U-1/A, 1998-06-03
Previous: ORBITEX GROUP OF FUNDS, 497, 1998-06-03

As filed with the Securities and Exchange Commission on June 3, 

File No. 70-09033





Sempra Energy
101 Ash Street
San Diego, California 92101

(Name of company or companies filing this statement and
address of principal executive offices)


(Name of top registered holding company parent of each applicant 
or declarant)

Richard D. Farman                         Stephen L. Baum
President and Chief Operating Officer     President and Chief     
                                          Executive Officer
Pacific Enterprises                       Enova Corporation
555 West Fifth Street, Suite 2900         101 Ash Street
Los Angeles, California 90013-1001        San Diego, California
(213) 895-5000                            (619) 696-2000

(Name and address of agents for service)


The Commission is requested to send copies of all notices, orders 
and communications 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



Sempra Energy                     )
                                  )   File No. 70-9033
Amendment No. 4 To Application On )
Form U-1 Of Sempra Energy         )

          On March 26, 1997, Sempra Energy (formerly, 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 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"); the 
Application also seeks an order exempting the Company (including 
its subsidiaries) under Section 3(a)(1) of the Act from all 
provisions of the Act except Section 9(a)(2).  Applicant represents 
that, upon consummation of the Transaction, the Company and its 
subsidiaries will meet the requirements of the Section 3(a)(1) 
exemption.  The Application was amended on May 13, 1997, on January 
28, 1998, and on April 7, 1998.  On July 21, 1997, the maps 
constituting Exhibits E-1, E-2, and E-3 were filed under Form SE.
          On May 27, 1998, the Federal Energy Regulatory Commission 
("FERC") issued its final order approving the Transaction, denying 
all requests for rehearing of its earlier conditional order and 
denying requests for a trial-type hearing. The Company hereby 
amends the Application for the purpose of providing FERC's final 
order.  This amendment also includes information concerning the 
Special Temporary Authorization obtained from the Federal 
Communications Commission authorizing the consummation of the Transaction. 
All capitalized terms used in this amendment will refer to the 
definitions in the Application, unless otherwise indicated. 
 Item numbers used are those found in the Form U-1.
          All other regulatory approvals necessary for consummating 
the Transaction have now been obtained.  FERC, the Department of 
Justice, the California Public Utilities Commission ("CPUC"), the 
California Attorney General, and the Nuclear Regulatory Commission 
have all scrutinized the Transaction and concluded that - with 
conditions that are acceptable to the applicants - it is consistent 
with the public interest.  This application has been pending before 
the Commission since March 1997.  The parties stand ready to close, 
and it is critical to reaping the substantial benefits of the 
Transaction, both for shareholders and consumers, that they be 
permitted to do so at the earliest possible moment.
         It is of particular importance that the Transaction be 
permitted to close by June 30, 1998 so that combined operations may 
commence by July 1.  A business combination of this size and 
complexity requires an enormous amount of advance preparation.  By 
way of example only, personnel decisions affecting the lives of 
11,000 employees - hundreds of which involve relocation of families 
and other major disruptions - have had to be made and communicated 
to the individuals concerned.  The parties commenced the final 
phase of this preparation in late March of this year, when the CPUC 
issued its final approval, in order to be ready for a prompt and 
efficient closing.
          Maintaining this state of readiness beyond July 1 will 
result in significant costs and inefficiencies, both of a purely 
financial nature and in the effects on individual lives.  The 
parties estimate the value of synergies foregone to be $6 million 
for each month that the closing is delayed, on a gross basis. The adverse 
effects on morale, productivity, and quality of life of so many careers and 
life plans hanging in the balance cannot be quantified.  Finally, 
the parties cannot implement their strategy for competing in the 
new deregulated California energy markets while the Transaction 
hangs in limbo. The Company therefore requests that the Commission 
issue its final order on the Application as promptly as possible, 
and in any event no later than June 26, 1998, to permit a June 30 
Item 4.     Regulatory Approvals
B.     Federal Power Act
          By its order of May 27, the Federal Energy Regulatory 
Commission ("FERC") granted final approval under Section 203 of 
the Federal Power Act of the Enova - Pacific merger.  In so doing, 
FERC required certain limited changes in the mitigation measures 
previously submitted by the applicants in satisfaction of the 
conditions specified in FERC's order of June 25, 1997, 
conditionally approving the merger.  <FN1>  The May 27 order also 
denied rehearing of the June 25 order and rejected claims by 
various intervenors that a trial-type hearing is necessary.
E.     Other
          San Diego Gas & Electric Company ("SDG&E") and Southern 
California Gas Company ("SoCalGas") hold licenses issued by the 
Federal Communications Commission ("FCC") to use certain radio 
frequency spectrum on certain prescribed terms and conditions.  
Section 310(d) of the Communications Act of 1934, as amended (the 
"Communications Act"), provides that an FCC license shall not be 
assigned and control of an FCC licensee shall not be transferred 
without the prior approval of the FCC.  The FCC evaluates such 
transactions to determine whether they serve the public interest, 
convenience and necessity.
          On May 22, 1998, a request for Special Temporary 
Authorization (the "STA Request") and applications for permanent 
authorizations were filed with the FCC requesting approval to 
transfer control of SDG&E and SoCalGas to Sempra Energy.  On May 
28, 1998, the FCC granted the STA Request permitting consummation 
of the merger.  The grant of the STA Request expires on November 
28, 1998.  The applications requesting permanent authorization to 
transfer control of SDG&E and SoCalGas to Sempra Energy are 
Item 6.     Exhibits and Financial Statements
     The following exhibit is filed with this Amendment.

Order of FERC Denying Rehearing and Approving Disposition of 
Facilities on a Final Basis.


          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.
                              SEMPRA ENERGY

Date: June 3, 1998      By:   /s/ Frederick E. John
                              Frederick E. John
                              Senior Vice President

<FN1>.  The applicants expect to make a filing at FERC in 
compliance with this requirement in the near future; however, no 
further action by FERC is required under the May 27 order for the 
approval to be effective.



San Diego Gas & Electric Company and Enova Energy, Inc.
Enova Corporation and Pacific Enterprises, Southern
California Edison Company v. San Diego Gas and Electric
Company, Enova Energy, Inc., and Ensource Corp.

Docket Nos. EC97-12-001, EL97-15-002, EL97-21-001


83 F.E.R.C. P61,199; 1998 FERC LEXIS 1003


  May 27, 1998

PANEL:  Before Commissioners: James J. Hoecker, Chairman; Vicky A. 
Bailey, William L. Massey, Linda Breathitt, and Curt Hebert, Jr.  


     In this order, we deny rehearing of our order conditionally 
approving the disposition of jurisdictional facilities that will 
occur as a result of the merger of Enova Corporation (Enova) and 
Pacific Enterprises (Pacific). n1 We also find that with certain 
changes to the Applicants' proposed remedial measures, the 
concerns we expressed in that order have now been resolved. Thus, 
we approve the disposition of jurisdictional facilities on a final 

n1 79 FERC P61,372 (1997)(Merger Order).

