Ratemaking decision

M. Shames (rebuttal testimony)
UCAN
Affiliate transaction rules

G. Rodriguez (rebuttal testimony)
Latino Issues Forum
Customer service issues

P. Carpenter (rebuttal testimony)
SCE
Market power 


                                      4


<Page)


S. Montovano
Enron Capital & Trade Resources
Market power; affiliate relationship





















                                     5



November 1997            ATTORNEY GENERAL'S OPINION  
  
                              November 20, 1997  
  
Requested by:           PUBLIC UTILITIES COMMISSION  
  
  
                  DANIEL E. LUNGREN, Attorney General  
                  Wayne Smith, Chief Deputy Attorney General  
                  Roderick E. Walston, Chief Assistant Attorney General  
                  Thomas Greene, Assistant Attorney General  
                  Kathleen Foote, Supervising Deputy Attorney General  
                  Lindsay Bower, Deputy Attorney General  
  
     THE PUBLIC UTILITIES COMMISSION has requested an advisory opinion,   
pursuant to Public Utilities Code section 854, on the competitive   
effects of the proposed merger between Pacific Enterprises and Enova   
Corporation.  The Commission has also asked for an opinion on mitigation   
measures that could be adopted to avoid any adverse competitive effects   
that do result.  
  
CONCLUSIONS  
  
      (1)   The proposed acquisition should not by itself adversely,   
affect competition in the markets for interstate gas or   
wholesale electricity.  
  
      (2)   The merger may eliminate the disciplining effect of San   
Diego Gas & Electric as a potential competitor in the   
partially regulated intrastate gas transmission market.  We   
recommend that the Commission consider requiring the merged   
entity to auction offsetting volumes of transportation   
rights within that system.  
  
  
<PAGE>  
  
  
                     BEFORE THE PUBLIC UTILITIES COMMISSION  
  
                          OF THE STATE OF CALIFORNIA  
  
____________________________________________________  
In the Matter of the Joint Application of Pacific   | A. 96-10-038  
Enova Corporation, Mineral Energy Company, B        |  
Mineral Energy Sub and G Mineral Energy Sub         | Opinion of   
For Approval Of A Plan Of Merger Of Pacific         | the Attorney   
Enterprises And Enova Corporation With And Into     | General on  
B Mineral Energy Sub ("Newco Pacific Sub") And      | Competitive   
G Mineral Energy Sub ("Newco Enova Sub"), The       | Effects of  
Wholly-Owned Subsidiaries Of A Newly Created        | Proposed  
Holding Company, Mineral Energy Company.            | Merger   
                                                    | Between   
                                                    | Pacific Enter-  
                                                    | prises and  
____________________________________________________| Enova Corp.  
  
  
                                DANIEL E. LUNGREN,  
                                Attorney General of the  
                                State of California  
                                WAYNE R. SMITH,  
                                Special Assistant Attorney General  
                                RODERICK E. WALSTON,  
                                Chief Assistant Attorney General  
                                THOMAS GREENE,  
                                Assistant Attorney General  
                                KATHLEEN E. FOOTE   
                                Supervising Deputy Attorney General  
                                LINDSAY BOWER  
                                Deputy Attorney General  
                                 50 Fremont Street, Suite 300  
                                San Francisco, California 94105-2239  
                                415) 356-6377  
  
                                Attorneys for the State of California  
  
  
  
  
<PAGE>  
  
                           OUTLINE OF ANALYSIS  
  
INTRODUCTION  
  
I.   ROCEEDINGS AND THE NATURE OF THIS OPINION                     
     A.  Prior Proceedings  
     B.  This Advisory Opinion  
  
II.  THE APPLICANTS AND THE INTRASTATE GAS TRANSPORTATION AND  
     ELECTRICITY SERVICES THEY PROVIDE  
  
     A.  The Purpose of this Merger  
     B.  SDG&E Market Power Mitigation under Electric Restructuring  
     C.  SoCalGas Intrastate Gas Transmission Services  
  
         1.  The SoCalGas Intrastate System  
         2.  Transportation "Unbundling" and System Bypass  
  
III. INTERSTATE GAS AND WHOLESALE ELECTRICITY MARKETS AT THE CALIFORNIA   
     BORDER  
  
     A.  Federal Deregulation and the Interstate Gas Market  
     B.  Federal Wholesale Electricity Deregulation  
     C.  The PX and the Western United States Wholesale Market  
  
IV.  THE RELEVANT MARKETS  
  
     A.  The Relevant Interstate Gas Market  
     B.  The Relevant Wholesale Electricity Market  
  
         1.  Alleged "Swing Capacity" Markets  
         2.  The Temporal Dimension  
  
     C.  The Relevant Intrastate Gas Transportation Market  
  
V.   THE COMPETITIVE EFFECTS  
  
     A.  The Vertical Integration of SoCalGas Intrastate Gas   
         Transmission and SDG&E Wholesale Electricity Operations  
  
         1.  The Intervenors' Vertical Integration Models  
         2.  Futures Markets  
         3.  The Kern River and Mojave Pipeline Purchase Options  
         4.  The Applicants' "Remedial Measures"  
  
  
<PAGE>  
  
  
     B.  Horizontal Effects in the "Gas Procurement" and Retail Gas  
         Markets  
  
     C.  Potential Competition for Intrastate Gas Transportation and  
         Electricity Retail Services  
  
       1.  The Perceived Potential Competition Doctrine  
       2.  The Retail Electric Services Market  
  
VI.  RETENTION OF JURISDICTION  
  
VII. CONCLUSION  
  
  
<PAGE>  
  
  
                             INTRODUCTION  
  
     The proposed merger of Pacific Enterprises and Enova Corporation is   
a response to the mandatory restructuring of the electric industry which   
will begin on January 1, 1998.  Through their subsidiaries, Pacific is   
the leading southern California supplier of intrastate gas transmission   
services, Enova is an electric distributor and a relatively minor   
participant in the wholesale electricity market, and both firms   
distribute gas within their respective service areas.  As regulated   
utilities doing substantial business within this state, the parties have   
submitted their application under Public Utility Code section 854.  This   
memorandum responds to a Commission request for an opinion on the   
competitive effects of the transaction.  
  
     Challenges to the merger have primarily focused upon alleged   
effects in the markets for wholesale electricity, interstate gas and   
intrastate gas transmission.  Through Southern California Gas Company   
(SoCalGas), Pacific provides gas transmission services to many of the   
gas-fired generation plants within southern California, including plants   
now owned by San Diego Gas and Electric (SDG&E) and Southern California   
Edison (Edison).  Edison and others contend that the merged company will   
"leverage" its position in the gas transmission market to manipulate the   
price of electricity sold by these plants in the wholesale market.    
Intervenors also allege that the applicants will unfairly benefit in   
financial markets and that, by exercising options to purchase competing   
intrastate facilities, their alleged ability to manipulate electricity   
prices will be enhanced in the future.  
  
     We conclude that this merger will not adversely affect competition   
within either the wholesale electricity or interstate gas markets.    
Because gas-fired plants now owned by SDG&E will be subject to   
comprehensive price regulation, the merged entity will lack any   
incentive (or, usually, the ability) to manipulate wholesale electricity   
prices.  Moreover, the wholesale electricity and interstate gas markets   
are already highly integrated, and comprise most of the western United   
States.  Price data -- as opposed to theoretical models -- shows that   
the wholesale electricity market connects California with numerous out-  
of-state suppliers over a transmission system that has never reached   
capacity.  These out-of-state suppliers, along with California   
generation plants outside the SoCalGas service area, would defeat any   
attempt by the merged entity to raise wholesale electricity prices above   
competitive levels.  
  
     We also conclude that the merger of the utilities' procurement   
operations will not adversely affect competition in the interstate gas   
market and that the applicants are not actual potential competitors for   
retail electricity services.  On the other hand, because the merger may   
eliminate the disciplining effect of SDG&E as a potential competitor in   
the partially regulated intrastate gas transmission market, we recommend   
that the Commission consider requiring SoCalGas to auction offsetting   
volumes of transportation rights within that system.  finally, because   
of the uncertain effects of electric industry restructuring, we also   
recommend that the Commission retain limited jurisdiction over this   
merger for the purpose or reexamining the  
  
                                 1  
<PAGE>  
  
  
question of whether the merged entity has used its intrastate gas   
transmission system for the purpose of manipulating the price of   
electricity it sells in the wholesale market.  
  
I.   PRIOR PROCEEDINGS AND THE NATURE OF THIS OPINION  
  
     A.  Prior Proceedings  
  
     This merger would be completed by combining Enova and Pacific into   
NewCo, a holding company created for the purpose of consummating this   
transaction. into Enova, with Enova as the surviving corporation.    
Likewise, NewCo Pacific Sub would merge into Pacific with Pacific as the   
surviving corporation.  Enova and Pacific would be wholly-owned NewCo   
subsidiaries.  Enova, Pacific, SDG&E, and SoCalGas would operate   
separately and under their existing names.  
  
     On June 25, 1997, the Federal Energy Regulatory Commission (FERC)   
conditionally approved the merger. FN /  In general, the conditions   
imposed by FERC would require SoCalGas to treat SDG&E and other   
affiliates "in the same way pipelines treat their gas' marketing   
affiliates." FN /  The applicants subsequently incorporated those   
conditions, along with other proposed restrictions, within their merger   
application. FN /  
  
     B.  This Advisory Opinion  
  
     This is the  fifth Opinion letter submitted by this office under   
the 1989 amendments to Section 854. FN /  Public Utility Code section   
854 refers to the opinion as advisory. FN /  Consequently this document   
does not control the PUC's finding under section 854, subdivision   
(b)(3).  However, the Attorney General's advice is entitled to the   
weight commonly accorded an Attorney General's opinion see, e.g., Moore   
v. Panish (1982) 32 Cal.3d 535, 544 ("Attorney General opinions are   
generally accorded great weight"); Farron v. City and County of San   
Francisco, (1989) 216 Cal.App.3d 1071).  
  
II.  THE APPLICANTS AND THE INTRASTATE GAS TRANSPORTATION AND   
     ELECTRICITY SERVICES THEY PROVIDE  
  
     Pacific Enterprises and Enova Corporation currently compete on a   
very limited basis.  SoCalGas purchases gas in the interstate market,   
which it distributes to its 4.7 million residential and other "core"   
customers In southern and central California.  Core customers include   
residential and commercial customers without alternate fuel capability,   
whereas "non-core" customers are large commercial and Industrial   
consumers that can buy gas from different sources.  SoCalGas is the   
leading supplier of intrastate gas transmission and gas storage services   
for both "core" and "noncore" customers within southern California.    
Pacific Enterprises also sold electricity in the wholesale market   
through QF facilities, all of which were recently divested. FN /  In   
1996, Pacific generated revenues of $1,613 million from its gas   
distribution operations and $778 million from intrastate gas   
transportation services provided to commercial/industrial and gas-fired   
generation   
  
<PAGE>  
  
                                 2  
plants.  
  
market, FN / sells electricity to 1.2 million retail customers in San   
Diego and southern Orange Counties (including parts of the SoCaIcas   
service area).  SDG&E also purchases gas in the interstate market, FN /   
which it distributes within its separate service areas." FN /  SDG&E   
provides no gas transmission services outside of San Diego County."   
FN /  In addition, an affiliate of Enova Corporation, Enova Energy,   
conducts extensive wholesale and retail energy marketing activities   
throughout California.  In 1996, Enova generated revenues of $1,591 and   
$348 million from its electricity and gas distribution operations,   
respectively.  
  
     Applicants have formed a joint venture, Energy Pacific, to market   
gas, power and a "broad range of value-added energy management products   
and services." FN /  The applicants also recently purchased AIG   
Trading, a natural gas and electricity marketer and a trader in   
financial markets for electricity and gas contracts. FN /  Both of   
those companies are actively  section discusses intrastate gas   
transmission services supplied by SoCalGas and SDG&E purchases and sales   
in the restructured electric industry.  Interstate gas and services are   
discussed in Section III.  
  
     A.  The Purpose of the Merger  
  
     The applicants claim that their merger will produce a firm with the   
necessary breadth and financial strength to compete with Edison, PG&E   
and out-of-state suppliers in the restructured electric industry   
mandated by AB 1890.  As a result of that restructuring program, SDG&E   
and other California electric utilities will lose their exclusive   
"franchises" on January 1, 1998.  The applicants contend that the merger   
will provide Enova, which is approximately one-fifth the size of Edison   
and PG&E," FN / with "access to adequate quantities of capital on   
favorable terms."  The parties also believe that the merged company will   
achieve certain efficiencies s and will respond more effectively to   
customer demand or broader and more cost effective energy services.  
  
     B.  SDG&E Market Power Mitigation under Electric Restructuring  
  
     Under industry restructuring, two separate central authorities, the   
Power Exchange (PX) and the Independent Service Operator (ISO), will   
coordinate all transactions between SDG&E and other California   
utilities. FN /  SDG&E currently purchases a majority of the   
electricity it sells to its retail customers.  In 1995, for example,   
SDG&E obtained 61 percent of its power requirements from short-term   
Western States Coordinating Council (WSCC) purchases, 22 percent from   
fossil generation plants--including its own 1,973 MW capacity plants--  
located within the San Diego Basin, FN / and the remaining 17 percent   
from the San Onofre Nuclear Generating Station (SONGS). FN /  In 1996,   
the peak load for the SDG&E system was 3,299 MW. FN /  
  
     During a five year transition period beginning January 1, 1998,   
SDG&E and other investor owned utilities (IOUs) must purchase and sell   
all of their power through the PX, which will  
  
                                  3  
<PAGE>  
  
establish a single clearing price for all hourly transactions. FN /    
Participating distribution companies and end users will submit "demand   
side" bids to the PX. FN /  Generation plants and marketers will   
simultaneously submit advance supply bids. FN /  The total capacity of   
WSCC members, including capacity divested from Edison and PG&E, FN /   
which can bid into the PX exceeds 150,000 MW. FN /  From the resulting   
demand and supply schedules, the PX will establish FN / the market   
"clearing price" governing all purchases and included sales. FN /  
  
     Power produced by "must-take" and "must-run" resources will be   
priced separately.  The output of must-run units -- the fossil   
generating plants used by the ISO to maintain system integrity FN / --   
will be sold at their variable operating costs. FN /The ISO Governing   
Board "has chosen all of SDG&E's units for Must-Run status." FN /    
Must-take resources, which include SONGS and other nuclear plants,   
qualifying facilities (QFs) and pre-existing power contracts, FN /   
provide more than half of the electricity requirements of the California   
IOUs. FN /  A "performance incentive mechanism . . . will isolate SONGS   
revenue received by SDG&E from the PX price." FN /  Other nuclear power   
output prices will be regulated by the PUC, and existing contracts will   
determine the price of purchased power and QF output.  
  