I. Background

A. Application and Merger Order

     The background of this case is set out in detail in our 
Merger Order. Briefly, Enova and Pacific are both public utility 
holding companies. n2 Enova is the parent of San Diego Gas & 
Electric Company (SDG&E), a traditional public utility that owns 
natural-gas fired electric generating facilities, and of Enova 
Energy, Inc. (Enova Energy), a power marketer. Pacific owns 
Southern California Gas Company (SoCalGas), a natural gas 
distribution company that provides delivered natural gas services 
to gas-fired electric power generators throughout Southern 
California. Enova and Pacific have also formed a joint venture, 
Energy Pacific, to be a marketer of electricity and natural gas.

n2 They are exempt holding companies under section 3(a)(1) of the 
Public Utility Holding Company Act of 1935, 15 U.S.C. sec. 79c(a)(1) 
     In our Merger Order, we noted that this "convergence" or 
vertical merger does not raise traditional horizontal market power 
concerns because the companies involved do not compete in the same 
product market. However, we explained that after a vertical 
merger, the merged company may be able to use its position in one 
segment of its business, the "upstream" segment (natural gas 
delivery services), to influence competition in the "downstream" 
segment (sales of electric power). After examining the upstream 
and downstream markets in the case at hand, we concluded that both 
were conducive to the exercise of market power. We stated that the 
merger could impair competition in the downstream market through 
"raising rivals' costs" and by facilitating anticompetitive 
coordination. We pointed out that SoCalGas delivers natural gas to 
virtually all gas-fired generators in Southern California. 
Moreover, by virtue of this dominant position, SoCalGas has access 
to sensitive market information regarding these generators' cost 
and fuel use. We found that if the merger were approved 
unconditionally, the merged company could use its vertical market 
power to restrict competing generators' access to delivered gas 
services, thus raising these generators' input costs and reducing 
their ability to compete. This, in turn, would tend to increase 
prices for electric power in California. n3 
n3 We also found that entry by competitors would not be likely to 
mitigate this market power.
     We identified seven ways in which the merged company could 
hamper competition. SoCalGas could:
   (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 

   (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  

   (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.
     Having reached this conclusion, we next considered what 
remedies could be used to address the problems raised by the 
merger. We noted that the Public Utilities Commission of the State 
of California (California Commission) has jurisdiction over 
SoCalGas and concluded that "the most direct and effective way to 
address the potential that SoCalGas will unduly discriminate in 
favor of downstream affiliates" n4 was mitigation requirements 
that were, for the most part, within the jurisdiction of the 
California Commission. For instance, the California Commission has 
direct authority to accept and enforce the Applicants' commitments 
that the companies will not share market information with one 
another without simultaneously making it available to non-
affiliates. The California Commission also has direct authority to 
accept and enforce a commitment to observe restrictions designed 
to prevent abuses between gas companies and their affiliates. 
n4 79 FERC at 62,564.
     Thus, we stated that if the California Commission approved 
the merger and adopted certain mitigation requirements to prevent 
SoCalGas from discriminating against non-affiliates, the 
Applicants should file these proposed mitigation measures with us. 
The mitigation measures were designed to preclude discriminatory 
conduct by SoCalGas, ensure transparency of transactions involving 
sales and purchases of gas transportation services, and separate 
SDG&E's purchases of transportation service from SoCalGas for gas 
that would be used for its electric generators from its other gas 
transportation purchases. n5 The mitigation measures needed 
involve codes of conduct (to regulate the sharing of market 
information); application of the requirements of our Order No. 497 
n6 (which is designed to prevent abuses of the affiliated 
relationship between jurisdictional pipelines and marketers) to 
SoCalGas; and a requirement that SoCalGas operate its electronic 
bulletin board (EBB), GasSelect, as an interactive same-time 
reservation and information system. We stated that if the 
California Commission approved mitigation measures that were 
different from those described in our Merger Order, we would 
decide whether these deviations were acceptable for our purposes. 
We also noted n7 that another way to eliminate the vertical market 
power problems would be for SDG&E to divest its gas-fired plants.
n5 79 FERC at 62,564.  

n6 Inquiry Into Alleged Anticompetitive Practices Related to 
Marketing Affiliates of Interstate Pipelines, Order No. 497, 53 
Fed. Reg. 22,139 (1988), FERC Statutes and Regulations, 
Regulations Preambles 1986-1990 P 30,820 (1988), order on 
rehearing, Order No. 497-A, 54 Fed. Reg. 52,781 (1989), FERC 
Statutes and Regulations, Regulations Preambles 1986-1990 P 30,868 
(1989), order extending sunset date, Order No. 497-B, 55 Fed. Reg. 
53,291 (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 Regulations P 30,934 (1991), reh'g denied, 57 
Fed. Reg. 5815, 58 FERC P61,139 (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. 58,978 (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. 15,336 
(1994), 66 FERC P61,347 (1994). 

n7 79 FERC at 61,372, n.58.
B. Events Since the Merger Order
     A number of intervenors requested rehearing of the Merger 
Order. n8 Their arguments are discussed below.
n8 These include Southern California Edison Company (SoCal 
Edison), Southern California Utility Power Pool (Power Pool), 
Imperial Irrigation District (Imperial), the City of Vernon 
(Vernon), the City of San Diego (San Diego), and Southern 
California Public Power Authority (Public Power Authority).
     After the Merger Order was issued, the Applicants filed a 
motion for a supplemental order. n9 They stated that several 
changes in circumstances since the issuance of the Merger Order 
justified immediate approval of the merger without waiting for the 
California Commission to take action. First, SDG&E has committed 
itself to divestiture of its generating assets and has asked the 
California Commission to approve that divestiture. The Applicants 
pointed out that the Commission had already said that divestiture 
of SDG&E's gas-fired plants could resolve our market power 
concerns. This obviated the need for the remedies envisioned by 
the Merger Order, they said. Second, SDG&E and SoCalGas had 
submitted to the California Commission filings n10 in which they 
committed themselves to restrictions on dealing with affiliates 
that are designed to prevent abuses of the affiliation. The 
Applicants said that these commitments meet the requirement 
imposed by our Merger Order that they adopt a code of conduct. 
They argued that in view of these developments, there was no need 
for this Commission to wait for the California Commission to take 
further action. 
n9 Filed February 12, 1998.  

n10 "Remedial Measures" filed as Attachment D to Applicants' 
February 12, 1998 filing.
     The Applicants also submitted n11 a stipulation filed by 
Enova and the Department of Justice (DOJ) with a United States 
District Court to resolve DOJ's concerns. The stipulation provides 
that SDG&E must divest almost all of its gas-fired generation 
within 18 months and limits Enova's ability to acquire new 
generation capacity. The Applicants also state that the code of 
conduct is now fully enforceable by the California Commission.
n11 Motion to Lodge Stipulation and Order filed March 10, 1998. 
Several intervenors argued that these changes in circumstances do 
not justify removal of the conditions. We need not resolve the 
question of whether the changes in circumstances would, in 
themselves, justify removal of the conditions. As noted below, the 
California Commission has now approved the merger. The question to 
be resolved is whether the changes in circumstances and the 
California Commission's actions resolve the concerns expressed in 
our Merger Order.
     The California Commission approved the merger after adopting 
and undertaking to enforce certain mitigation measures. n12 It 
notes in its order n13 that it has adopted rules governing 
transactions between affiliated natural gas local distribution 
companies and electric utilities and their affiliates who market 
energy and energy-related services. These rules are designed to 
foster competition and to protect consumers, focusing particularly 
on cross-subsidization (in which a utility's customers subsidize 
an affiliate of the utility).
n12 Decision 98-03-073, March 26, 1998 (California Decision). The 
conditions imposed by the California Commission are attached as 
Appendix A to our order.  