     To preclude the exercise of any possible market power, SDG&E will   
bid the output of its gas-fired and other plants into the PX under ISO   
"Agreement B" FN / during periods when those plants are not operated on   
a must-run basis.  That agreement applies separate payment provisions to   
the two periods.  As noted above, SDG&E will recover its variable costs   
during must-run periods.  At other times, Agreement B requires the   
operator to return to the ISO "90 percent of any revenues earned in   
excess of the running costs." FN /  The remaining ten percent will   
apparently be applied to SDG&E stranded costs through the competitive   
transition charge (CTC) mechanism. FN /  On October 30, 1997, FERC   
concluded that this arrangement "adequately mitigate[s] [SDG&E's]   
generation market power for PX sales of energy." FN /  
  
     In conjunction with the PX, the ISO will coordinate intrastate   
power flows and provide open access to the California transmission grid.   
FN /  On January 1, 1998, all participants will transfer operational   
control of their transmission facilities to the ISO. FN /  The state   
will initially be divided into "congestion zones" for northern and   
southern California, within each of which little or no congestion is   
expected.  Users within the zones will pay a single transmission access   
charge based upon the revenue requirements of the owners of the   
transmission facilities. FN /  A bidding process, similar to that used   
by the PX, will establish usage charges for entities which transmit   
power over congested paths through or out of the ISO grid. FN /  
  
     C.  SoCalGas Intrastate Gas Transmission Services  
  
     SoCalGas carries gas to its "core" and "noncore" customers from   
delivery points for interstate pipelines or their intrastate extensions.   
 When it created these customer   
  
  
                                  4  
<PAGE>  
  
  
classifications in 1986, the PUC required SoCalGas to offer   
"transportation only" services to its noncore customers, including   
generation plants owned by some of the intervenors in this proceeding.    
Since 1986, the ability of noncore customers to choose among gas   
producers and transportation services has been significantly expanded.  
  
     1.  The SoCalGas Intrastate System  
  
     Five interstate pipelines carry natural gas to California:  the   
Transwestern Pipeline Company ("Transwestern"); the El Paso Natural Gas   
Company ("El Paso"); the Pacific Gas Transmission Company ("PGT"), a   
PG&E subsidiary; the Kern River Transmission Company, ("Kern River");   
and the Mojave Pipeline Company ("Mojave").  At the Arizona-California   
border, SoCalGas receives gas from the Transwestern line at North   
Needles and from the El Paso line at Topock and Blythe. FN /  In the   
northern part of its service area, SoCalGas receives gas from PG&E at   
Kern River Station and Pisgah, FN / and from the Kern River and Mojave   
lines at Wheeler Ridge and Hector Road. FN /The SoCalGas system is   
capable of receiving approximately 3.5 Bcf/d at these connection points.   
FN /  
  
     The SoCalGas Acquisition Group purchases about 1000 MMcf/d, which   
is ultimately transported to core customers. FN /  SoCalGas noncore   
transportation customers include Edison, members of SCUPP, SDG&E, the   
City of Long Beach, and various large commercial and industrial   
customers. FN /  SoCalGas supplies 42 gas-fired generation plants,   
including plants owned by SDG&E, Edison, Imperial Irrigation District   
(IID) and SCUPP members. FN /  These plants have a total generating   
capacity of 15.837 MW. FN /  SoCalGas is the only intrastate gas   
pipeline to which SCUPP members can feasibly connect. FN /  
  
     To coordinate deliveries to these customers and to preserve "system   
integrity." FN /SoCalGas calculates in advance of "flow day" FN / a   
system "window" from the difference between estimated overall next-day   
demand FN / and local FN / California gas production. FN /  This   
"take away" capacity figure is then adjusted by anticipated injection or   
withdrawal volumes FN / for SoCalGas storage fields, FN / which   
according to Edison "are used to satisfy the majority -- approximately   
57 per cent -- of peak day demand." FN /  Windows are also established   
at each of the individual receipt points. FN /SoCalGas uses a variety   
of procedures, including "custody cut" FN / and Rule No. 30   
restrictions, FN / to achieve system balance when demand "nominations"   
for core and noncore customers exceed system or individual receipt point   
windows. FN /  
  
     2.  Transportation "Unbundling" and System Bypass  
  
     When the PUC "unbundled" transportation services in 1986, noncore   
customers were able to directly purchase commodity from wellhead   
producers at competitive prices and to make their own arrangements for   
the transport of that gas over interstate pipelines.  In subsequent   
years, the Commission has also permitted the creation of a limited   
secondary market for intrastate  
  
                                5  
  
<PAGE>  
  
  
transportation, even though it still prohibits "brokering on the   
intrastate system. FN /  The GasSelect electronic bulletin board, "an   
interactive same-time FN / reservation and information system," FN /   
provides information within this secondary market about intrastate   
transportation transactions between SoCalGas and its affiliates. FN /  
  
     Bypass opportunities for noncore customers have also been expanded.   
 The Kern River and Mojave pipelines responded to these opportunities by   
extending their interstate systems across the California border into the   
SoCalGas service territory. FN /  SoCalGas withdrew its initial   
opposition under 1989 agreements providing it with options to purchase   
in the year 2012 the California extensions of those two lines. FN /    
Since their completion in 1992, both systems have delivered gas to   
Enhanced Oil Recovery (EOR) and related cogeneration loads, and "to   
SoCalGas and PG&E for redelivery to other industrial and commercial   
loads." FN /  
  
     This competition has induced SoCalGas to "provide discounted FN /   
transportation rates and associated cost saving to numerous customers   
[perhaps including SDG&E FN /] on its system." FN /  SoCalGas can   
provide such discounted service to noncore customers without obtaining   
prior CPUC approval.  SoCalGas estimates that, since 1992, it has lost   
transportation volumes of 400 million cubic feet per day to competing   
gas pipelines. FN /  SoCalGas also claims that competition from out-of-  
state electric generation plants ("bypass by wire") has reduced the   
aggregate load of California gas-fired facilities by an additional 275   
million cubic feet per day. FN /  
  
     Along with federal deregulation efforts, these changes left   
SoCalGas and other utilities with contracts for interstate pipeline   
capacity that exceeded their market requirements.  Accordingly, SoCalGas   
has since 1992 reduced its firm capacity on the El Paso pipeline from   
1750 MMcf/d to 1150 MMcf/d and from 750 MMcf/d to 300 MMcf/d on the   
Transwestern system. FN /To mitigate the resulting losses, the PUC has   
required customers to pay SoCalGas an ITCS (Interstate Transportation   
Cost Surcharge) FN / to help recover certain fixed capacity costs.   
FN /  
  
III.  INTERSTATE GAS AND WHOLESALE ELECTRICITY MARKETS AT THE  
      CALIFORNIA BORDER                                        
  
     SoCalGas and California generation plants purchase the majority of   
their gas supplies from four producing basins in the western United   
States and Canada. FN /Likewise, SDG&E purchases the majority of its   
electricity supplies from western United States and Canadian generation   
plants.  
  
     As a result of federal deregulatory efforts, these western United   
States gas and electricity markets are fully competitive.  Both   
industries consist of three vertically-related stages:  production,   
transmission, and distribution. FN /  Production and interstate   
transmission services within both of those markets are highly integrated   
at the California border.  Moreover, California  
  
                                 6  
  
<PAGE>  
  
  
wholesale electricity transactions, which SDG&E and other utilities now   
make throughout the western United States, will remain integrated with   
the interstate market after the January 1, 1998 restructuring.  
  
     A.  Federal Deregulation and the Interstate Gas Market  
  
     Federal deregulation of the gas market has created a network of   
transmission suppliers connecting purchasers at the wholesale level with   
middlemen and well operators at the production level.  Prior to these   
efforts, each interstate "pipeline would purchase natural gas from   
producers, transport it largely along their own proprietary pipeline   
system, and resell the rebundled product to local distribution companies   
(LDCs) and other large customers."  This institutional structure meant   
that "each producer could sell gas to a limited number of buyers" and   
that "LDCs and large end users had limited options in terms of the   
number of pipeline companies from which they could purchase gas." FN /   
 As a result of FERC's deregulatory policies, "an active and viable spot   
market has developed for gas." FN /  
  
     FERC transformed the gas industry by providing open access to   
interstate pipelines, removing all controls over the wellhead price of   
natural gas, FN / and establishing secondary markets for storage and   
pipeline capacity. FN /  Pipelines now compete to provide   
transportation services with each other and with middlemen and with   
other owners of capacity rights.  Wellhead deregulation has   
simultaneously generated competition between producers in different   
basins. FN /  Because end users attempt to minimize their "delivered   
prices," FN / competitive forces have also linked the production and   
transmission markets.  
  
     FERC's open access policies, instituted in Orders 436 FN / and   
636, required that interstate pipelines separate gas sales from   
transportation services, FN / allowing users to enter into direct   
agreements with producers at the wellhead and arrange transportation in   
a separate transaction.  Orders 436 and 636 also created a "secondary   
transportation market" for natural gas FN / by allowing "holders of   
unutilized firm capacity [to resell] them in competition with any   
capacity offered directly by the pipeline." FN /  Previously, shippers   
were only able to purchase capacity rights directly from pipelines.   
FN /  Under Order 636, shippers who wish to sell (i.e. "release") their   
firm capacity rights must first offer FN / those rights on the   
pipeline's electronic bulletin boards ("EBB") FN /, which carry   
"information about available and consummated capacity release   
transactions." FN /  
  
     These policies have allowed producers in Canada, the Rocky   
Mountains, the San Juan and Permian Basins, as well as other regions to   
compete for sales throughout California.  The five pipelines which   
deliver this gas have an aggregate capacity of 7,130 MMcf per day. FN /   
 The 3.5 Bcf/d El Paso Natural Gas Company and the 1.1 Bcf/d   
Transwestern Pipeline Company lines are the primary links between the   
southern California border and producers in the San Juan and Permian   
basins. FN /  Pacific Gas Transmission Company ("PGT"), a PG&E   
subsidiary, transport gas from Canada to the California border on its   
own 1.89 Bcf/d pipeline.  
  
                                 7  
  
<PAGE>  
  
  
Coupled with downstream pipeline system operated by SoCalGas and SDG&E,   
PG&E can serve end users in most of California. FN /  As noted in   
Section II, the 770 MMcf/d Kern River line, which originates in the   
Rocky Mountain Basin, and the 400 MMcf/d Mojave pipelines began   
commercial operations in 1992.  
  
     In this deregulated interstate market, both purchasers and   
suppliers have various alternatives as they seek to minimize the overall   
cost of purchasing, transporting and storing gas. FN /  Thus, many EOR   
customers, who previously transported gas from Southwest fields over the   
El Paso or Transwestern lines, substituted when they found it more   
economical to transport Rocky Mountain gas over the Kern River or Mojave   
lines. FN /  In other instances, customers have substituted by   
transporting over the same pipeline to California gas purchased in   
entirely different basins. FN /  Customers committed to a particular   
supply source can also substitute between firm contracts and capacity   
released in the secondary market. FN /  Commodity and transportation   
markets are also linked, FN / as producers in the San Juan Basin   
demonstrated between November 1990 and April 1992 and again between   
March 1995 and December 1996 by reducing commodity prices to offset the   
temporarily increased cost of transporting gas over the constrained El   
Paso line. FN /  
  
     B.  Federal Wholesale Electricity Deregulation  
  
     Federal deregulation has had similar effects on wholesale   
electricity prices at California delivery points.  Congress initiated   
deregulation of the electricity industry by first allowing independent   
power producers and then utility affiliates to offer wholesale   
electricity at "market-based prices." FN /  Through Order 888 and   
earlier mandates, FN / FERC simultaneously encouraged open access and   
other "wheeling" transactions between non-contiguous buyers and sellers.   
FN /  By 1993, the "wholesale sector of the U.S. electricity industry   
[had] been transformed from an industry dominated by ineffectively   
regulated inefficient monopolists to an industry that is increasingly   
dominated by robust competition." FN /  
  
     Edison, SDG&E and PG&E actively participate in one of the most   
integrated of these wholesale electricity markets, the WSCC, which   
includes "fifteen states in the western United States and part of   
Canada." FN /  The WSCC "is a highly complex network that   
interconnects the entire western United States from Canada to Mexico and   
east as far as Montana, Utah, and New Mexico." FN /  WSCC members   
include Bonneville Power & Light, British Columbia Hydro, Los Angeles   
DWP, SMUD, and the Salt River Project.  The aggregate capacity of WSCC   
members, which arrange wholesale electricity transactions through the   
Western States Power Pool ("WSPP") or through separate bilateral   
transactions, FN / exceeds 150,000 MW. FN /  
  
     As a result of industry deregulation, suppliers can now sell to any   
purchaser on the grid. FN /  In fact, the availability of displacement   
contracts and the physics of electricity transmission has rendered   
irrelevant transmission constraints between any two points within the   
  
                                   8  
  
<PAGE>  
  
  
network. FN /  The existence of "loop flows," FN / in particular,   
means the power in a network "moves across many parallel lines in often   
circuitous routes." FN /  Likewise, suppliers facing transmission   
constraints can indirectly meet their contractual obligations by   
entering into offsetting displacement contracts with sellers located on   
unconstrained links to the delivery point. FN /  Accordingly, sellers   
must now compete for any sale with utility affiliates, independent power   
producers and power marketers.  
  
     The resulting competition has dramatically increased the   
integration and efficiency of the wholesale electricity market.  The   
WSCC, in particular, had actually become a highly integrated market even   
before FERC issued Order 888. FN /  Using data from 1994-1996   
transactions, DeVany and Walls have shown that the implicit delivered   
price of wholesale electricity is identical throughout the western   
United States during most hours of the day. FN /  The market is so   
highly integrated, in fact, that arbitrage opportunities are virtually   
nonexistent between supply points during both "peak" and "off-peak"   
hours.  Thus, De Vany and Walls found that the California-Oregon Border   
("COB"), Northern California, Palo Verde and Southern California were   
cointegrated FN / with all ten of the other major WSCC delivery points   
examined during off-peak hours; and with 9, 9, 10, and 9 of the other 10   
delivery points, respectively, during peak hours.  Order 888 has   
undoubtedly strengthened these results. FN /  
  
     C.  The PX and the Western United States Wholesale Market  
  
     ISO and PX rules will allow out-of-state utilities to bid into the   
PX. FN /  Those out-of-state suppliers will compete for sales of   
wholesale electricity sold through the Power Exchange, and their   
participation will equalize prices between the Exchange and the larger   
market.  Any differences between the Power Exchange price and the   
prevailing wholesale price would also be disciplined by marketers and   
California utility customers who would bypass the PX and arrange direct   
purchases from out-of-state sources. FN /  
  
     As noted above, loop flows maintain system viability when   
constraints arise over individual transmission paths.  The "contract   
path" between a generating plant and a customer is a "fiction," which   
"may and often does diverge" from the actual flow of power. FN /    
Thus, the physics of electrical networks would allow southern California   
customers to withdraw from the WSCC transmission grid power   
simultaneously generated by BPA, even if a link in the most direct   
transmission route between the two parties (e.g., Path 15) were at   
capacity.  For that reason, the precise capacity of any single link   
between California and other WSCC members is not relevant to this   
proceeding. FN /  
  
     Price data -- which provides the best measure of market performance   
- -- confirms the implications of engineering data which show that   
California has never been isolated from the rest of the WSCC. FN /    
During off-peak hours, the implicit "shadow" price for transmitting   
electricity between the four major California delivery points at off-  
peak hours is virtually zero,` FN / reflecting the system's low   
variable supply costs.  Implicit peak hour transmission rates  
  
                                  9  
  
<PAGE>  
  
  
are higher, but wholesale electricity prices at the four delivery points   
during those times remain cointegrated within arbitrage bounds. FN /    
These data are inconsistent with the fragmented transmission system and   
isolated wholesale markets alleged by some intervenors.  
  
IV.  THE RELEVANT MARKETS  
  
     The traditional antitrust model assesses the competitive effects of   
a merger within a "relevant market," which generally exhibits both   
product and geographic dimensions.  The relevant product refers to the   
"horizontal" range of products or services that are or could be easily   
be made relatively interchangeable, so that pricing decisions by one   
firm are influenced by the range of alternative supplies available to   
the purchaser.  The substitutes comprising the product market can be   
differentiated, at least to some extent.  Thus, local telephone calls   
within the same exchange between A and B and between C and D are not   
identical services, but they are still in the same product market   
because they are such close substitutes.  
  
     The relevant product also has a vertical dimension.  In most   
antitrust cases, there is a "range of possible markets of varying   
breadth." FN /  In theory, the horizontal and vertical dimensions of   
the relevant market are "immaterial." FN /  In fact, however,   
empirical limitations require a "noticeable 'gap in the chain'" of   
substitutes and complements. FN /  For example, it would usually be   
misleading to define separate product markets for left and right shoes   
or, because they are so strongly linked, for ski boots and ski bindings.   
FN /More generally, the relevant product is defined by including the   
good which is immediately in question along with all other substitutes   
and complements which significantly affect the ability of the supplier   
to raise price above marginal cost.  
  
     Similar considerations govern the delineation of the relevant   
geographic market.  The relevant geographic market is defined as the   
area in which sellers compete and in which buyers can practicably turn   
for supply. FN /In any market, including interstate gas or wholesale   
electricity networks, the relevant geographic market will include all   
supplies whose prices remain closely linked, after transportation and   
other transaction costs are accounted for.  Thus, distant seller A and   
local Seller B are in the same market if the price at B equals the price   
at A plus the cost of transportation between two points.  More   
generally, two locations are in the same market if the differential   
between their (possibly independently varying) prices remains "less than   
the potential wedge created by arbitrage costs." FN /Accordingly   
"[p]rice relationships are clearly the best single guide to geographic   
market definition." FN /  
  
     A.  The Relevant Interstate Gas Market  
  
     For purposes of analyzing this merger, a relevant market can be   
defined as gas delivered at interstate receipt points by pipelines from   
the San Juan Basin, the Permian Basin, and basins in the Rocky Mountains   
and Canada. FN /  In a gas network, the ability of a customer (like   
SoCalGas) to deviate rates from competitive levels is determined by   
conditions at the   
  
                                 10  
  
<PAGE>  
  
  
wellhead or the cost of transmission over a single line.  Prices are   
inextricably linked between basins, between pipelines, between firm and   
interruptible capacity on each line, FN / and across these various   
service levels. FN /  The most limited product market providing a   
"gap" in this "chain" of complements is delivered interstate gas.  
  
     The geographical extent of this market includes at least deliveries   
from the four basin area. FN /  In 1995, total average production by   
these basins was 24,000 MMcf/d. FN /  Estimated peak day supplies to   
California are 3,536 MMcf/d. FN /  Because gas deliveries throughout   
the network are close substitutes, after transportation is accounted   
for, the geographic market is broader than gas deliveries to southern   
California customers. FN /  Similarly, the relevant product and   
geographic market is broader than capacity rights on the El Paso line   
between the San Juan basin and the California border. FN /  
  
     Competition within this market is intense.  The ability of a firm   
to raise prices above competitive levels is "commonly" shown with   
circumstantial evidence of industry concentration, FN / entry   
barriers, and the short-run ability of existing competitors to increase   
their output. FN /  The courts also recognize the use of "direct   
evidence" to resolve market power questions. FN /  In the relevant   
interstate gas market, there are many buyers and sellers at the wellhead   
level, numerous holders of capacity rights competing with pipeline   
owners for transportation services, and strong price interactions   
between those levels.  Moreover, "direct" evidence shows that prices at   
delivery points within the four basin area remain cointegrated within   
arbitrage bounds.  
  
     B.  The Relevant Wholesale Electricity Market  
  
     A relevant market also exists for wholesale electricity delivered   
throughout the WSCC.  Like their counterparts i the natural gas   
industry, customers purchase wholesale electricity as the "delivered"   
combination of generation and transmission services. FN /  Thus, the   
relevant market includes all suppliers whose combined "netback" and   
transportation costs would be competitive at California delivery points.   
FN /  The relevant geographic market is the WSCC because that is "the   
region from which generators will be able to bid power into the Power   
Exchange." FN /  
  
     The relevant product market includes "all" effectively unregulated   
delivered electricity which can compete in the Power Exchange for   
residual wholesale electricity demand. FN /  Within the WSCC, the   
total capacity of competitive gas-fired, hydro, and coal plants exceeds   
150,000 MW.  These resources will compete for the demand remaining in   
the PX after sales of price-regulated must-run and must-take capacity   
are completed.  As in the gas industry, there are numerous buyers and   
sellers in the wholesale electricity market, strong interactions between   
generation and transmission prices, and highly cointegrated prices at   
delivery points.  
  
     1.  Alleged "Swing Capacity" Markets  
  
                                 11  
  
<PAGE>  
  
  
  
     The relevant product market for wholesale electricity cannot be   
meaningfully limited to "swing capacity" producers.  Edison and other   
intervenors implicitly allege a product market consisting of generation   
with "full load marginal costs" FN / within some range FN / of the   
variable costs of producing electricity on Edison and other WSCC gas-  
fired plants.  Intervenors contend that gas-fired plans with their   
relatively high production costs will be the only firms bidding at or   
near the "clearing Prices" established by the Power Exchange.  This   
proposed market, however, excludes Bonneville Power and other   
"inframarginal" suppliers located throughout the WSCC FN / that are   
equally likely to establish the clearing price. FN /  
  
     Intervenors exclude these other generation sources by implicitly   
assuming that out-of-state participants do not incur opportunity costs.   
FN /  Theoretically, PX participants will offer wholesale electricity   
at their marginal supply costs, including fuel and other variable   
production expenses. FN /  In addition, however, the relevant economic   
cost to out-of-state sellers FN / will include returns foregone by   
selling to the Power Exchange instead of other western United States   
buyers. FN /  The existence of these opportunity costs explains why   
gas is not "the" marginal fuel, FN / why out-of-state suppliers will   
equalize the PX and prevailing WSCC prices FN / and, at least in part,   
why gas and electricity prices are weakly correlated in southern   
California. FN /  Their existence also means that the relevant product   
market includes the output of "inframarginal," out-of-state suppliers.   
FN /    
  
     2.  The Temporal Dimension  
  
     Similarly, the relevant market is not time-sensitive.  A relevant   
market includes all firms which would respond to a hypothetical a"small   
but significant and nontransitory" price increase. FN /  
  
     As discussed above, WSCC suppliers can sell electricity throughout   
the grid during both peak and off-peak hours. FN /  Some intervenors   
have suggested that the relevant market will be limited during peak   
hours. FN /  It is true that during those periods, supply costs   
increase as some firms begin to reach capacity and (in some cases) as   
individual transmission paths become congested. These transitory,   
geographically dispersed costs increase price volatility.  Even so,   
there is no evidence that, during peak periods, any WSCC firms withdraw   
from the market or that any out-of-state suppliers will be   
systematically excluded from the PX.  In fact, price data shows that   
even before FERC issued Order 888 the major California delivery points   
were highly cointegrated during peak periods with the rest of the WSCC.  
  
     C.  The Relevant Intrastate Gas Transportation Market  
  
     Although the applicants and many intervenors combine it with the   
interstate gas market, a separate relevant market can be defined for   
intrastate gas transportation and storage services within southern   
California.  Ten years ago, SoCalGas and PG"&E were the principal   
  
                                  12  
  
<PAGE>  
  
  
suppliers of these services.  Since the completion of their intrastate   
extensions in 1992, Kern River and Mojave pipelines have also competed   
for transportation services to EOPR and related cogeneration loads.    
Private pipelines provide additional competition.  
  
     Despite this recent competition, SoCalGas has maintained   
significant market power over these services. SoCalGas controls most of   
the intrastate capacity within southern California, including all   
transportation facilities located within Los Angeles, Orange and   
Riverside Counties. FN /  Moreover, as the extended kern River and   
Mojave pipeline application process demonstrated,potential suppliers   
face substantial regulatory entry barriers.  A controlling market   
position reinforced by high regulatory barriers to entry is strong   
evidence of market power. FN /  SoCalGas also price discriminates   
between transportation customers, and can sometimes discount without   
Commission approval. FN /  The ability to persistently price   
discriminate between similarly situated customers also implies that a   
seller possesses market power. FN /  
  
V.  THE COMPETITIVE EFFECTS  
  
     Mergers are generally categorized as "horizontal," "vertical," or   
"conglomerate."  The competitive effects of a merger are assessed by   
first defining the relevant markets and then determining whether the   
merged entity will have an enhanced ability to profitably skew price or   
output from competitive levels. FN /  Under the DOJ/FTC Guidelines,   
the effects of a "horizontal" merger depend upon several related   
factors, including changes in concentration levels, entry conditions,a   
nd efficiency enhancements.  The government's vertical merger guidelines   
"recognize only three possible anticompetitive effects:  that vertical   
mergers might create entry barriers, facilitate horizontal coordination,   
or allow a regulated firm to evade rate regulation." FN /  A failure   
to properly define the relevant markets is fatal to a plaintiff's prima   
facie case. FN /  A plaintiff must also demonstrate "probabilities"--  
not "ephemeral possibilities"--of anticompetitive effects within those   
markets. FN /  
  
  
     A.  The Vertical Integration of SoCalGas Intrastate  
         Gas Transmission and SDG&E Wholesale Electricity Operations  
  
     Although this merger has some horizontal feathers, the primary link   
between the applicants is the gas transportation services SoCalGas   
provides to SDG&E.  Those transportation services are an important   
component in the cost of generating electricity to SDG&E and other gas-  
fired plants in southern California.  Vertical integrations do not,   
however, "automatically have an anticompetitive effect." FN /  This is   
because, unlike horizontal consolidations, vertical mergers do not   
eliminate competitors from the market. FN /  The vertical integration   
resulting from this merger, in particular, will not adversely affect   
competition in the wholesale electricity market because Agreement B   
negates any incentive of SDG&E (or the merged entity) to manipulate PX   
prices.  
  
                                  13  
  
<PAGE>  
  
  
  
     Even without the restrictions of Agreement B, however, out-of-state   
suppliers would defeat any attempt by the merged entity to manipulate   
the price of wholesale electricity sold in southern California. FN /    
The total capacity of plants supplied by SoCalGas is 15,837 MW.  These   
plants will compete with aggregate WSCC, out-of-state capacity exceeding   
100,000 MW FN / for California's relatively modest "residual" demand.   
Because out-of-state suppliers account for their opportunity costs,   
FN / the resulting PX price will equal the prevailing WSCC spot price.   
Price data -- as opposed to simulation models -- demonstrate that WSCC   
prices are competitively determined.  Neither SoCalGas nor the merged   
entity will have the ability to profitably deviate prices from   
competitive levels within that market.  
  
     1.  The Intervenors' Vertical Integration Models  
  
     The Intervenors have failed to demonstrate with "probabilities"   
that the integration of these vertically-related operations will have   
adverse competitive effects in any relevant market.  Relying upon an   
engineering simulation instead of price data, FN / the Edison"swing   
capacity model" discussed above ignores opportunity costs incurred by   
low cost producers and fails to define a cognizable relevant market.    
Similarly, SCUPP cites a vertical integration model which assumes that   
inputs are consumed only by suppliers in the endproduct market. FN /    
That assumption does not hold in this case, where core and other noncore   
customers consume the vast majority of the gas transportation input gas-  
fired plants used to generate the wholesale electricity endproduct.    
Because both models assume that all suppliers employ the same technology   
to produce the endproduct, they also fail to account for other sources   
of competition in the wholesale market (e.g., hydro and coal general   
plants.) FN /  Finally, and most important, neither model reflects the   
incentives of suppliers offering a price-regulated output, such as   
electricity sold by the merged entity under Agreement B.  
  
     2.  Futures Markets  
  
     Edison, SCUPP and other intervenors also allege that the merged   
entity could "unfairly benefit" from vertical integration by   
manipulating wholesale electricity prices after it purchased contracts   
in the futures markets. FN /  Thus, they contend, the merged entity   
would essentially trade on "inside" information. FN /  As before,   
however, the merged entity would still be unable to manipulate wholesale   
prices and the merger would not enhance any existing ability of SoCalGas   
to profit in the futures markets. FN /  Moreover, adverse effects upon   
competition within the futures markets -- which are characterized by   
their liquidity and ease of entry and exit FN / -- are extremely   
unlikely. FN /  In any event, the hypothetical conduct would be   
unlawful under the Commodity Futures Trading Act.  
  
     3.  The Kern River and Mojave Pipeline Purchase Options  
  
     Kern River claims that the merged entity can extract increased   
supracompetitive profits in the wholesale electricity market by   
exercising its options to purchase in 2012 the   
  
                                   14  
  
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California operations of the Kern River and Mojave pipelines. FN /    
This theory, which relies upon the swing capacity model, again   
overstates the significance of gas-fired generation and ignores the   
ability of an independent SoCalGas to obtain available supracompetitive   
profits. FN /  
  
     Kern River also ignores the competitive nature of the purchase   
options, whose effects should be assessed from the perspective of the   
original settlement agreements.  Economic efficiency considerations   
require courts to establish rights and obligations "ex ante;" i.e., on   
the date on which a crucial choice was made. FN /  In 1987, SoCalGas   
and PG&E dominated transportation service markets in southern   
California.  The purchase options, which the applicants contend were   
integral to the settlements between the parties, permit Kern River and   
Mojave to compete for those services from 1987 to 2012.  If the parties   
had not settled their dispute, entry by those two pipelines would have   
been delayed and the subsequent competition they furnished would have   
been reduced.  Abrogating the purchase options now would reduce   
incentives of other firms to enter into similar pro-competitive   
settlements in the future.  
  