n13 California Decision at 9-10.
     With regard to the effect of the merger on competition, 
specifically vertical market power, the California Commission 
examined the Remedial Measures submitted by the Applicants and 
concluded that Applicants have met the requirements of this 
Commission's Order No. 497. n14 To ensure compliance, the 
California Commission set up a verification process to be carried 
out by an independent firm.
n14 California Decision at 67-68.
     The California Commission also required that SoCalGas divest 
its options to purchase certain pipelines (the Kern River and 
Mojave pipelines) that provide the only competition to SoCalGas. 
It did so because it believed that competition in natural gas 
transportation provides benefits to consumers, and if SoCalGas 
exercised its options to buy these pipelines, there would be no 
competition at all in the relevant market.  

     The Applicants then made a filing with this Commission n15 in 
which they asked for final approval of the merger. Certain 
intervenors argue in response that the Commission should not 
approve the merger because the conditions imposed by us and by the 
California Commission and the other changes in circumstances do 
not resolve the problems with the merger. Their arguments are 
discussed below. n16 
n15 Filing of April 2, 1998. The Commission published notice of 
the filing and provided an opportunity for comments. 63 Fed. Reg. 
18,396 (1998).  

n16 We will discuss these arguments as rehearing arguments insofar 
as these intervenors (who earlier sought rehearing) argue not that 
the California Commission did not do what we said was necessary, 
but that our Merger Order did not address the full extent of the 
market power that could be exercised by the merged company. 
II. Issues
A. Rehearing Issues: Whether Our Merger Order Adequately Addressed 
Market Power Concerns  

1. Arguments
     On rehearing, several parties argue that the conditions we 
imposed in the Merger Order would not mitigate the merged 
company's market power. For example, SoCal Edison argues n17 that 
the Commission failed to recognize several kinds of 
anticompetitive behavior in which the merged company could engage. 
It says that the Commission focused entirely on the possibility of 
discrimination that would favor SDG&E's gas-fired generation and 
argues that there would also be opportunities for market 
manipulation that would not involve such discrimination. For 
instance, the merged company would benefit from higher rates for 
electric power across the board. It could use its market power 
over delivered gas services to raise the cost of gas-fired 
generation to everyone, including SDG&E. Since spot market prices 
in the California Power Exchange (PX) n18 will be set by the 
marginal generating unit, which will generally be gas-fired, this 
would raise the revenues of marginal and infra-marginal generating 
units. n19 
n17 SoCal Edison's Request for Rehearing at 8-21. Similar 
arguments are raised by others, including Power Pool.

n18 We authorized establishment of the PX after our Merger Order 
was issued.  Pacific Gas and Electric Company, San Diego Gas and 
Electric Company, and Southern California Edison Company, 77 FERC 
P61,204 and P61,265 (1996), 81 FERC P61,122 (1997); 81 FERC 
P61,122 (1997). 

n19 Infra-marginal units are those with marginal costs below the 
market-clearing price.
     SoCal Edison describes a number of ways in which the merged 
company could use its monopoly power in delivered gas services to 
cause the effects described above even without discriminating in 
favor of SDG&E. It argues that in addition to controlling 
intrastate transportation to gas-fired generators and owning all 
the storage in Southern California, the merged company would be 
the dominant gas purchaser in the region. The combination of 
dominating gas demand (gas flowing on the Southern California 
pipeline system) and controlling gas storage would allow the 
merged company to manipulate the gas system in a variety of ways. 
For instance, SoCalGas decides where and when storage injection 
and withdrawal will occur, which affects the price of gas. The 
merged company's control of gas demand would enable it to 
manipulate the release of interstate pipeline capacity and to 
force other users to renominate gas shipments at an increased 

     SoCal Edison and others express concern that the merged 
company could manipulate financial markets, even inhibiting the 
growth of a secondary market for contracts written against the 
spot market. Several parties argue that the only information 
SoCalGas would need to manipulate the price of gas would be an 
affiliate's (such as the Joint Venture's) publicly posted position 
in the electricity futures or derivatives markets. SoCalGas could 
increase or decrease competing generators' delivered gas costs to 
increase or decrease electricity prices in the California PX and, 
therefore, the value of affiliates' long or short positions. They 
say that an alternating sequence of long and short positions could 
be made profitable without affecting the average price of either 
gas or power over that period. n20 Power Pool argues that the 
similar outcomes would result from SoCalGas using non-public 
insider information regarding real-time system operations and 
customer activities (not prohibited by the remedial conditions) to 
advantage itself or its affiliates in the energy commodity 
derivatives markets. n21 
n20 SoCal Edison filing of July 25, 1997 at 18-19; Public Power 
Authority filing of July 25, 1997 at 20. Public Power Authority 
refers only to" forward" positions.  

n21 Power Pool filing of July 25, 1997 at 3. Such insider 
information would originate from combining the gas procurement 
functions of SDG&E's UEG with the retail functions of SDG&E and 
     According to SoCal Edison, n22 these manipulations of the 
market would not be overtly discriminatory and would not be 
checked by the remedial measures the Commission envisioned in the 
Merger Order. The Commission wrongly assumed that reporting 
requirements and standards of conduct that are sufficient to check 
monopoly power in the intrastate natural gas market are also 
sufficient when applied to the interstate market. SoCal Edison 
argues n23 that the code of conduct requirement is inadequate 
because: (1) it cannot prevent SoCalGas from acting "on the basis 
of its knowledge of its affiliate's general positions" n24 ; and 
(2) the 24-hour period during which SoCalGas may make discounts 
available to its affiliates and not to others is too long, in view 
of the speed with which the spot electricity market will move. 
n22 SoCal Edison filing of July 25, 1997 at 8-9, 39-44.  

n23 SoCal Edison filing of July 25, 1997 at 30-31.  

n24 Id. at 30, citing Graves Affidavit P 41.
     SoCal Edison argues that structural remedies are needed. 
SoCalGas should divest its intrastate gas transmission and storage 
facilities, and SDG&E should divest its gas distribution assets.  