     In addition, the year 2012 effective date allows purchasers and   
alterative suppliers a substantial period in which to respond the   
possible exercise of these options FN /  In any event, predictions   
about competitive effects 15 years into the future are highly   
speculative, particularly when they concern markets as dynamic as the   
rapidly changing gas industry. FN /  We conclude that the purchase   
options, which contemplated increased competition within the intrastate   
market and which will not endow the surviving entity with additional   
market power, should not be abrogated by the merger.    
  
     4.  The Applicants' "Remedial Measures"    
  
     Although this vertical integration does not "create" market power,   
it could alter the manner in which SoCalGas exercises its existing   
market power over intrastate transportation services.  SoCalGas now   
exercises market power by discriminating in the price of services   
charged to gas-fired generation plans and other potential "bypass"   
customers.  The merger will not provide new opportunities for profitable   
price or non-price FN / discrimination.  We are also not aware of any   
evidence that the merged entity would use its market power to require   
simultaneous competitive entry into the gas and electricity markets or   
to facilitate coordination between SDG&E and other WSCC suppliers.  
  
     In fact, the remedial conditions proposed by the applicants will   
reduce the ability of the merged entity to engage in either price or   
non-price discrimination.  Those proposed conditions expand FERC's   
requirement that Order 497 govern intrastate transactions between   
SoCalGas and SDG&E and other marketing affiliates.  Order 497 generally   
requires interstate gas pipelines to treat their marketing and other   
affiliates and "similarly situated persons" on a non-discriminatory   
basis.  Here, the applicants will retain their ability to price   
discriminate, but they have agreed to submit any planned discounts to   
the Commission for approval.  In addition, they   
  
                                  15  
  
<PAGE>  
  
  
have agreed to refrain from discriminating in the provision of various   
types of services, including:  the application of tariff provisions;   
transportation scheduling, balancing, storage, or curtailments; the   
processing of transportation requests; the disclosure of transportation   
information; and the offering of intrastate transportation discounts.   
FN /  
  
     B.  Horizontal Effects in the Intrastate Gas Transportation, "Gas   
         Procurement" and Retail Gas Markets                              
               
  
     The principal horizontal feature of this merger is the consolidated   
ownership of the applicants' gas procurement functions. FN /  Both of   
the applicants purchase gas in the interstate market for their core and   
some of their noncore customers and SDG&E makes significant purchases   
for its electricity generation plants.  In 1996, SoCalGas and SDG&E gas   
purchases averaged 963 FN /and 255 FN / MMcf/d, respectively, while   
total production in the relevant interstate market averaged 24,000   
MMcf/d. FN /  Thus, SoCalGas and the merged entity would account for   
approximately four and five percent, respectively, of purchases within   
the unconcentrated four basin gas market.  We assume for within the   
unconcentrated four basin gas market.  We assume for purposes of   
analyzing this merger that SoCalGas is among the largest purchasers in   
the western United States.  Following the Guidelines, we conclude from   
this assumed distribution of buyers that the merger of the two companies   
will have an insignificant effect upon competition in the interstate gas   
market. FN /  
  
     The merger will also combine the two companies' partially   
deregulated non-core gas retailing functions. FN /  Although both   
applicants currently distribute gas to non-core customers, PUC rules   
significantly restrict the ability of SoCalGas to compete for such sales   
within its service area. FN /  Moreover, neither firm has made non-  
core sales outside its service area. FN /  In 1996, total non-core   
sales in southern California averaged 1821 MMcf/d. FN /  SoCalGas and   
SDG&E sales to non-core customers during that year averaged 58 and 144   
MMcf/d, respectively. FN /  We conclude that the consolidation of   
these non-competing, relatively limited operations will not adversely   
affect competition for non-core retail services.    
  
                             16  
  
<PAGE>  
  
  
     C.  Potential Competition for Intrastate Gas Transportation and   
         Electric Retail Services  
  
     This merger may eliminate SDG&E as a limited potential competitor   
in the market for intrastate gas transportation services.  The demand   
for intrastate transportation in southern California is approximately 1   
Bcf per day for SoCalGas core customers, between 125 and 300 MMcf per   
day for SDG&E, FN / and approximately 1 Bcf per day for other noncore   
customers.  The Project Vecinos agreement between the applicants and   
other evidence suggests, although not conclusively, that the threat of   
independent entry by SDG&E has provided some discipline to this less   
than fully competitive, high-entry-barrier market.  We recommend that   
the Commission consider requiring SoCalGas to auction a volume of   
transmission rights over its system equal to the average SDG&E load.  
  
     The courts recognize two theories under which a merger between   
potential competitors may be challenged.  The actual potential   
competition doctrine -- which is so speculative that it has never   
provided the basis for a successful challenge FN / -- applies if the   
acquiring firm would have "probably" entered a concentrated market,   
thereby providing significant procompetitive effects. FN /  SDG&E may   
present a "threat of competitive entry by a bypass pipeline" and it may   
be an "attractive anchor customer" for pipeline construction "within"   
California. FN /  The courts, however, require showings of an intent   
to enter FN / that go beyond evidence of generalized abilities and   
incentives.  To avoid speculation, FN / they also require a showing   
that entry will occur, not in the "reasonably foreseeable" future, but   
in the near future. FN /  We are not aware of any evidence that SDG&E   
had current or even reasonably contemporaneous plans to enter the gas   
transportation market.  
  
     1.  The Perceived Potential Competition Doctrine  
  
     A merger may also be challenged if the acquiring firm is a   
"perceived potential entrant."  This doctrine applies if the acquiring   
firm is "(1) perceived by existing firms as a potential independent   
entrant and (2) has exercised a tempering impact on the competitive   
conduct of existing sellers." FN /  In this case, SDG&E may have   
tempered the pricing of intrastate transportation services by   
threatening to bypass the SoCalGas system.  Thus, in 1988, SDG&E   
considered building a pipeline to directly interconnect with the El Paso   
system. FN /  SDG&E considered at least two other bypass proposals   
during the next six years. FN /  Finally, in 1994, the parties entered   
into their Project Vecinos Revenue Sharing Agreement, where SoCalGas   
agreed to reduce transportation rates by an amount equal to:  "the   
potential benefits that SDG&E would have received had it partially or   
totally bypassed SoCalGas by utilizing transportation services from a   
pipeline constructed in Baja California. FN /  
  
     Despite this tempering effect, it is unclear if SDG&E is a current   
entry threat or if the Kern River pipeline and other suppliers view   
SDG&E as a potential entrant to the intrastate market.  Because the   
Revenue Sharing Agreement remained confidential until recently, FN /   
these other suppliers may not have recognized that SDG&E was considering   
bypass alternatives.  Similarly, because SDG&E would have to build   
dedicated facilities to bypass SoCalGas, SDG&E entry or withdrawal may   
not affect price or output levels elsewhere in the market.  More   
important, SDG&E may not still be a potential supplier of intrastate   
services.  Although SDG&E would constitute a valuable "anchor tenant,"   
FN / perceived potential competition doctrine applies to suppliers,   
not customers, which have the ability to compete with their merging   
partners.  Unfortunately, the record fails to clarify these issues.  
  
     If the Commission does conclude that SDG&E is a significant   
potential competitor, we recommend that it require the merged entity to   
auction transmission rights over the SoCalGas system equal in volume to   
the average SDG&E load which will be withdrawn from the intrastate   
market.  Following SCUPP, we suggest that buyers of those rights obtain   
undivided interests based on contract paths "from an established point   
of receipt to an established point of delivery." FN /  Those auctioned   
rights will constitute an alternative source of intrastate   
transportation, thereby offsetting the loss of SDG&E as a potential   
competitor.  We propose an auction, with a long run marginal cost (LRMC)   
minimum bid, because it will ensure that the highest valued users   
receive these rights and because it will help reimburse SoCalGas for   
losses in the value of its system.  Finally,m because the competitive   
effects of SDG&E withdrawal from the intrastate market appears somewhat   
isolated, we suggest that the Commission establish this auction in   
separate proceedings following the completion of this merger.  
  
     2.  The Retail Electric Services Market  
  
     IID alleges that SoCalGas is a potential competitor for retail   
electric sales within its gas distribution area. FN /  For the actual   
potential competition theory to apply, entry must have a deconcentrating   
or other significant procompetitive effect.  This predicate effect will   
not exist "if there are numerous potential competitors," because the   
elimination of one of many "would not be significant." FN /  
  
     As the applicants demonstrate, however, Edison and the Los Angeles   
Department of Water & Power already provide retail services within that   
region and 92 other companies, including eight of the leading firms in   
the industry, have already registered as Energy Service Providers with   
the Commission. FN /  Furthermore, SoCalGas has no competitive retail   
affiliates and limited experience within the electricity industry.   
FN /There is also no evidence that Pacific had "actual" plans to   
provide such services or that Pacific's entry would have had significant   
procompetitive effects in any retail electricity markets.  We conclude   
that the elimination of SoCalGas as a potential supplier would not have   
a significant effect upon competition in any California retail   
electricity market.  
  
  
                                18  
  
<PAGE>  
  
  
VI.  RETENTION OF JURISDICTION  
  
     This office recognizes the uncertainty of the transition to the   
restructured system of wholesale electricity sales and transmission that   
will go into effect on January 1, 998.  Although we believe it is   
unlikely, we acknowledge the possibility that out-of-state sellers will   
fail to discipline the pricing of electricity sold by the merged entity.   
 We do expect, however, that SoCalGas will continue to provide   
intrastate transportation services to the vast majority of gas-fired   
generation plants within southern California.  In the unlikely event   
that the merged entity can manipulated the PX price, plants supplied by   
the Kern River and Mojave pipelines and plants subject to "take-or-pay"   
contracts may provide valuable competition in the restructured market.    
Accordingly, we recommend that the PUC, during its continuing review of   
the competitiveness of the wholesale market, specifically examine the   
pricing practices of the merged entity and the relationship between   
those practices and the operation of the Commission consider retaining   
jurisdiction over this merger for a period of two years for the purpose   
of reexamining the limited questions of whether:  (1) the merged entity   
has used its intrastate system to manipulate the price of electricity it   
sells in the wholesale market; and (2) whether abrogating the Kern River   
and Mojave pipeline options and the take-or-pay options would limit the   
ability of the merged entity to engage in such practices.  
  
VII.  CONCLUSION  
  
     The only difficult factual issue raised by this merger is whether   
the applicants are potential competitors in the intrastate gas   
transportation market.  The merger has no adverse "horizontal" effects   
because competition between the applicants is limited to such areas as   
the vast interstate gas market and non-core gas retailing.  Vertical   
effects are also negligible because wholesale electricity offered by the   
merged entity will be subject to the constraints of comprehensive price   
regulation mandated by ISO Agreement B.  In addition, out-of-state WSCC   
sellers, which are highly integrated with southern California during   
both peak and off-peak hours, would defeat any attempt by the merged   
entity to manipulate wholesale electricity prices.  Edison's swing   
capacity model comes to an opposite conclusion by overlooking the   
fundamental concept of opportunity costs.  
  
     Some evidence does suggest that SDG&E is a potential supplier of   
intrastate gas transportation services.  If the Commission finds that   
evidence persuasive, we recommend that it consider, in proceedings   
subsequent to the completion of this merger, requiring SoCalGas to   
auction a volume of intrastate transmission rights equal to the SDG&E   
load which will be withdrawn from the market by this merger.  This   
remedy would introduce competition into the intrastate market, thereby   
offsetting any adverse effect of the merger and reducing incentives to   
construct duplicative, "uneconomic bypass" facilities.  Finally, we   
recommend that the Commission retain limited jurisdiction over this   
matter for a period of two years during which it can review whether the   
merged entity uses its intrastate system to manipulate the price of   
electricity it sells in the wholesale market.  
  
                                 19  
  
<PAGE>  
  
  
FN ./ See San Diego Gas & Electric Co., 79 FERC &61,372 (1997) ("FERC   
June 1997 Merger Order").  
FN ./ Exhibit 14, Chapter 3, at 11 ("Stewart Rebuttal").  
FN ./ Stewart Rebuttal at 9-10.  
FN ./ See Opinion of the Attorney General on Competitive Effects of   
Proposed Merger between Pacific Telesis Group and SBC Communications,   
Inc., 79 Cal.Ops.Atty.Gen. 301 (1996); Opinion of the Attorney General   
on Competitive Effects of Proposed Merger of American Telephone &   
Telegraph Company and McCaw Cellular Communications, Inc., 77   
Cal.Ops.Atty.Gen. 50 (1994); Opinion of the Attorney General on   
Competitive Effects of Proposed Merger of GTE and Contel Corporations,   
Submitted Pursuant to PU Code Section 854(b)(2); Opinion of the Attorney   
General on the Proposed Acquisition of San Diego Gas and Electric   
Company by SCEcorp, the Parent of Southern California Edison Co., 73   
Cal.Ops.Atty.Gen. 366 (1990).  
FN ./ Section 854(b) provides in pertinent part:  
  
Before authorizing the merger, acquisition or control of any electric,   
gas, or telephone utility organized and doing business in this state . .   
 ., the commission shall find that the proposal does all of the   
following:  
  
(1)     Provide short-term and long-term benefits to ratepayers.  
  
(2)     Equitably allocates, where the commission has ratemaking   
authority, the total short-term and long-term forecasted economic   
benefits, as determined by the commission, of the proposed merger,   
acquisition, or control, between shareholders and ratepayers.    
Ratepayers shall receive not less than 50 percent of those benefits.  
  
(3)      Not adversely affect competition.  In making this finding, the   
commission shall request an advisory opinion from the Attorney General   
regarding whether competition will be adversely affected and what   
mitigation measures could be adopted to avoid this result.  
FN ./ Applicants' Opening Brief, at 86.  These QF facilities included 67   
MW capacity wastewood, 30 MW capacity hydroelectric, and 37 MW capacity   
landfill projects.  Application at 16 n.11.  
FN ./ SDG&E wholesale sales are "economy energy sales and short-term   
sales of capacity."  FERC June 1997 Merger Order, mimeo at 6.  
FN ./ Exhibit 2 at 30 ("Hieronymous Direct").  
FN ./ According to SCUPP, SDG&E "represents a total load of about 350   
MMcfd."  Exhibit 105 at 52 ("Yap Direct").  
FN ./ Hieronymous Direct at 30.  In fact, San Diego Gas & Electric   
purchases its gas supplies from out-of-state producers, and transports   
them to San Diego over interstate pipelines and the SoCalGas intrastate   
system.  Exhibit 104 at 6 ("Taylor Direct").  
FN ./ Application at 30.  
FN ./ The applicants state that AIG is the nation's 15th largest gas   
marketer and the 19th largest   
  
                             20  
  
<PAGE>  
  
  
electricity marketer.  Exhibit 14, Chapter 1 at 44 ("Hieronymous   
Rebuttal").  Edison claims that AIG is the tenth largest gas marketer in   
the United States.  Exhibit 209 at 17 ("Carpenter Rebuttal").  
FN ./ Hieronymous Direct 6.  
FN ./ Following "guidance" proceedings, FERC conditionally approved the   
ISO and PX on October 30, 1997.  Pacific Gas and Elec. Co., San Diego   
Gas & Elec. Co., and Southern Cal. Edison Co.  81 FERC &61,122 (1997)   
("FERC October 1997 ISO/ PX Order").  See Pacific Gas and Elec. Co., San   
Diego Gas & Elec. Co., and Southern Cal. Edison Co., 77 FERC &61,204   
(1996) ("FERC November 1996 ISO/ PX Order"); Pacific Gas and Elec. Co.,   
San Diego Gas & Elec. Co., and Southern Cal. Edison Co., 77 FERC &61,265   
(1996) ("FERC December 1996 ISO/ PX Order"), and Pacific Gas and Elec.   
Co., San Diego Gas & Elec. Co., and Southern Cal. Edison Co., 80 FERC   
&61,128 (1997) ("FERC July 1997 ISO/ PX Order").   
FN ./ Exhibit 2, Attachment A, Chapter III at III-9:  Southern   
California Edison Company and San Diego Gas & Electric Company Report on   
Horizontal Market Power Issues ("Hieronymous MBR").  
FN ./ Hieronymous Direct at 5.  Firm purchases during 1996 were 1,434   
MW.  Id.  
FN ./ Hieronymous Direct at 5 n.7.  
FN ./ "After the transition period, the Companies' participation in the   
PX will be voluntary."  FERC December 1996 ISO/ PX Order, mimeo at 2.  
FN ./ End users who pay exit fees, however, can "directly access"   
suppliers in the wholesale market which are "interconnected to the ISO   
grid (directly or through wheeling arrangements)."  Exhibit 2,   
Attachment A at I-5.  
FN ./ After January 1, 1998, "utilities that join the ISO and PX will   
sell the output from their generating stations into the PX."  Yap Direct   
at 75.  "A uniform market-clearing price for PX buyers in a congestion   
management zone will be established based on the cost of the marginal   
generator in the zone for each hour."  FERC December 1996 ISO/ OX Order,   
mimeo at 3.  
FN ./ The Commission ordered Edison and PG&E to sell at least 50   
percent of their fossil-fuel-fired generation capacity.  FERC December   
1996 ISO/ PX Order, supra, at 26.  PG&E will divest nearly all of its   
gas-fired capacity.  Exhibit 125, Chapter 2 at 77 ("Graves Direct").    
Edison's Board of Directors has voted to divest all 9,600 MW of its gas   
generation.  Id.  
FN ./ Graves Direct at 84.  
FN ./ The schedules devised by the PX, however, "are subject to   
adjustment by the ISO for reliability and congestion management   
purposes."  FERC November 1996 ISO/ PX Order, supra, at 61,804.  
FN ./ "The price received for energy sold into the PX will be   
established through a 'second price auction.' . . . [Thus,] the highest   
cost unit that is needed in order to meet the hour's demand will   
establish the price for power in that hour."  Yap Direct at 75.  
FN ./ "Must-run" units, would be "certain generating units the   
Companies would designate to provide necessary support services to the   
transmission system at cost-based rates."  FERC December 1996 ISO/ PX   
Order, mimeo at 34-35 n.48.  Under "call contracts" proposed by the   
  
                             21  
  
<PAGE>  
  
  
IOUs, these must-run units "would be paid a reservation fee or demand   
charge to be available.  When that unit is required by the ISO to   
generate for reliability purposes, it would be paid its variable   
operating costs.  When it is not required to generate, it would be   
treated like any other generator, i.e., it would be dispatched based on   
its bid and paid the market price."  FERC December 1996 ISO/ PX Order,   
mimeo at 25-26.  
FN ./ ISO Agreement B discussed below "provides an availability payment   
which covers the annual contribution to the initial capital investment,   
fixed fuel costs, fixed annual O&M costs, and annual auxiliary power   
costs; it also provides a payment for running costs when a unit is   
called to run."  FERC October 1997 ISO/ PX Order, supra, at 251.  
FN ./ FERC October 1997 ISO/ PX Order, supra, mimeo at 219-20.  SDG&E   
expects to enter into "Agreement B," which "is intended for units that   
can participate in the market profitably in some periods but not in   
others."  
FN ./ FERC December 1996 ISO/ PX Order, mimeo at 34 n. 48.  "In the   
restructured California energy market, at least during the initial years   
of operation, nuclear units, QF contracts and pre-existing wholesale   
purchase contracts will not be bid into the PX and market-based prices   
will not apply to their output.  Instead, these will be regulatory must-  
take resources scheduled by the ISO."  Exhibit 2, Attachment B at &30:    
Affidavit of Joe D. Pace ("Pace MBR").  
FN ./ Pace MBR at &27.  
FN ./ Hieronymous MBR at III-15.  
FN ./ ISO Agreement A will actually govern SDG&E from January 1, 1998   
to April 1, 1998, after which Agreement B will be effective.  "[T]he ISO   
has committed to revise the Agreement [B] by October 31, 1998."  FERC   
October 1997 ISO/ PX Order, supra, mimeo at 225.  
FN ./ FERC October 1997 ISO/ PX Order, supra, mimeo at 251; Hieronymous   
Rebuttal at 5 n.1.  
FN ./ Proposed Decision of ALJ Minkin, A.96-08-001, slop op. at 50   
(Oct. 20, 1997).  
FN ./ FERC October 1997 ISO/ PX Order, supra, mimeo at 233-235.  
FN ./ / An ISO "Oversight Board" will (1) establish nominating/   
qualification procedures and determine the composition of the board   
representation and select the ISO and PX Governing Board members and (2)   
serve as a permanent appeal board for reviewing ISO Governing Board   
decisions.  FERC November 1996 ISO/ PX Order, supra, at 61,817.  
FN ./ See Hieronymous Direct at 21.  
FN ./ FERC November 1996 ISO/ PX Order, supra at 61,799.  
FN ./ See FERC July 1997 ISO/ PX Order, supra, at 26-27; FERC November   
1996 ISO/ PX Order, supra, at 61,828-61, 834 (discussing congestion   
pricing).  
FN ./ Stewart Rebuttal at 4.  
FN ./ Line 401 runs from the California-Oregon border at Malin to the   
Kern River Station.  That line, which went into service on November 1,   
1993, has an average annual firm capacity of 755 MMcf per day.  
FN ./ Stewart Rebuttal at 4.  Edison claims, though, that SoCalGas does   
not "list Hector as a delivery point."  Carpenter Direct at 37-38.  
  
                                22  
  
<PAGE>  
  
  
  
FN ./ Stewart, Rebuttal at 4.  IID estimates that the system capacity   
is 3,700 MMcfd.  Exhibit 104 at 23 ("Taylor Direct").  
FN ./ Stewart Rebuttal at 9.  
FN ./ Taylor direct at 5; Stewart Rebuttal at 3.  See Yap Direct at 69.   
 The SoCalGas "noncore throughput excluding SDG&E's load exceeds 1 bcf/   
d."  Stewart Rebuttal at 32.  
FN ./ Exhibit 115 at 25 ("Roach Direct"); Taylor Direct at 6.  
FN ./ Id.  
FN ./ SCUPP alleges that the intrastate system is an "essential   
facility."  YAP direct at 65.  
FN ./ Stewart Trans. at 2595.  
FN ./ Stewart Trans. at 2556.  
FN ./ SoCalGas estimates core demand from a statistical model and   
noncore demand from gas nomination information.  Stewart Rebuttal at 5.  
FN ./ "[O]ut-of-state sources supplied the vast majority --   
approximately 84% -- of the total demand in southern California in   
1996."  Carpenter Direct at 21.  
FN ./ Stewart Rebuttal at 5.  
FN ./ See Stewart Trans. at 2560-2563.  See also Stewart Trans. at   
2407-2411, 2414 (discussing the consequences to SoCalGas under the Gas   
Cost Incentive Mechanism (GCIM) "of not meeting injection or withdrawal   
targets or storage levels").  
FN ./ Stewart Rebuttal at 5.  "SoCalGas owns all of the approximately   
115 Bcf of gas storage in southern California.  SoCalGas reserves 70 Bcf   
of this capacity for its core customers, reserves 5 Bcf for balancing,   
and markets the remaining 40 Bcf to noncore customers."  Taylor Direct   
at 44.  
FN ./ Carpenter Direct at 49.  
FN ./ Stewart Trans. at 2401; Stewart Rebuttal at 7.  
FN ./ A custody cut occurs when SoCalGas notifies an interstate   
pipeline that it cannot accept the full amount of gas nominated for   
delivery at a particular receipt point.  Approximately 600 custody cuts   
occurred in 1995 and 1996.  SoCalGas matches the window at that receipt   
point by pro-rating shippers' nominations.  Carpenter Direct at 34.  
FN ./ See Carpenter Direct at 31-37; Stewart Trans. at 2551-2557.    
SoCalGas imposes Rule 30 when its system is overnominated.  Carpenter   
Direct at 35.  SoCalGas has "called" Rule 30 events six times in 1997.    
Carpenter Direct at 36.  
FN ./ Stewart Trans. at 2406-2409, 2547-2555; Stewart Rebuttal at 6-7.  
FN ./ Re Gas Utility Procurement Practices and Refinement to the   
Regulatory Framework for Gas Utilities, D.91-11-025, mimeo at 20; 41   
CPUC 2d 668 (1991) (CPUC 1990).  See Exhibit 14, Chapter 2 at 9 n.24   
("Leitzinger Rebuttal").  
FN ./ SoCalGas estimates that it posts transactions on GasSelect   
"within the hour."  Stewart Trans. at 2578.  
FN ./ Stewart Trans. at 2575-2576, 2583.  
FN ./ Stewart Trans. at 2577.  
FN ./ See Broadman and Kalt, How Natural Is Monopoly?  The Case of   
Bypass in Natural Gas Distribution Markets, 6 Yale J. on Reg. 181   
(1989); Kelly, Intrastate Natural Gas Regulation:    
  
                              23  
  
<PAGE>  
  
  
Finding Order in the Chaos, 9 Yale J. on Reg. 365 (1992); Pierce,   
Intrastate Natural Gas Regulation:  An Alternative Perspective, 9 Yale   
J. On Reg. 407 (1992).  Because PG&E and SoCalGas have "exclusive   
service territories," PG&E cannot "offer any customer in SoCalGas"   
service area direct connection to Line 300-A or -B."  Stewart Trans. at   
2776-2777.  
FN ./ Exhibit 114, Chapter 1, at 5-7 ("Larsen Direct"); Exhibit 114,   
Chapter 2 at 9 ("Wadlington Direct"); Stewart Rebuttal at 34-35 ("There   
appears to be no dispute that Kern River only acceded to provide   
SoCalGas the option to purchase its California facilities as a means to   
induce SoCalGas and the Commission to withdraw their opposition before   
the FERC"); Stewart Trans. at 2524-2525, 2783-2786; Roach Direct at 63;   
Yap Direct at 58-60.  
FN ./ Roach Direct at 25.  
FN ./ Hieronymous Direct at 28.  
FN ./ See Taylor Direct at 12, 51 ("SoCalGas provides gas   
transportation to SDG&E at less than the regulated rate because SDG&E   
could bypass SoCalGas gas transportation."); Yap Direct at 52-53.  But   
see Stewart Rebuttal at 38 (contending that SDG&E merely shifted risk by   
agreeing to pay a higher demand charge and lower volumetric rate).  
FN ./ Larsen Direct at 9.  See Stewart Trans. at 2744 ("we compete   
vigorously against bypass and against all kinds of bypass and against   
all kinds of bypass including by wire and everything else"), 2772-2775   
(referring to "local gas production as a form of competition," and   
competition from "municipalization efforts similar to Vernon's");   
Leitzinger Rebuttal at 30 ("new construction" has "been a source of   
competitive discipline in the pipeline business"); Roach Direct at 69   
(estimating that Kern River customers pay approximately 18% less for   
their transportation services).  
FN ./ Yap Direct at 50.  
FN ./ Stewart Rebuttal at 31.  See Leitzinger Rebuttal at 31.  
FN ./ Stewart Rebuttal at 20.  
FN ./ The CPUC established the ITCS in Decision No. 91-11-025, Re Gas   
Utility Procurement Practices and Refinement to the Regulatory Framework   
for Gas Utilities, 41 CPUC 2d 668 (1991).  The ITCS for any shipment   
equals the difference between "the maximum rates charged by the   
interstate pipelines for firm capacity" ("as-billed rate") and the   
actual shipping rate.  The PUC capped ITCS charges recoverable from core   
customers at 10 percent of the core's total capacity reservation costs.   
 D.91-11-025, mimeo at 51.  Noncore customers, including Edison, pay all   
additional ITCS costs.  The PUC annual "BCAP" proceedings establish the   
size of these ITCS funds and transfer balances from year to year.  The   
amount SoCalGas and other intrastate pipelines can recover from ITCS   
funds is also limited, in some cases, by settlements which have   
discounted the maximum rate which the end-user must pay.  Since May 1,   
1996, SoCalGas has also offered "released" capacity on interstate   
pipelines at rates "posted" on "electronic bulletin boards" for all   
requirements beyond those of its core customers.  As SoCalGas releases   
capacity, resulting revenues reduce the ITCS surcharge amount.  
FN ./ See Stewart Trans. at 2744.  
FN ./ Leitzinger Rebuttal at 8.  
  
                             24  
  
<PAGE>  
  
FN ./ Doane and Spulber, Open Access and Evolution of the U.S. Spot   
Market for Natural Gas, 37 J.L. & Econ. 477, 479 (1994); Black and   
Pierce, The Choice between Markets and Central Planning in Regulating   
the U.S. Electricity Industry, 93 Columbia L.Rev. 1339, 1343 (1993) (the   
electricity industry combines "production of wholesale electricity;   
transmission of bulk power over high-voltage lines from power plants to   
local geographic areas; and distribution of power to retail customers").  
FN ./ DOE/ EIA, Natural Gas 1996, Issues and Trends, at 40 (Washington,   
D.C. Dec. 1996).  Thus, each "pipeline was a link in a supply chain from   
a field whose resources were dedicated by contract to that line to the   
distribution company which was obligated by contract to buy gas from the   
pipeline."  DeVany and Walls, The Emerging New Order in Natural Gas, at   
5 (Quorum Books 1995).  
FN ./ Order No. 636, Pipeline Service Obligations and Revisions to   
Regulations Governing Self-Implementing Transportation and Regulation of   
Natural Gas Pipelines After Partial Wellhead Decontrol under Part 284 of   
the Commission's Regulations, F.E.R.C. Stats. & Regs. (CCH) &30,939, at   
30,396 (1992).  See Black and Pierce, supra, at 1351; Pierce,   
Reconstituting the Natural Gas Industry from Wellhead to Burnertip, 9   
Energy L.J. 1 (1988).  
FN ./ The 1978 Natural Gas Policy Act, together with FERC Order 436 and   
the 1989 Decontrol Act, removed all controls over the wellhead price of   
natural gas.  Order 636, supra, at 30,397.  "Take or pay" disputes   
subsequently arose, however, because price regulation was retained for   
"old," "high cost," and other subcategories.  "By the end of 1986, $10   
billion worth of contracts were involved in take-or-pay disputes."    
Doane & Spulber, supra, at 483.  
  