     SoCal Edison says that the remedies we envisioned in our 
Merger Order contain many weaknesses. n25 The marketing affiliate 
rules are inadequate because SoCalGas can still manipulate the 
price of and access to gas delivery services without disclosing 
information to its affiliates by means of the following tools: (1) 
access to nonpublic operational information (such as daily receipt 
point capabilities and flow constraints); (2) intrastate access 
(flexibility to determine which gas will flow and under what 
conditions); (3) pricing and availability of intrastate services 
(latitude in pricing hub services and in discounting other 
services); (4) core procurement behavior (operation of SoCalGas's 
market area storage that is directly connected to its intrastate 
transportation system); and (5) interstate access and its effect 
on the border price (control over the amount of capacity available 
on the secondary interstate capacity market, which affects the 
price of transportation capacity to the border of Southern 
n25 Id. at 21-32.
     Imperial argues n26 that we correctly identified the major 
concern with the merger -- SoCalGas's dominant position as a 
supplier of delivered gas services -- but that the conditions we 
envisioned are inadequate. The Commission should have focused the 
remedies directly on wholesale electricity markets instead of on 
the potential for SoCalGas to discriminate in favor of SDG&E. 
Specifically, we should have adopted remedies "that operate 
directly on the ability of the merger applicants to control prices 
in the relevant wholesale bulk markets,...." n27 We also could 
have convened a federal-state board under FPA section 209(b). 
Finally, we could have simply disapproved the merger. 
n26 Imperial Request for Rehearing at 3-10.  

n27 Id. at 8.
     Public Power Authority argues n28 that we did not recognize 
certain anticompetitive effects of the proposed merger. It says 
that we failed to look at the effect of the merger on the "energy 
services or Btu market." The primary reason for the merger is to 
enable the merged company to participate in this market. While we 
recognized a possible effect on the energy services market, n29 
according to Public Power Authority, we incorrectly assumed that 
this was a retail matter only. 
n28 Public Power Authority's filing of July 25, 1997 at 3-13.

n29 79 FERC at 62,566 (recognizing that to the extent gas and 
electricity compete, the merger would eliminate a competitor).
     Public Power Authority also argues that we overlooked the 
effect of the corporate realignment on the wholesale component of 
the energy services (Btu) market. It argues that Btus are 
substitutes in wholesale markets, since Power Authority members 
compare the cost of self-generating from gas-fired generation for 
resale to their retail customers with the cost of purchasing 
electricity in the wholesale market. n30 Absent the merger, Power 
Authority argues that SoCalGas would be SDG&E's principal 
competitor in the wholesale energy services market in southern 
California. With the merger, the Applicants could raise the price 
of gas when gas-fired generation is on the margin in the PX. An 
increase in gas prices could increase the price of electricity to 
Power Authority members, regardless of whether they self-generate 
or purchase electricity at wholesale. Power Authority offers 
analysis showing that post-merger, the Applicants would have a 56 
percent share of the market in Btus in southern California and 
that the merger would produce a change in HHI of almost 1000, for 
a post-merger HHI of 3700. n31 Finally, Public Power Authority 
argues that even if the energy services market is retail only, 
this Commission should consider the effect of the merger on this 
n30 Public Power Authority's filing of March 28, 1998 at 8.  

n31 Id. 9-10. 
2. Resolution
     As noted in the previous section, intervenors are concerned 
that the Commission failed to address the full range of 
competitive effects of the proposed merger, including: the effects 
of combining gas procurement functions; the effects on financial 
(energy commodity derivatives) markets; and the effects on the 
energy services market. The Commission does not agree, for two 
reasons. First, each of these arguments describes the very same 
concern that the Commission addressed and discussed remedies for 
in the Merger Order, that is, that raising the cost of delivered 
gas would adversely affect prices and competition in the 
downstream electricity markets in southern California. Second, the 
proposed divestiture of SDG&E's gas-fired generation largely moots 
the competitive concerns associated with the effects of combining 
gas procurement functions and the effect of the proposed merger on 
the energy services market. This is because the divestiture 
significantly lessens the incentive for the merged company to 
raise the cost of delivered gas and, therefore, electricity 
a. Combination of Gas Procurement Functions
     Certain intervenors are concerned about the competitive 
implications of combining SoCalGas's and SDG&E's gas procurement 
functions. They argue that this would enhance the merged entity's 
ability to manipulate delivered gas prices and, therefore, 
electricity prices in southern California. They are concerned that 
the conditions imposed by the California Commission do not address 
how the merged company could raise gas prices in such a way as to 
disadvantage (while not necessarily discriminating against) non-
affiliated users through the manipulation of storage and gas 
transportation services.  

     The Commission believes that we have addressed this 
competitive concern in the Merger Order. First, as we noted above, 
the mechanism by which prices and competition in the downstream 
electricity market would be adversely affected by the combination 
of gas procurement functions is the same mechanism the Commission 
described and proposed remedies for in the Merger Order. The 
second remedial condition is, in part, designed to address 
situations in which the merged company's actions could have a 
detrimental effect on competition in the downstream electricity 
market without overtly discriminating against competing 
generators. n33 The condition accomplishes this by requiring the 
merged company to set up an information "firewall" between the 
upstream affiliate, SoCalGas, and downstream affiliates with an 
electric power merchant function. Without such a "firewall," 
SoCalGas could transfer competitively sensitive information to 
downstream generation affiliates, thereby "chilling" competition 
in the downstream electricity market.
n33 See Order 497 restrictions, discussed below.
     Second, the planned divestiture of SDG&E's gas-fired 
generation will largely resolve this concern. Without the need to 
purchase gas for SDG&E's electric generators, there will be fewer 
gas purchases to" consolidate" (and those remaining would largely 
be limited to SoCalGas's retail and SDG&E's retail components). 
Even with such a consolidation, the divestiture largely removes 
the incentive for the merged company to manipulate gas prices, 
since it will have less marginal and inframarginal capacity on 
which to collect higher downstream revenues. We discuss the 
divestiture question in more detail in Section D, below.
b. Financial Markets
     Certain intervenors argue that the merged entity could 
manipulate gas prices to ensure the profitability of affiliates' 
positions in the energy commodity derivatives markets. For 
example, SoCal Edison contends that manipulating the electricity 
futures market could result in corresponding changes in the spot 
electricity markets and hamper the growth of the secondary market 
for contracts written against the spot market. We have already 
addressed any competitive aspect of this issue in our Merger 
Order. Again, the argument regarding the energy commodity 
derivatives market describes the same mechanism (manipulation of 
delivered gas prices to adversely affect prices and competition 
and therefore profit in the downstream electricity market) that we 
described and discussed remedies for in the Merger Order.  

     We are also skeptical that the merged company could profit 
from manipulating gas prices to ensure the profitability of 
affiliates' positions in the derivatives markets. No intervenor 
provides any analysis supporting the contention that such a scheme 
would prove profitable. Also, these intervenors themselves 
recognize that such a scheme would require the systematic 
manipulation of gas prices by SoCalGas. n34 Such manipulation is 
tantamount to manipulation of the commodity markets, an abuse that 
is subject to the jurisdiction of other agencies. n35 
n34 SoCal Edison implicitly recognizes this requirement when it 
states that an alternating sequence of long and short positions 
could be made profitable without affecting the average price of 
either gas or power over that period. SoCal Edison at 19.  

n35 The Commodity Exchange Act, enforced by the Commodity Futures 
Trading Commission, prohibits market manipulation of the type 
envisioned by the parties.
     Finally, it is incorrect to state, as do some of the 
intervenors, that the only information needed to implement the 
strategy they envision is publicly posted. Individual positions in 
the futures markets are not publicly posted. What are periodically 
posted, under the requirements of the Commodity Exchange Act, are 
numbers of contracts and traders. n36 Therefore, it would not be 
possible for SoCalGas to manipulate gas prices based only on 
publicly posted positions of its affiliates. Instead, it would 
require the transfer of information between affiliates, and we 
concur with the California Commission's position on the transfer 
of inside information: "we will not presume that officers of the 
merged company are prepared to conspire to violate criminal 
statutes. . . ." n37 
n36 Trading reports can be obtained from the Commodity Futures 
Trading Commission, Department of Economic Analysis web site.  

n37 California Decision at 64.
c. Energy Services Market
     Public Power Authority argues that we failed to address the 
competitive effect of the merger on the retail and wholesale 
components of the energy services (Btu) market. We have already 
addressed the competitive implications of this argument in our 
Merger Order. Public Power Authority's argument is essentially 
that the merged entity can raise gas prices to adversely affect 
prices and competition in the downstream electricity market. 
Public Power Authority simply recasts this vertical market power 
concern as a" horizontal" effect of the merger by which a supplier 
of Btus is eliminated as a result of the merger. It says that the 
proposed merger would eliminate a competitive supplier of Btus, 
potentially enabling the merged company to withhold Btus from the 
market, raising the price of Btus and, therefore, of electricity. 
n38 The Commission addressed and discussed remedies for this in 
the Merger Order. 
n38 For example, price competition in the pre-merger Btu market 
would produce lower delivered gas prices (increasing the 
attractiveness of self-generating) and lower electricity prices 
(increasing the attractiveness of purchasing electricity). Whether 
higher electricity prices would be likely to result depends on the 
extent to which customers could turn to other sellers of Btus to 
avoid a price increase, including switching to other (gas and non-
gas) fuel suppliers to purchase Btus and switching to other 
suppliers to purchase Btus in the form of electricity.
     Moreover, the Btu market concentration analysis offered by 
Public Power Authority does not explicitly address the effect of 
the merger on the wholesale energy services market and, therefore, 
does not support its argument regarding the effect of the merger 
on the wholesale energy services market. n39 Moreover, with the 
planned divestiture, SDG&E's generation will remain a non-
affiliated (independent) competitor in the wholesale energy 
services market. Therefore, the proposed merger will bring about 
no significant change in concentration in the wholesale energy 
services market.
n39 Public Power Authority Protest and Motion to Intervene and 
Consolidate, Exhibit 1, at 9-13. Data from which SoCalGas's Btu 
market share is calculated include sales to non-utility end-use 
(retail) customers in California. Data from which SDG&E's Btu 
market share is calculated include both retail and wholesale 
electricity sales.
     Finally, as to whether we abdicated our responsibility under 
section 203 by leaving competitive issues associated with the 
retail component of the energy services markets to the California 
Commission, we note that we explained in our Merger Order that as 
a retail issue, this would be more appropriately addressed by the 
California Commission, which did not request our assistance. 
Public Power Authority has provided no reason why we should depart 
from the policy set forth in our Merger Policy Statement, where we 
said that we will only consider retail issues when the affected 
state lacks authority to do so and raises concerns. n40 
n40 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 & Regulations P 31,044 (1996), order 
on reconsideration, 78 FERC P61,321 (1997) (Merger Policy 
Statement). As we stated in Baltimore Gas & Electric Company and 
Potomac Electric Power Company, 79 FERC P61,105 at 61,115 (1997), 
the effect of a merger on retail competition merits consideration, 
but is appropriately addressed by the state and District of 
Columbia commissions.
C. Rehearing Issues: Whether Commission's Reliance on State-
Imposed Remedies is Improper  

1. Arguments
     Several intervenors n41 argue that the Commission has ample 
legal authority to order the remedies envisioned in the Merger 
Order and that we should have directly required these (or other) 
remedies as conditions of approving the merger rather than leaving 
it to the California Commission to impose them. For example, 
Vernon argues n42 that under the FPA, we cannot defer to a state 
the implementation of remedies that are necessary to meet the 
federal standard that the merger be consistent with the public 
interest. While Vernon recognizes that there is "overlapping" 
state and federal jurisdiction, n43 this should not prevent us 
from exercising our authority to impose and enforce the remedies 
directly. The fact that SoCalGas is not under our jurisdiction 
does not mean that we lack authority to order remedies to address 
our concerns about the merger. Vernon argues that our reliance on 
remedies imposed by the California Commission is an impermissible 
delegation of our regulatory responsibilities to a state agency, 
citing several court decisions on delegation of an agency's 
n41 These include Vernon, SoCalEdison, and Public Power Authority.

n42 Vernon Request for Rehearing at 6-17.  

n43 Id. at 7. Similar arguments were raised by Public Power 
Authority, among others.
     Even if the reliance on the state can be defended legally on 
the grounds that this Commission intended to review the state's 
remedies to ensure that our goals are met, Vernon argues that, as 
a matter of policy, we should not adopt such an approach. It says 
that this approach is inefficient and puts the Commission in the 
position of either "rubber-stamping" the state's decision or 
possibly coming into conflict with the state.  

     Vernon also argues that our reliance on the California 
Commission to impose remedies could be construed as an attempt to 
induce a change in the state's regulatory policies. It argues that 
it is "inappropriate and, in some circumstances, unlawful" n44 for 
the federal government to attempt to impose its policies on a 
state agency that has a different statutory mandate. Similarly, 
Imperial Irrigation argues n45 that this Commission cannot 
"commandeer" the State's processes, citing several cases in which 
courts struck down such actions. n46 
n44 Vernon Request for Rehearing at 15, citing Altamont Gas 
Transmission Company v. FERC (Altamont), 92 F.3d 1239 (D.C. Cir. 
1990). Similar arguments were raised by other intervenors.

n45 Imperial Request for Rehearing at 12-16.  

n46 Id. at 12-14, citing Hodel v. Virginia Surface Mining & 
Reclamation Assoc., Inc. (Hodel), 452 U.S. 264 (1981); New York v. 
United States (New York), 505 U.S. 144 at 168 (1991), and Printz 
v. United States (Printz), 117 S. Ct. 2365 (1997). 
2. Resolution
     To some degree, these issues are moot, now that the 
California Commission has actually imposed conditions on the 
merger and undertaken to enforce them. If the State had imposed 
its conditions before the Applicants filed their section 203 
application here, we certainly could have taken those state-
imposed conditions into consideration when deciding whether to 
approve the merger. Thus, we need not decide whether we would have 
had legal authority to impose the conditions directly ourselves; 
the California Commission has now imposed the conditions, and we 
need to decide only whether those conditions (and other changes in 
circumstances) are sufficient to assure us that the disposition of 
jurisdictional facilities is consistent with the public interest.  

     We do not agree that our reliance on the State's conditions 
impermissibly delegates our responsibilities to the State. We have 
reviewed the California Commission's conditions and are satisfied 
that (with one change to those conditions) the disposition of 
jurisdictional facilities will be consistent with the public 
interest. We will not presume that the Applicants will not comply 
with the conditions or that the State will not enforce them. 
Moreover, we retain authority under FPA section 203(b) to issue 
any supplementary order that is necessary or appropriate.  