     "Take-or-pay liabilities arise from a typical provision in a   
contract between an LDC and a gas producer which obliges the LDC to take   
a minimum volume of gas from the producer or pay for it anyway."  Kelly,   
supra, 9 Yale J. on Reg. at 361 n.16.  Order 436 "gave pipelines facing   
mounting take-or-pay liability the right to convert their sales   
obligations under their wellhead contracts to transportation   
entitlements from other suppliers."  Fagan, From Regulation to   
Deregulation:  The Diminishing Role of the Small Consumer within the   
Natural Gas Industry, 29 Tulsa L.J. 707, 721 (1994).  FERC Order 500   
attempted to resolve further disputes by, among other things, allowing   
the establishment of a "gas inventory charge" (GIC).  Lyon and Hackett,   
Bottlenecks and Governance Structures:  Open Access and Long-term   
Contracting in Natural Gas, 9 J. Law. Econ. & Org. 380, 387 (1993).    
Order 500, however, "fared poorly on judicial review."  United   
Distribution Cos. v. F.E.R.C., 88 F.3d 1105, 1125-26 (D.C. Cir. 1996).  
FN ./ DOE/ EIA, supra, at 40.  
FN ./ Leitzinger Rebuttal at 16.  
FN ./ Leitzinger Rebuttal at 25.  
FN ./ Regulation of Natural Gas Pipelines after Partial Wellhead   
Decontrol, F.E.R.C. Stats. and Regs. &30,665 (1985), vacated and   
remanded, Associated Gas Distributors v. FERC, 824 F.2d 981 (D.C. Cir.   
1987).  
FN ./ Doane & Spulber, supra, at 477; Order 636, supra, at 30,396.  
  
                             25  
  
<PAGE>  
  
  
  
FN ./ "Among the central goals of Order Nos. 436 and 636 has been the   
conversion of bundled sales arrangements into separate transportation   
and gas sales transactions.  On the transportation side, the Commission   
recognized that while much of the nation's interstate pipeline capacity   
was reserved for firm transportation those transportation rights   
ultimately were not being utilized . . . .  FERC therefore sought to   
develop an active 'secondary transportation market,' with holders of   
unutilized firm capacity rights reselling them in competition with any   
capacity offered directly by the pipeline."  United Distribution Cos. v.   
F.E.R.C., Circuit Review:  September 1992-August 1993, 62 Geo.   
Wash.L.Rev. 718, 740 (1994) ("Order 636 mandates pipelines to 'unbundle'   
their gas services" and "offer the same quality of service to all   
potential customers, irrespective of where the gas was purchased.")  
FN ./ "Brokering arrangements allowed a holder of firm capacity rights   
(the "releasing shipper") to sell those rights to a 'replacement   
shipper.'  The transaction took place directly between the two parties   
and the replacement shipper essentially stepped into the shoes of the   
releasing shipper."  United Distribution Cos., supra, 88 F.3d at 1149.  
FN ./ Id.  
FN ./ Edison alleges that, in developing that offer, SoCalGas can "take   
as tough a negotiating stance as it wants because there is no regulatory   
requirement for it to release any of the capacity it holds and the ITCS   
guarantees full recovery of all cost associated with the capacity."    
Opening Brief of Southern California Edison, at 40.  Edison further   
alleges that "SoCalGas' minimum bid, minimum take, and other capacity   
release practices -- by withholding capacity from the market -- have the   
potential to raise the price of gas at the southern California border   
from what it otherwise would have been."  Carpenter Direct at 53.  As   
indicated below, however, this theory fails to account for the full   
extent of the competition that exists throughout the four basin   
interstate market.  It also fails to explain how SoCalGas can limit   
supply in a market where unused capacity rights revert to the pipeline,   
which can then sell that capacity as interruptible transportation.    
Leitzinger Rebuttal at 20.  Finally, Edison fails to reconcile its   
theory that SoCalGas capacity releases occur at prices under the initial   
opening offer."  Stewart Rebuttal at 25; Leitzinger Rebuttal at 25.  
FN ./ Leitzinger Rebuttal at 19.  "[E]ach interstate pipeline is   
required to establish and administer an electronic bulletin board   
('EBB') . . .  The EBB carries information about available and   
consummated capacity release transactions.  For example, holders of   
excess firm capacity rights may 'post' their available capacity on the   
EBB . . . .  Pipelines are also required to post on the EBB any firm   
capacity that they have available for sale, where the capacity competes   
for buyers against capacity made available for resale by shippers."    
United Distribution Cos., supra, 88 F.3d at 1150.  
FN ./ United Distribution Cos., supra, at 1150-1151.  FERC requires   
that end users contract with gas producers during "bid week."  Bid week   
"generally occurs about the last week of the previous month."  Exhibit   
353, Vol. I, at 56:2-4 ("Lorenz Depo.").  
FN ./ Leitzinger Rebuttal at 21.  See Yap Direct at 21.  
FN ./ Stewart Rebuttal at 22.  Transwestern and El Paso substantially   
increased the capacity of   
  
                             26  
  
<PAGE>  
  
  
those pipelines in 1991, and again in 1996.  Leitzinger Rebuttal at 24.   
 See Stewart Rebuttal at 23.  
FN ./ PG&E "transports this gas across northern California to an   
interconnection with the SoCalGas system in Kern County, providing   
access to Canadian gas supplies for customers in southern California."    
Taylor Direct at 33.  
FN ./ Leitzinger Rebuttal at 16; Leitzinger Trans. at 3148, 3155.  
FN ./ Following its line 401 expansion, PG&E likewise increased its   
transportation of Canadian gas into California, while announcing plans   
to terminate its 1.14 Bcf/ d capacity contract with El Paso.  Leitzinger   
at 21.  
FN ./ Leitzinger Trans. at 3164.  Edison notes that El Paso and   
Transwestern carry gas to California "from Canada via Northwest   
pipelines."  Carpenter Direct at 21.  
FN ./ Leitzinger Trans. at 3167.  See Samuels, supra, 62   
Geo.Wash.L.Rev. at 722 (Gas service is either provided on a firm or   
interruptible basis.)  
FN ./ Leitzinger Rebuttal at 16.  
FN ./ Leitzinger Rebuttal at Exhibit JJL-6, 24 (discussing "netback   
pricing"); Leitzinger Trans. at 3149-50.  See also Leitzinger Rebuttal   
at 16 ("(T)o compete for southern California customers Canadian   
producers on some occasions agreed to contract pricing involving a   
netback price starting with the price of southwest gas delivered to   
southern California"); Leitzinger Trans. at 3145 ("if the price of   
transportation capacity goes up, it has the effect of lowering the basin   
price").  
FN ./ Black and Pierce, supra, at 1348.  
FN ./ Order No. 888, Promoting Wholesale Competition through Open   
Access Non-Discriminatory Transmission Services by Public Utilities;   
Recovery of Stranded Costs by Public Utilities and Transmitting   
Utilities, F.E.R.C. Stats. & Regs. (CCH) &31,036 (1996).  FERC also   
effectively deregulated non-firm transmission services.  Id. at 31,743.  
FN ./ Black and Pierce, supra, at 1349.  
FN ./ Black and Pierce, supra, at 1350.  
FN ./ Cities of Anaheim, Cal. et al. v. Southern Cal. Edison Co.,,   
1990-2 Trade Cases &69,246 at 64,899-64,900 (C.D.Ca. 1990), aff'd 955   
F.2d 1363 ("Anaheim v. Edison").  
FN ./ Exhibit 379 at 4:  DeVany and Walls, Open Transmission and Spot   
Markets for Power (July 1997) ("DeVany and Walls").  See Hieronymous   
Direct at 16-17 ("the WSCC transmission grid . . . is characterized by a   
great number of interconnections and includes companies with   
transmission ownership and rights covering wide geographic areas.")  The   
WSCC includes two regional transmission groups, the Western Regional   
Transmission Association and the Northwestern Regional Transmission   
Association, both of which require members to provide open access,   
comparable service tariffed transmission services.  WRTA, 71 FERC   
&61,158 (1995); NWRTA, 71 FERC &61,397 (1995).  
FN ./ The WSPP, a power pool consisting of approximately 70 WSCC   
members, allows participating electric utilities to sell economy energy,   
capacity service and transmission service at "rates determined between   
predetermined price floors and ceilings."  WSPP, 55 FERC &61,099 at   
  
                             27  
  
<PAGE>  
  
  
61,300.  In approving the WSPP, FERC set the ceiling rate for power   
sales at 'sellers' forecasted incremental cost plus up to . . . 18.3   
mills/ kWh."  Id. at 61,321.  Because WSPP and other applicable price   
ceilings are rarely binding, however, the vast majority of WSCC sales   
are effectively unregulated.  Hieronymous Trans. at 2971.  See Graves   
Direct at 96 (referring to "(largely) unregulated generation").  
FN ./ Graves Direct at 84.  The annual average WSCC load is 82,000 MW.   
Graves Direct at 79.  
FN ./ The network provides multiple, alternative connections between   
generating plants, substations, and load centers, as well as multiple   
interconnections with other control areas, utilities and regions."    
DeVany and Walls, supra, at 6.  
FN ./ LADWP, for example, obtains power from generation units located   
in the eastern half of Montana.  Hieronymous Direct at 17.  Likewise,   
after January 1, 1998, TRW will obtain power for its 44 California   
facilities from Montana Power Group.  See TRW to Switch to Montana   
Energy Firm, Los Angeles Times (Orange Cty.), Nov. 6, 1997, at D1.  
FN ./ See Hieronymous Trans. at 2973-2974 ("[A] loop flow . . . refers   
to the fact that electrons flow in the path of least resistance   
according to Kirchoff's laws.  And so despite that you have a contract   
path from A to B, the electrons may actually go from A to C to B, or may   
even never get to B as electrons at all, and that's a loop flow.  It   
loops around the area covered by the contract path.").  
FN ./ Hogan, Contract Networks for Electric Power Transmission, 14   
J.Reg.Econ. 211, 215 (1992) (also noting that "[o]ne of the most   
important economic implications of this prevalence of loop flow is that   
the power transmission highway is very unlike other highways, and   
analogies comparing other highways, railroads, or pipelines can be quite   
misleading").  
FN ./ Hieronymous Trans. at 2976.  
FN ./ DeVany and Walls, supra, at 3 n.2.  
FN ./ De Vany and Walls, supra, at 2, 15.  
FN ./ Cointegration is a statistical relationship which "occurs when   
variability over time in two respective data series which cannot be   
associated with a trend in either series individually is closely related   
as between those data series."  Leitzinger Rebuttal at 12.  See Michaels   
and De Vany, Market-Based Rats for Interstate Gas Pipelines:  The   
Relevant Market and the Real Market, 16 Energy L.J. 299, 327 (1995) ("If   
two areas are in the same competitive market, their prices will inhabit   
a band whose width reflects the cost of arbitrage.  Those costs include   
transportation, risk exposure, and information about profitable   
opportunities.  If competition exists, it will quickly bring disparate   
prices back within their arbitrage limits. . . .  If the cost of   
arbitrage varies little over time, two areas are in the same market if   
the difference between their prices is relatively constant.  The   
statistical technique known as cointegration provides a criterion under   
which to determine the relative constancy of such a difference.").  
FN ./ Hieronymous Trans. at 2978.  
FN ./ "Any interfacing utility (or generators/ sellers with access to   
an interface) can sell into the PX and will be treated comparably to   
other market participants operating in the PX area."    
  
                             28  
  
<PAGE>  
  
  
FERC December 1996 ISO/ PX Order, mimeo at 4; FERC July 1997 ISO/ PX   
Order, mimeo at 18 (rejecting a "special settlement rule" and related   
"reciprocal transmission service" requirements).  In our Reply Comments   
of Attorney General of California on Electric Industry Restructuring   
Proposals, R. 94-04-031 (Aug. 24, 1995), this office noted that an   
earlier version of the PX, which prohibited "Direct Access" transactions   
and which did not clearly permit sales into the PX by out-of-state   
suppliers, was vulnerable to coordinated bidding.  We do not believe the   
formulation of the PX approved by FERC contains that defect.  
FN ./ Joskow MBR at II-57 ("Other capacity, including that owned by   
entities other than the IOUs, and all of the IOUs' generating capacity   
that is divested or otherwise brought to market, is free to enter into   
physical bilateral contracts as an alternative to bidding into the PX.    
These contracts will be confidential and presumably could facilitate   
secret price cuts and output expansion that would further undermine the   
potential for coordinated pricing behavior by sellers in the PX.").  
FN ./ Hogan, Contract Networks for Electric Power Transmission, 14   
J.Reg.Econ. 211, 216 (1992).  
FN ./ Nevertheless, FERC conducted such an analysis in one of its   
reviews of the PX and ISO.  See FERC December 1996 ISO/ PX Order, mimeo   
at 22.  
FN ./ In the WEPEX proceedings before FERC, Edison contended that   
"there will in fact be large quantities of resources chasing a   
relatively small residual demand curve."  Joskow MBR at II-51.  In Table   
14 of its submission, Edison noted that its "must-take" resources   
"include [its] nuclear units (2,222 megawatts), its QF purchases (3,688   
megawatts), and its purchases from other utilities (2,002 megawatts)."    
Joskow MBR at II-45.  Demand in "SCE's control area" ranges between a   
low of around 5,670 megawatts and a peak of around 13,500 megawatts.    
Accordingly, Edison roughly estimated that residual demand in its   
control area will vary between 837 and 5499 megawatts.  PG&E faces   
similar supply and demand schedules.  These amounts are a small   
percentage of supplies available from California and out-of-state   
suppliers in the wholesale market.  
  
     In fact, Edison argued that the capacity of the transmission system   
connecting California to out-of-state suppliers easily satisfies demand.   
Thus, for Edison, the lines from the desert Southwest "were never   
constrained and [have been] never even particularly close to being   
constrained" (Joskow MBR, at II-20) and the capacity of North to South   
lines have never been fully loaded.  Joshkow MBR, at II-20.  similarly,   
"there has been an abundance of unused transmission capability into   
SCE's control area at . . . high demand times -- 5,303 megawatts on   
average during summer peak hours, 6,056 megawatts on average during   
summer mid-peak hours, and 6,165 megawatts on average during winter mid-  
peak hours."  Joskow MBR, at II-48.  
  