     The cases cited by Vernon do not undermine our determination. 
In Assiniboine, n47 the court considered whether a federal agency 
could have improperly abdicated its responsibility to a state 
agency. While the Court of Appeals held that the District Court 
improperly dismissed the case and that there was, in fact, a 
justiciable controversy, the facts were entirely different from 
those in this case. The state agency to which the federal agency 
deferred had no jurisdiction over the subject, while the federal 
agency had a fiduciary duty and had to meet the strict standard 
applicable to a trustee. Moreover, the court accepted as true for 
purposes of deciding whether the case should be dismissed the 
plaintiff's claim that the federal agency made no independent 
review of the state agency's recommendation.
n47 Assiniboine and Sioux Tribes of the Fort Peck Indian 
Reservation v. Board of Oil and Gas Conservation of the State of 
Montana, 792 F.2d 782 (9th Cir. 1986).
     Likewise, the facts in Sierra Club v. United States Army 
Corps of Engineers (COE) n48 were entirely different. There, the 
court held that a federal agency cannot simply delegate its 
responsibilities under the National Environmental Policy Act 
(NEPA) to a state agency. It specifically noted in COE that the 
federal agency had done no independent evaluation whatsoever of 
the state's action. Moreover, as Vernon itself admits, many other 
cases find that there is no improper delegation when the federal 
agency independently reviews the state action. n49 
n48 701 F.2d 1011 (2d Cir. 1983).

n49 Save Our Wetlands Inc. v. Sands, 711 F.2d 634 (5th Cir. 1983) 
(no abdication of agency responsibility where agency independently 
reviewed consultant's work, rather than "rubber-stamping" it); 
Sierra Club v. Lynn, 502 F.2d 43 (5th Cir. 1974), cert. denied, 
421 U.S. 994 (1974) (similar).
     We have not simply delegated our responsibility to the 
California Commission. n50 Rather, consistent with the cases cited 
by Vernon, in our prior order we deferred the specific terms by 
which remedies were to be accomplished to another agency that does 
have jurisdiction over the subject matter, and in this order we 
independently review that agency's remedial measures. n51 
n50 We also note that the court expressed concern that the state 
agency involved had its own goals and that in its effort to obtain 
federal approval of the project at issue, the state might make 
self-serving assumptions in its preparation of NEPA documents. In 
fact, the court found that the NEPA document at issue was entirely 

n51 79 FERC at 62,565.
     We also do not agree that the Merger Order was an attempt to 
"commandeer" the State's processes. While SoCal Edison states that 
the California Commission "responded to the Commission's mandate" 
by instituting a hearing on the merger application, n52 this 
Commission did not mandate that the California Commission do 
anything. Rather, we concluded that if applicants committed to the 
remedial mechanisms discussed in our order and if the California 
Commission accepted those remedial mechanisms that were in its 
jurisdiction, the proposed merger would be consistent with the 
public interest. n53 We note that the California Commission was 
not acting merely in response to a Commission order. It has 
authority and responsibility under state law to review the merger. 
n52 Filing of April 22, 1998 at 3.  

n53 79 FERC at 62,565.
     The California Commission was entirely free not to adopt the 
conditions that this Commission found would be necessary for it to 
approve the merger. n54 Thus, far from being coercive, our actions 
were designed to serve the interests of comity and efficiency in 
the use of regulatory resources. The Merger Order was not an 
attempt to improperly induce a change in the State's policies or 
to improperly influence the outcome of the California proceeding, 
as Vernon suggests. n55 
n54 The cases Imperial cites involve Tenth Amendment challenges to 
Federal legislation and they do not support its argument that we 
"commandeered" the state process. For example, in Hodel, the court 
examined a federal statute that directly regulated surface mining 
but that also encouraged the states to adopt their own programs by 
allowing the states to regulate surface mining as long as the 
states adopted requirements that met the federally-established 
minimum requirements. The court held that this federal statute did 
not commandeer the states' legislative processes. The New York 
case illustrates what does constitute an improper commandeering of 
the states' processes. In that case, the court struck down federal 
legislation that ordered the states to implement federal standards 
on radioactive waste. The court held that while Congress could 
itself directly regulate radioactive waste, it could not force the 
states to do so. The court contrasted that statute with the one 
upheld in Hodel, which merely encouraged the states to adopt 
certain standards. The Printz case makes a similar point.

n55 The Altamont case also does not support Vernon's position. Our 
Merger Order was not an improper attempt to induce a change in the 
State's policies in a matter beyond our jurisdiction, as was the 
case in Altamont.
C. Compliance Issues: Whether Concerns Commission Expressed in 
Merger Order Have Now Been Met
     In the California Commission proceeding dealing with the 
merger, Applicants proposed 23 Remedial Measures. The California 
Commission adopted conditions that incorporated (with revisions) 
these Remedial Measures and added two other commitments. n56 It 
undertook to enforce the mitigation measures envisioned by this 
Commission and says that it will create an independent 
verification process. The California Commission stated that it was 
confident that Applicants would comply with any changes required 
by this Commission. n57 
n56 The California Commission's conditions are set forth in 
Appendix A to this order.  

n57 California Commission decision at 67.
1. Arguments
     Applicants argue n58 that the concerns we expressed in the 
Merger Order have now been met. They say that: they have filed the 
required codes of conduct for SDG&E and Enova Energy; n59 they 
have agreed to apply the standards of the Commission's Order No. 
497 to SoCalGas; SoCalGas is operating GasSelect as an interactive 
same-time reservation system; SDG&E and Enova Energy are buying 
gas transportation from SoCalGas for electric generation 
separately from that bought for other purposes; and the California 
Commission has required SoCalGas to post on GasSelect its use of 
pipeline capacity to fill storage. The Applicants also point to 
the planned divestiture of SDG&E's generation and power purchases 
and several other measures not required by our Merger Order, 
including the functional unbundling of SoCalGas' operations and 
procurement functions and its commitment to get the California 
Commission's approval before offering transportation discounts to 
its affiliates.
n58 Filing of April 2, 1998.  

n59 Applicants refer to Enova Energy's filing of a revised code of 
conduct in Docket No. ER96-2372-008 and a code of conduct for 
SDG&E as part of a section 203 application filed by SDG&E, Enova 
Energy and AIG Trading Corporation (AIG). AIG is being acquired by 
a joint venture owned equally by Pacific and Enova. The Commission 
approved the acquisition subject to the same conditions imposed in 
our Merger Order. San Diego Gas & Electric Company, Enova Energy, 
Inc. and AIG Trading Corporation, 81 FERC P61,410 (1997), reh'g 
     SoCal Edison argues that the Applicants did not fully comply 
with what we required. It identifies several provisions in the 
conditions that it claims can easily be abused. For instance, 
Conditions 1, 8, and 18 require equal treatment for "similarly 
situated" non-affiliated shippers, but do not define this term, 
and SoCalGas could construe it to mean "identically" situated. 
Condition 8 says that SoCalGas must offer "comparable" discounts 
to non-affiliates, but does not define that term. Moreover, our 
Merger Order said that SoCalGas must maintain its EBB, GasSelect, 
as a same-time information system, but SoCalGas proposes to use it 
as a same-day system. Thus, SoCalGas would be able to withhold 
information from non-affiliates for some number of hours. 
Moreover, all the conditions would be difficult to monitor and 
enforce, SoCal Edison says.  