     The capacity of transmission lines from the Pacific Northwest   
includes 3200 megawatts over the Pacific Intertie (PACI), 1600 megawatts   
over the California Oregon Transmission Project (COTP) and 3500-3800   
megawatts over Path 15.  Pace MBF, at 24, 26.    
  
                             29  
  
<PAGE>  
  
  
Power over these lines flows to southern California over the Midway to   
Vincent path.  Joskow MBR, at II-21.  Another path, the PDCI, "goes   
around PG&E's area and directly interconnects the Pacific Northwest with   
southern California."  Pace MBR, at 24, 28.  Although Path 15 can be   
individually constrained, these lines have so much excess capacity in   
the aggregate that 95 percent of the time, over 2,374 megawatts of their   
capacity was unused in 1995.  Joskow MBR, at II-20.  See also Pace MBR,   
at 25.  
FN ./ Hogan defines the "efficient" short-run price of transmission as   
the difference between prices at delivery points.  See Hogan, supra, at   
214, 233.  
FN ./ DeVany and Walls at 12-13, Table 2.  
FN ./ Landes and Posner, Market Power in Antitrust Cases, 94 Harv.   
L.Rev. 937, 978 (1981).  
FN ./ Id.  
FN ./ Schmalensee, On the Use of Economic Models in Antitrust:  The   
ReaLemon Case, 127 U.Pa.L.Rev. 994, 1010 (1979).  
FN ./ Fisher, Diagnosing Monopoly, 19 Q.Rev.Econ. & Bus. 7, (Summer   
1979).  
FN ./ U.S. v. Connecticut National Bank, 418 U.S. 656, 668 (1974).    
See also Stigler and Sherwin, The Extent of the Market, 28 J.L. Econ.   
555, 556 (1985) ("[T]he market area embraces the buyers who are willing   
to deal with any seller, or the sellers who are willing to deal with any   
buyer, or both.")  
FN ./ Spiller and Huang, On the Extent of the Market:   Wholesale   
Gasoline in the Northeastern United States, 33 J.Ind,.Econ. 131, 133   
(1985).  Spiller and Huang note:  "Arbitrage costs, however, do not   
necessarily separate producers in different markets.  Consider the case   
of two different geographic regions with one continuously exporting to   
the other.  Prices will differ exactly by the arbitrage costs, and the   
two regions will be in the same economic market."  Id. at 133 n.7.    
FN ./ Areeda & Turner, 2 Antitrust Law &522a.  
FN ./ See Leitzinger Rebuttal at 3, 10 (including within the relevant   
market "those locations where gas is bought and sold along the   
interstate gas supply network extending from [basins in the western   
United States] to points of interconnection with local California gas   
distribution systems").  See also Yap Direct at 29 (essentially alleging   
effects in the interstate market [see Leitzinger Rebuttal at 3] and   
referring to supplies from the "southwestern U.S., Rocky Mountain, and   
Canadian regions," but limiting the buyers within her proposed market to   
southern California customers).  FERC uses "delivered gas" as the   
relevant product in its analysis and IID contends that the relevant   
product is "natural gas delivered to the burner tip."  Taylor Direct at   
32, 33.  The relevant market employed by the applicants is generally   
equivalent to the combined interstate gas and intrastate gas   
transportation markets employed here.  
FN ./ Stewart Rebuttal at 21.  
FN ./ "The ability of customers to contract independently for pieces   
of the network acts both to discipline price differences along the   
network and bring locations across the network into competitive   
association with one another.  Not only does the network mean that   
producers in the various basins compete and that pipelines serving the   
different basins compete, it also means that   
  
                             30  
  
<PAGE>  
  
  
producers in one basin discipline pipeline charges in other basins and   
vice versa."  Leitzinger Rebuttal at 16.  
FN ./ Various intervenors allege a delivered gas product market, but   
they apparently exclude from the geographic market delivered gas   
supplies which can be economically transported to California.  See FERC   
at 20.  
FN ./ Leitzinger Rebuttal at Exhibit JJL-2.  
FN ./ Leitzinger Rebuttal at 21.  
FN ./ See Yap Direct at 29 (alleging a southern California gas   
procurement market).  
FN ./ Interruptible and short term firm transmission are strong   
substitutes for capacity rights held by SoCalGas on the El Paso and   
Transwestern pipelines.  Leitzinger Rebuttal at 19.  Because these rates   
interact so strongly with commodity prices, interstate gas   
transportation is not a separate product market.  Leitzinger Rebuttal at   
23 (discussing "derived demand").  Similarly, "inframarginal" southwest   
supplies, which have no price advantage at the California border, are   
included within the broader relevant market.  Leitzinger Rebuttal at 14.   
   
  
     Edison alleges that the price of gas at the southwest border   
determines the price of gas coming from Canada and Rocky Mountain basins   
because the southwest is the "marginal supply region for California."    
Carpenter Direct at 24-25.  It is true that prices at those basins are   
very strongly related.  Leitzinger Rebuttal at 13, 26.  We conclude in   
the absence of evidence of collusion, however, that those highly   
volatile prices are competitively determined.  See Carpenter Direct at   
27 ("gas prices vary significantly on a daily basis").  
FN ./ Market share statistics are often misleading, however, and their   
value is particularly dubious when a proposed market is part of an   
integrated network.  This is because any grouping composed of only a   
part of the network (such as the proposed capacity release and southern   
California gas procurement markets) will lack the required "gap in the   
chain of substitutes."  
FN ./ Rebel Oil Co., Inc. v. Atlantic Richfield, 51 F.3d 1421, 1434   
(9th Cir. 1995); Ryko Mfg. Co. v. Eden Serv. 828 F.2d 1215, 1232 (8th   
Cir. 1987).  Thus, isolated concentration figures are inherently   
meaningless.  See Lades and Posner, supra; Pace MBR at &23 (referring to   
"concentration statistics . . . calculated slavishly or interpreted   
mechanistically").  
FN ./ FTC v. Indiana Fed'n of Dentists, 476 U.S. 447, 460-61 (1986);   
Rebel Oil, supra, at 1434.  
FN ./ Hieronymous Trans. at 2979.  Prior to open access, transmission   
services constituted separate product markets.  See Town of Concord,   
supra, at 29; Anaheim v. Edison, supra, at 64,899-64,900.  
FN ./ Hieronymous Rebuttal at 11.  Thus, spot prices at Palo Verde and   
California "should be identical on a netback basis.  That is, the Palo   
Verde price should equal the California electricity price, less the cost   
of interruptible transmission.  The reason, simply, is that if   
electricity is available from Palo Verde at a lower price than the   
incremental price of producing it in California, utilities will purchase   
rather than generate."  Id.  
FN ./ Graves Direct at 78.  In 1990, a federal district court rejected   
the WSCC as a relevant   
  
                             31  
  
<PAGE>  
  
  
geographic market because plaintiff wholesale purchasers "were not   
completely free to purchase bulk power from . . . other suppliers in the   
wester United States."  Anaheim v. Edison, supra, at 64,899.  FERC Order   
888, however, subsequently provided wholesale purchasers with that   
freedom.  See also Town of Concord, Mass. v. Boston Edison Co., 915 F.2d   
17, 30 (1st Cir. 1990); Lopatka, The Electric Utility Price Squeeze as   
an Antitrust Cause of Action, 31 UCLA L.Rev. 563, 611 (1984).  
  
FN ./ Similarly, FERC found that the relevant product was:  "all   
capacity whose variable costs are no more than 5% above the market   
price," which FERC equated with the "cost of gas-fired steam   
generation."  FERC June 1997 Merger Order, mimeo at 22.  FERC, however,   
excluded out-of-state supplies from its analysis because the "Applicants   
did not prepare a delivered price analysis."  Id.  
FN ./ Joskow MBR at II-42.  
FN ./ Edison contends that in "off-peak periods bid are likely to be   
fairly close to short run variable cost (mostly fuel cost)."  Graves   
Direct at 96.  
FN ./ Of the total WSCC capacity, coal plants account for 26 percent,   
gas/ oil for 21 percent, hydro for 33 percent, nuclear for 6 percent,   
geothermal for 1 percent, and remaining plants for 13 percent.  Yap   
Direct at 78.    
FN ./ See, e.g., Roach Direct at 32, who "stacked" power plants within   
the WSCC from lowest to highest cost, and excluded "plants owned by   
competitive power suppliers" by "view[ing]" them as "must run."  These   
plants, in fact, are not must run and their incentive will be to bid   
their full marginal costs, including their opportunity costs, into the   
PX.  
FN ./ Thus, Edison claims that, "The reason that competition from   
generators outside California to import power [sic] does not counteract   
the effect of higher gas prices is that the margin of the WSCC supply   
curve is dominated by California gas capacity.  The inexpensive hydro,   
coal and nuclear capacity that is available from out-of-state (as well   
as in-state) generating stations is being utilized most of the time in   
any case, so it is inframarginal and does not directly affect the   
electricity price."  Carpenter Direct at 85-86.  It is true that some   
plant owners must consider the costs they incur throughout the day as   
those of a joint product, requiring them to calculate all bids   
simultaneously.  Hieronymous Trans. at 2983-2984.  See Hirshleifer,   
Peaks Loads and Efficient Pricing, 72 Q.J. Econ. 451 (1958).  In   
general, however, out-of-state suppliers have sales alternatives   
throughout the WSCC and they "are going to bid where the prices are the   
highest, that's their incentive."  Hieronymous Trans. at 2989.  
FN ./ Edison contends that in "off-peak periods, bids are likely to be   
fairly close to short run variable cost (mostly fuel cost)."  Graves   
Direct at 96.  
FN ./ California utilities, on the other hand, will not recognize such   
costs because they will be required to sell their entire output to the   
Power Exchange.    
FN ./ See Pace MBR at 40-41, 48, 57 (noting that swing analysis "fails   
to capture one extremely important source of potential supply   
responsiveness -- that is, the ability of owners with hydroelectric   
resources . . . to shape the output of those resources in an effort to   
maximize their   
  
                             32  
  
<PAGE>  
  
  
value").  See also Graves Direct at 86 (explicitly recognizing the   
concept of opportunity costs and its applicability to the analysis of   
competition within the WSCC).  
FN ./ Contrary to the positions taken by the applicants and other   
parties in this proceeding, when several types of generation sell   
electricity in California, gas will not be the marginal fuel, even if it   
(along with coal or hydro or other types of fuel) is on the margin, and   
even if gas-fired generation has the highest variable costs.  See Taylor   
Direct at 13, 52 (gas fired generation is "expected to be the marginal   
generation"); Hieronymous Trans. at 2866; Hieronymous Rebuttal at 10   
(referring to the "production of hours that gas delivered to southern   
California generators is the marginal fuel).    
FN ./ Hieronymous Trans. at 2980.  
FN ./ While the correlation between gas and electric prices is only   
 .22 (Hieronymous Rebuttal at 11; Surrebuttal at 9), wholesale rates   
throughout the WSCC are strong cointegrated.  See De Vany and Walls,   
supra.  
FN ./ Moreover, as then Judge Bryer recognized in assessing the market   
power of a low cost generation supplier, the "'extra profit' resulting   
from lower costs is not a monopoly profit," and the existence of these   
"economic rents" is "consistent with a perfectly competitive   
marketplace."  Town of Concord, supra at 30.  In a competitive market   
like the WSCC, the "opportunity costs" to a low cost firm foregoing   
alternative sales will equal its scarcity rents, which are the   
difference between the market price and its production costs.  
FN ./ Merger Guidelines '1.01; State of N.Y. v.Kraft General Foods,   
Inc., 926 F.Supp. 321, 359 (S.D.N.Y. 1995).  
FN ./ Hieronymous Trans. at 2976.  
FN ./ Edison contends that "for the few percent of hours near peak   
demand (perhaps a few hundred out of 8760 hours per year), it is very   
likely that the marginal bid will substantially exceed short run costs   
of the marginal unit, particularly once the supply of peaking generation   
in the region tightens up."  Graves Direct at 97.  In fact, the optimal   
bid in a competitive auction will include variable and opportunity costs   
during both peak and off-peak periods.  
FN ./ Yap Direct at 49.  
FN ./ See U.S. v. Syufy Enterprises, 903 F.2d 659, 672 n.21 (9th Cir.   
1990).  
FN ./ Hieronymous Direct at 28.  
FN ./ Posner, Antitrust Law:  An Economic Perspective, at 63 (1976).    
It is not clear, however, whether SoCalGas has market power over those   
customers whose transmission rates re at the tariff level.  See State of   
Ill. of ex Rel. Hartigan v. Panhandle Eastern, 730 F.Supp. 826, 905   
(C.D. Ill. 1990).  
FN ./ See U.S. v. Connecticut Nat'l Bank, 418 U.S. 656, 669 (1974).  
FN ./ Areeda and Hovenkamp, Antitrust Law, '1015.1 (1977) Supp.).  
FN ./ U.S. v. Mercy Health Services, 1995-2 Trade Cases &71,162.  
FN ./ Section 7 "deals in 'probability,' not 'ephemeral   
possibilities.'"  U.S. v. Marine Bancorporation, Inc., 418 U.S. 602,   
622-623 (1974).  "There must be 'the reasonable probability' of a   
substantial impairment of competition to render a merger illegal under   
'7.  A 'mere possibility'   
  
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will not suffice."  Fruehauf Corp. v. F.T.C., 603 F.2d. 345, 351 (2nd   
Cir. 1979).  
FN ./ Fruehauf Corp. v. F.T.C., 603 F.2d 345, 351 (2d Cir. 1979),   
citing R. Posner, Antitrust Law, An Economic Perspective 200 (1976).  In   
fact,the FTC and the DOJ "appear not to have challenged a purely   
vertical transaction during the period from 1981-1993."  Roscoe B.   
Starek, III, Reinventing Antitrust Enforcement?  Antitrust Enforcement   
at the FTC in 1995 and Beyond, Remarks at "A New Age of Antitrust   
Enforcement:  Antitrust in 1995" (Marina Del Rey, CA Feb. 24, 1995).  
  
     In general, "there is but one maximum monopoly profit to be gained   
from the sale of an end product."  See Town of Concord, 915 F.2d 17, 23   
(1st Cir. 1990) (nothing that "several members of the Supreme Court have   
pointed out [this] 'widely accepted' (albeit 'counterintuitive')   
economic argument").  It is for this reason that the "government's 1984   
vertical merger guidelines are not concerned . . . with the possible use   
of vertical integration to 'leverage' monopoly from one market into   
another."  Areeda & Hovenkamp, supra, &1015.1.  See also 3A Areeda &   
Hovenkamp, Antitrust Law, &756b at 12; Western Resources, Inc. v.   
Surface Transp. Bd., 109 F.3d 782 (D.C. Cir. 1997); Alaska Airlines,   
Inc. v. United Airlines, Inc., 948 F.2d 536 (1991), cert. denied, 112   
S.Ct. 1603 (1992).  
  
     Relying in part upon the single monopoly rent theory, Judge (now   
Supreme Court Justice) Breyer rejected a claim in town of Concord that   
the defendant utility manipulated the price of input generation and   
transmission services to "squ  
  
eeze" the plaintiff in the endproduct delivered wholesale electricity   
market.  Here, the endproduct is also delivered wholesale electricity,   
but the inputs are interstate gas, intrastate gas transmission, and   
electricity transmission.  "[A] price squeeze occurs when the integrated   
firm's price at the first level is too high, or its price is too low,   
for the independent to cover its costs and stay in business."  Town of   
Concord, supra, 915 F.2d at 18.  The swing capacity theory advanced by   
the intervenors essentially alleges that the merged entity will   
"squeeze" the gas-fired plants served by SoCalGas.  See Yap Direct at   
67.  Because SoCalGas tariff rates are not binding for all noncore   
customers,t his merger presents a mixture of the regulated and   
unregulated cases analyzed in the Town of Concord decision.  
FN ./     Areeda & Turner, 2 Antitrust Law &527a at 376 (978).  
FN ./ Apart from the issue of whether out-of-state competition   
constrains SoCalGas transportation rates, it is also highly questionable   
whether the merged entity would benefit from higher rates.  As the   
applicants note, "SDG&E's share of revenues from SONGS is subject to the   
incentive-based ratemaking mechanism approved by the Commission in D.96-  
01-011 and D.96-04-059.  Under this mechanism, the market price of   
electricity will have no impact on SDG&E's earning from SONGS through   
2003."  surrebuttal at 18.  For other plants, higher transportation   
costs will reduce the stranded costs recoverable by the merged entity   
during the four year transition period, during which time AB 1890 has   
"frozen" retail electricity rates.  The merged entity must recover all   
of these stranded costs through a Competitive Transition Charge ("CTC")   
which expires in 2002.  
  
                             35  
  
<PAGE>  
  
  
FN ./ See WSCC, Summary of Estimated Loads and Resources  (April   
1997).  
FN ./ Edison acknowledges the applicability of the opportunity cost   
concept to the analysis of competition within the WSCC and, similarly,   
that suppliers will bid into the PX what "they believe the market will   
bear."  Graves Direct at 86, 96.  
FN ./ It is widely understood that "[a]lternative simulation models   
can give substantially different results."  Lande & Langenfeld, The   
Evolution of Federal Merger Policy, 11 Antitrust at 9 n. 22 (Spring   
1997).  Thus, "the answers may come flowing out of the machine highly   
dependent upon the approach, depending upon how the data are handled,   
depending upon the framework, the functional form, and the method of   
estimation. . . .  [I]n an adversarial setting with different data sets,   
lack of cooperation, and a very narrow group of players, only a few of   
whom understand the technical issues, the outcome can be really skewed."   
 Interview with Economist Robert D. Willig, 11 Antitrust 11, at 13   
(Spring 1997).  
  
     In this case, Edison and the applicants rely upon swing capacity   
models to support their positions on the questions of whether the merged   
entity would have the ability and incentive to manipulate California   
electricity prices.  The applicants' PROSYM/ MULTISM model, based upon   
assumptions listed on "four inches of printout material," uses a "cost   
minimization approach. . . to identify the lowest cost mix of generators   
available to serve the electric load."  Hartman Trans. 2434; Surrebuttal   
at 5.  Inputs to the model include "fuel prices, transmission line, and   
pathways, and the ratings on those pathways."  Hartman Trans. at 2434.    
From the resulting least-cost mix, the hourly marginal clearing price is   
"calculated based on the marginal generator's marginal cost and   
allocation of that particular generator's commitment costs during the   
peak period load period."  Surrebuttal at 6.  This model predicts that   
increased gas prices (Hartman Trans. at 2459-2461) would reduce   
electricity sales by SDG&E and other southern California gas-fired   
plants (Hartman Trans. at 2449, 2452), increase sales for plants locate   
din other parts of the WSCC (Hartman Trans. at 2449, 2452-55), and   
reduce revenues for the merged entity (Surrebuttal at 18).  
  
     Edison employed the Inter-Regional Market Model (IREMM) of the WSCC   
to predict the effect on California electricity prices of "changes in   
the price of gas delivered to the California boarder.  Graves Direct at   
84.  This model "segments" the market into California and the remainder   
of the WSCC and "forecast[s] the market price of electricity by   
simulating power trades between electric utilities or market areas based   
on opportunities to buy and/ or sell electricity."  Graves Direct at   
Attachment H.  The IREMM model predicts that "a 5 per cent gas price   
increase translates to a 3.8 per cent electricity price increase."    
Graves Direct at 85.  
  
     For reasons discussed above, we conclude that both of those models   
are highly misleading because of their failures to account for   
competition from low cost, out-of-state supplies.  Both models also   
overstate electricity revenues resulting from gas price increases   
because they assume the merged entity will receive the PX price, instead   
of the levels set forth in Agreement B.  We do   
  
                             35  
  
<PAGE>  
  
  
note, however, that PROSYM/ MULTISYM, unlike IREMM, can simulate the   
effects of cost increases to gas-fired plants located in southern   
California.  Graves Trans. at 3408.  We also note Edison's admission   
that a hypothesized increase in electricity revenues resulting from   
higher gas prices would be more than offset by reduced transportation   
revenues.  Gravel Trans. at 3407.  
FN ./ Riordan and Salop, Evaluating Vertical Mergers:  A Post-Chicago   
Approach, 63 Antitrust L.J. 513 (1995).  In any event Riordan and Salop   
overstate the circumstances under which variable proportion models   
predict adverse competitive effects from vertical integration.  See   
Reiffen and Vita, Comment: IS There new Thinking on Vertical Mergers?    
63 Antitrust L.J. 917 (1995).  Moreover, the economic model upon which   
Riordan and Salop apparently rely contains extremely limiting gage   
theory assumptions which necessarily restrict its applicability.  Id. at   
924-33 (noting that model uses a "static . . . game to analyze premerger   
equilibrium [which] shift[s] implicitly to a multi-stage, dynamic game   
to analyze post-merger conduct"); Remarks of Roscoe B. Starek, III,   
supra, at 8 (noting that vertical integration models "are notorious for   
their lack of generality -- their inability to predict likely as   
distinguished form possible, effect even under the most strictly devised   
theoretical conditions -- and for ignoring procompetitive rationales for   
vertical mergers that have greater empirical support").  Thus, Reiffen   
and Vita warn, "[e]nforcers must have some reason to believe that a   
particular model -- and a particular (anticompetitive) equilibrium of   
that model -- better describes behavior than some alternative model."    
Id. at 928.  
FN ./ See Areeda & Hovenkamp, supra, at &759c at 38 ("When [a] primary   
market monopolist integrates into a competitive secondary market, no   
injury to competition is ordinarily apparent. . . .  [This form of   
integration] -- is a clear candidate for a rule of absolute legality.").  
FN ./ See Yap Direct at 102-120.  
FN ./ Yap Direct at 108.  
FN ./ Ensource or some other affiliate of SoCalGas could theoretically   
benefit from precisely the same machinations today."  Applicants'   
Opening Brief, at 112.  
FN ./ A seller wishing to corner a market must be able to limit   
supply.  The supply of futures contacts is not "fixed," however, because   
the total volume of contracts promising future delivery expands with   
each new contract that is written.  See Hieronymous Trans. at 2982   
("People can just come piling into the market.").  See also Easterbrook,   
Monopoly, Manipulation, and the Regulation of Futures Market, 59 J. of   
Business S103, S109 (1986 ("Entry and exit [into futures markets] are so   
easy that monopoly cannot thrive.").  Moreover, sellers wishing to   
corner a futures market must also control the underlying commodity   
market.  See Sanner v. Board of Trade of City of Chicago, 62 F.3d 918,   
927 (7th Cir. 1995) (recognizing that cash and futures markets move   
together).  
FN ./ Few, if any, futures markets have been successfully cornered   
within the past 20 years.  Hieronymous Trans. at 2981.  See Easterbrook,   
supra, 59 J. of Business at S111 n. 7 ("n one has ever seriously   
alleged, let alone documented, a manipulation of a financial futures   
contract").  The Hut Browers did attempt to monopolize silver futures,   
but their unsuccessful efforts cost them several billion dollars.    
Hieronymous Trans. at 2981; Easterbrook, supra, 59 J. Business at S110   
  
                             36  
  
<PAGE>  
  
  
n.5.  
FN ./ See Roach Direct at 73, Yap Direct at 58-60, Beach Direct at 31.  
FN ./ We agree that the merged entity may be able to enhance its   
market power over intrastate gas transportation services by exercising   
those options, but there is no evidence that the gas-fired generation   
served by SoCalGas and these other two pipelines actually have market   
power in the broad wholesale electricity market.  
FN ./ See Easterbrook, The Supreme Court 1983 Term; Forward:  The   
Court and the Economic System, 98 Harv.L.Rev. 4, 10-12 (1984).  
FN ./ A new pipeline can be built in one to four years. Steward Trans.   
at 2526.  
FN ./ See Schuykill Energy Resources, Inc. v. Pennsylvania Power &   
Light Co., 113 F.3d 405 (3d Cir. 1997) (rejecting as speculation claims   
about competitive conditions in electricity markets in the year 2001).    
FN ./ Edison and other intervenors contend that the merged entity   
could raise the costs of rival gas-fired generation plants by   
manipulating the windows into the SoCalGas transportation system to   
force re-routings or renominations of gas supplies.  We conclude,   
however, that SoCalGas lacks the ability to impose such costs with the   
"surgical precision" alleged by these intervenors.  As the applicants   
point out, "there is no significant or persistent advantage to be gained   
[for UEGs] by buying at one location over the others."  Leitzinger   
Rebuttal at 26.  In fact, when SoCalGas imposes Rule No. 30   
restrictions, customers may still deliver up to the sum of 110% of their   
expected daily usage plus their firm storage injection rights.  Stewart   
Rebuttal at 6.  Thus, overnominations have not caused any plant to   
curtail operations within the past several years.  Hieronymous Rebuttal   
at 8.    
FN ./ To preclude the transfer of "inside" information, the applicants   
have also agreed to maintain an interactive EBB reservation and   
information system for its gas transportation network which would report   
all significant operational data, including maintenance and system   
status information.  In addition, SDG&E will separately nominate and   
schedule its UEG volumes over the EBB and obtain CPUC approval before   
providing transportation discounts to any affiliates.  Finally, groups   
responsible for gas operations will operate independently the gas   
acquisitions and marketing groups and of SDG&E employees providing   
"electric merchant functions."    
FN ./ The Southern California Public Power Authority contends that the   
merger will adversely affect competition within an alleged "BTU" product   
market.  Sinclair Direct at 21.  The Power Authority fails, however, to   
provide any evidence of a significant cross-elasticity of demand between   
electricity and gas.  See United States v. E.I. du Pont de Nemours &   
Co., 351 U.S. 377, 404 (1956).  In fact, there is a significant cost   
difference between gas and electricity for those applications were   
substitution is theoretically possible.  Hieronymous Rebuttal at 32.    
Moreover, evidence that the two resources are jointly marketed is wholly   
inconclusive, and may suggest that they are actually complements.  We   
conclude that a significant "gap" exists in the "chain" between these   
two hypothetical substitutes, and that "BTUs" is not a cognizable   
relevant product for purposes of reviewing this merger.    
FN ./ Yap Direct at 32.  
  
                             37  
  
<PAGE>  
  
  
  
FN ./ Yap Direct at 34.  
FN ./ Leitzinger Rebuttal at Exhibit JJL-2.  
FN ./ In fact, because the procurement activities of the two companies   
will not be combined, market share statistics overstate the market power   
of the combined entity.  See Leitzinger Rebuttal at 28.    
FN ./ Until recently, PUC rules prohibited the companies from   
competing for sales to core customers.  Hieronymous Rebuttal at 30.    
FN ./ Hieronymous Rebuttal at 30.  
FN ./ Id.    
FN ./ Hieronymous Rebuttal at 31.  
FN ./ Id.  
FN ./ Stewart Trans. at 2781.  
FN ./ Broadley, Potential Competition under the Merger Guidelines, 71   
Ca. L.Rev. 376, 378 (1983).  Areeda and Hovenkamp also question the   
doctrine as a basis for a section 7 violation.  Agreeda and Hovenkamp,   
Antitrust Law ' 1118 (1996 Supp.).  
FN ./ Marine Bancorporation, supra, at 630-32.  
FN ./ See Yap Direct at 48, 55; Taylor Direct at 53.  But see Stewart   
Rebuttal at 32 (noting that SDG&E loads are increasingly fragmented).  
FN ./ Tenneco v. F.T., 689 F.2d 346 (2d Cir. 1982).  See B.A.T.   
Indus., 104 F.T.C. 852 (the "best evidence . . . is likely to be   
subjective").  
FN ./ See BOC Int'l Ltd. v. FTC, 557 F.2d 24, 29 (2d Cir. 1977)   
(rejecting a finding of "eventual" entry as "uncabined speculation").  
FN ./ Republic of Texas Corp. v. Board of Governors of the Fed.   
Reserve Sys., 649 F.2d 1026, 1047 (5th Cir. 1981) (demonstrating entry   
in the "reasonably foreseeable future" was insufficient); BOC Int'l,   
supra, 557 F.2d at 29.  
FN ./ Tenneco, supra, at 355; Merger Guidelines ' 4.11.  
FN ./ Exhibit 3985 at Response to Request 6.16.  
FN ./ Id.  
FN ./ Yap Direct at 53.  
FN ./ Yap Direct at 184.  
FN ./ The anchor tenant theory advanced by some intervenors, although   
presented as a potential competition question, essentially alleges that   
the merger will vertically "foreclose" opportunities for Kern River and   
other competitors in the intrastate gas transportation market.  The   
issue may have been reframed because the courts view foreclosure   
allegations in vertical merger cases with considerable skepticism.  See   
Alberta Gas Chems. v. E.I. du Pont de Nemours, 826 F.2d 1235, 1244 (3d   
Cir. 1987) cert. denied, 486 U.S. 1059 (1988); 4 Areeda & Turner,   
Antitrust Law & 1004, at 211 (foreclosure argument has "grave   
weaknesses").  
FN ./ Yap Direct at 61.  
FN ./ Taylor Direct at 35.  
FN ./ Mercantile Texas Corp., 638 F.2d at 1267.  See also U.S. v.   
First National State   
  
                             38  
  
<PAGE>  
  
  
Bancorporation, 499 F. Supp. 793, 814 (D.N.J. 1980).  
FN ./ Hieronymous Rebuttal at 42-43.  
FN ./ Hieronymous Rebuttal at 43.  
   
  
  
  
   
  
   
  
  
  




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