     SoCal Edison also faults the absence of detailed procedures 
for ensuring compliance with the Order No. 497 restrictions 
referred to in condition 9-I and believes that procedures outlined 
in condition 14-N for auditing communications between Operations 
and shippers on the system, including Gas Acquisition, are 
unworkable. In addition, it criticizes the lack of detail needed 
to ensure effective monitoring and enforcement and to investigate 
and resolve complaints.  

     Imperial argues that the California Decision does not fully 
implement the remedies set forth in our Merger Order. n60 It 
points out that our Merger Order says that in order to mitigate 
the market power created by the merger, the Order No. 497 
restrictions would have to be expanded to address the potential 
for abuse of any of the affiliated relationships within the merged 
company. n61 According to Imperial, four conditions imposed by the 
California Commission do not apply to the entire corporate family. 
The restrictions are limited to "marketing" affiliates and SDG&E 
and should be expanded to cover any present or future affiliate 
that has a gas or electric merchant function. Moreover, conditions 
5 and 6 restrict only disclosure of information by SoCalGas to its 
affiliates. Likewise, Imperial argues that these conditions should 
be expanded to be reciprocal among SoCalGas and marketing 
affiliates engaged in a gas or electric merchant function. n62 
n60 Filing of April 22, 1998 at 6-15.

n61 79 FERC at 62,565.  

n62 Imperial cites the Commission's recent Notice of Proposed 
Rulemaking, Revised Filing Requirements Under Part 33 of the 
Commission's Regulations, 83 FERC P61,027 at fn. 59 (1998), where 
we expressed concern over the many possible types of 
anticompetitive coordination, particularly involving the passing 
of information among affiliates. 
     Finally, Imperial argues that the conditions imposed by the 
California Commission do not meet our requirement that SoCalGas's 
EBB, GasSelect, be operated as a same-time information and 
reservation system. It says that the Commission could not have 
meant that it would be acceptable for SoCalGas to simply keep 
operating GasSelect as it has done in the past. Imperial argues 
that the Applicants' operation of GasSelect does not offer truly 
equal access to information on discounting; not only is the 
information not released contemporaneously, but the information 
that would be posted is inadequate in several respects. For 
instance, Remedial Measures 16 and 13 contain an ambiguous, open-
ended provision that a seven-day delay in posting is permitted for 
information exchanged between SoCalGas's Gas Operations and Gas 
Acquisition where necessary for reliability and system balancing. 
Imperial also identifies Remedial Measures No. 8 and 15 as 

2. Resolution  

a. Order No. 497 Restrictions
     To satisfy the requirement that they adopt restrictions on 
the sharing of information, Applicants rely on conditions A 
through K imposed by the California Commission. They note that the 
California Commission stated that it "has the authority and shall 
enforce SoCalGas's compliance with [FERC] Order No. 497 . . . ." 
n63 California Decision at 146.
     The Commission does not believe that the applicability of the 
restrictions to marketing affiliates and the gas or electric 
merchant function of SDG&E meets our objective. Non-marketing 
affiliates with electric merchant functions with the exception of 
SDG&E would be exempt from conditions 3-C, 5-E, 6-F, 8-H. Our 
concern is that any transfer by SoCalGas of competitively-
sensitive information to its downstream electric generation 
affiliates could adversely affect competition in the downstream 
electricity market. Therefore, we grant Imperial Irrigation's 
request regarding the affiliates that are addressed in conditions 
3-C, 5-E, 6-F and 8-H and direct Applicants to modify these 
conditions to apply to any affiliate in the corporate family with 
an electric power merchant function. n64 
n64 In Morgan Stanley, 72 FERC P61,082 at 61,436-7 (1995), the 
Commission announced that for public utilities that are not exempt 
wholesale generators (EWGs), it would, for purposes of Part II of 
the FPA, define "affiliate" as that term is defined in section 
161.2 of the Commission's regulations, 18 C.F.R. sec. 161.2 (1997). 
Public utilities that are EWGs must define an "affiliate" for 
purposes of evaluating EWG rates as set forth in section 2(a) of 
the Public Utility Holding Company Act. If the merged company has 
any questions about whether an entity in which it has an ownership 
interest falls within the definition of affiliate, it may seek a 
declaratory order from the Commission.
     We disagree that allowing certain communications relating to 
system reliability and balancing service between Gas Operations 
and Gas Acquisition to be posted up to seven days after the fact, 
is an unwarranted exception to the contemporaneous posting 
requirement. We note that SoCalGas is obligated under condition 9-
I to file procedures with the California Commission that will 
enable shippers and the California Commission to determine whether 
SoCalGas is complying with Order No. 497 requirements. The 
California Commission has determined that it has the authority to 
enforce all of the conditions. This includes authority to adopt 
necessary enforcement procedures. We also have continuing 
authority under section 203(b) to ensure compliance.  

b. Codes of Conduct
     We find that with certain revisions, the codes of conduct 
will comport with the standards applicable to affiliated public 
utility marketers. n65 
n65 Applicants should also file the revised codes of conduct as a 
supplement to Enova Energy's market-based rate schedule and as an 
amendment to SDG&E's market-based power sales tariff. SDG&E 
recently received conditional market-based rate authority. See 
pacific Gas and Electric Company, et al., 81 FERC P61,122 at 
61,537 (1997).
     The revisions that are necessary are in sections 2 and 4 of 
both codes of conduct. Section 2 in each code of conduct addresses 
information-sharing requirements. Enova Energy and SDG&E agree to 
abide by the Standards of Conduct established in Order No. 889. 
n66 However, pursuant to our rulings in other market-based rate 
authority cases, the Commission believes it is necessary for each 
code of conduct to also separately provide that to the fullest 
extent possible, the employees of Enova Energy and SDG&E will 
operate independently of each other. n67 
n66 Codified at 18 C.F.R. sec. 37.1 - 37.4. The purpose of this part 
of the regulations is to ensure that potential transmission 
customers receive access to information that will enable them to 
obtain transmission service on a non-discriminatory basis from any 
transmission provider.  

n67 See Illinova Power Marketing, Inc., 79 FERC P61,010 at 61,066-
67 (1977); Energis Resources Incorporated, 79 FERC P61,170 at 
61,796 (1997); and Horizon Energy Company, 81 FERC P61,368 at 
62,750-51 (1977). 
     Section 2.B of each code of conduct prohibits sharing between 
SDG&E and Enova Energy (or between SDG&E and any electric 
marketing affiliate) of information concerning "possible wholesale 
power transactions (e.g., customer information), unless such 
information is publicly available or simultaneously made publicly 
available." The Commission is concerned that the reference to 
"possible wholesale power transactions" may be viewed as a limit 
on the type of information covered by the provision. As we have 
concluded previously, "any communication between the two 
concerning the utility's power or transmission business ..." is 
subject to this requirement. n68 The requirement applies to any 
communication concerning power or transmission business, present 
or future, positive or negative, concrete or potential. n69 Both 
codes of conduct are to be revised accordingly. Also, to eliminate 
any ambiguity, section 4.B of SDG&E's code of conduct must be 
revised to require SDG&E to make available "simultaneously" any 
non-public market information it provides to its marketing 
n68 UtiliCorp United, Inc., 75 FERC P61,168 at 61,557 (1996) 
(emphasis added).

n69 See 79 FERC at 61,796 and Unitil Power Corp., et al., 80 FERC 
P61,358 at 62,226 (1997).
     With respect to brokering, section 4 of Enova Energy's code 
of conduct provides that Enova Energy will attempt to broker 
SDG&E's power first before offering its own wholesale power on the 
condition that SDG&E's power is not more costly than Enova 
Energy's own wholesale power. Consistent with Wholesale Power 
Services, n70 this provision must be revised to provide that any 
SDG&E power available for brokering will be offered first, 
irrespective of its cost relative to cost of other power Enova 
Energy is offering for sale. 
n70 72 FERC P61,284 at 62,226-27 (1995).
     Also with regard to brokering, while we note that section 4 
of SDG&E's code of conduct provides that SDG&E will not pay any 
brokerage fee or commission to any electric marketing affiliate 
and that SDG&E will use non-affiliated brokers for wholesale power 
transactions when opportunities arise, Enova Energy's code of 
conduct lacks parallel provisions. Enova Energy must amend its 
code to provide that it will not accept fees or commissions from 
SDG&E and that its brokerage arrangements with SDG&E allow SDG&E 
to use other brokers as opportunities arise.  

c. Electronic Bulletin Board (EBB)
     Condition 20-T, imposed by the California Commission, 
provides that SoCalGas shall continue to maintain an EBB that is 
an interactive same-day reservation and information system and 
that when SoCalGas is required to post information on the 
GasSelect EBB, the information shall be posted within one hour of 
an executed transaction or the receipt and/or transmission of any 
relevant information. Applicants state that with this condition, 
GasSelect is operating as an interactive same-time reservation 

     Both SoCal Edison and Imperial contend that SoCalGas's EBB 
does not comply with the Commission's requirement for a same-time 
reservation and information system, since Applicants admit that 
data are not actually posted at the same time they are generated 
or used by SoCalGas and its affiliates. According to SoCal Edison, 
GasSelect compounds the deficiencies of Order No. 497 restrictions 
in preventing discrimination by failing to specify when a non-
affiliated shipper would learn of any potentially preferential 
treatment by SoCalGas to an affiliate. SoCal Edison asserts that 
SoCalGas could exercise its discretion in timing of release of 
information to deny "comparable" terms on the basis that the time 
lapse prevents the affiliate and non-affiliates from being 
"similarly situated."  

     Imperial also argues that rather than simply requiring a 
continuation of the status quo operation of the EBB, the Merger 
Order's use of "same-time" must have contemplated more than the 
usual Order No. 497 end-of-day posting requirement for information 
required to be posted contemporaneously. Imperial suggests that 
the Commission appears to have intended that some Order No. 889-A 
requirements be added, such as posting communications concerning 
discounting. n71 As Imperial views condition 8-H, it does not 
actually require the EBB posting of notification of availability 
of a comparable discount for non-affiliated shippers. Finally, 
Imperial contends that condition 13-M's statement that 
communications between Gas Acquisition and Gas Operations are to 
occur "preferably" through the EBB calls into question whether 
SoCalGas will actually be operating a same-time reservation and 
information system in practice. 
n71 See Open Access Same-Time Information System and Standards of 
Conduct, Order No. 889-A, 62 Fed. Reg. 12,484 (March 14, 1997), 
FERC Stats. & Regs. (Regulations and Preambles 1991-1996) P 31,049 
at 30,562, order on reh'g, Order No. 889-B, 81 FERC P61,253 
     The Commission finds that conditions 9-I, 13-M and 14-N will 
allow the California Commission to resolve concerns about any 
communications that occur outside the EBB. The California 
Commission states that it has authority to ensure compliance with 
each of the conditions and that it can develop detailed procedures 
to enforce the measures, as necessary. We further note that under 
condition 17-Q, SoCalGas is required to propose to the California 
Commission in an upcoming Gas Industry Restructuring proceeding 
certain provisions that may clarify the nature of communications 
between Gas Acquisition and Gas Operations to be conducted outside 
the EBB. In addition, while communications necessary to provide 
system reliability and balancing services are not restricted 
between Gas Operations and Gas Acquisition, all such 
communications are to be posted and will be available for 

     Concerns similar to those expressed by Imperial and SoCal 
Edison about the availability or posting of information regarding 
gas transportation discounts as required by condition 8-H were 
addressed in Order No. 566-A. n72 There, shippers had sought to 
have offers of discounts posted on the EBB during negotiations, in 
addition to posting the final offer. The Commission struck a 
balance between providing for disclosure of affiliate discount 
information and the preservation of competition between affiliates 
and non-affiliates. Under Standard H of the Order No. 497 
requirements, a pipeline is obligated to make discounts offered to 
affiliates contemporaneously available to non-affiliates. The 
Commission determined that the 24-hour posting requirement after 
gas first begins to flow was adequate to allow a non-affiliate to 
examine whether a denial of a discount to it is discriminatory. 
Here, as the California Commission points out, Applicants have 
agreed to seek prior approval from the California Commission of 
any transportation rate discount offered to any affiliated shipper 
(Remedial Measure 19-S). Applicants have also committed to posting 
such information within one hour of an executed transaction 
(Remedial Measure 20-T). We believe that these conditions achieve 
sufficient timeliness with respect to information flow and 
communication to resolve discrimination concerns. Intervenors have 
presented no new arguments that would cause us to alter this 
n72 Standards of Conduct and Reporting Requirements for 
Transportation and Affiliate Transactions, Order No. 566-A, 59 
Fed. Reg. 52,896 (October 20, 1994), FERC Statutes & Regulations, 
Regulations Preambles 1991-1996 P 31,002 at 31,123-27, order on 
rehearing, 69 FERC P61,334 (1994). 
d. Separation of Gas Purchases

     The California Commission imposed condition 18-R, which 
requires that SDG&E and any affiliate of SoCalGas shipping gas on 
the systems of SoCalGas and/or SDG&E use the GasSelect EBB to 
nominate and schedule gas used in electric generation separately 
from other gas it ships on either system. Condition 18-R also 
provides that such gas will be transported under rates and terms 
no more favorable than those available to similarly-situated non-
affiliated shippers for transporting gas used in electric 
generation. Applicants state that SDG&E and Enova Energy are 
currently purchasing gas transportation from SoCalGas in 
accordance with these requirements. n73 
n73 In their February 12, 1998 motion for a supplemental order (at 
p. 11, note 14), the Applicants indicate that they have filed with 
the California Commission a tariff establishing non-discriminatory 
transportation service to the interconnection points between 
SoCalGas and SDG&E. According to the Applicants, this tariff 
permits any shipper on both SoCalGas and SDG&E to obtain 
transportation from SoCalGas on the same terms as does SDG&E's 
electric generation load.
     The Commission finds that condition 18-R complies with our 
requirement. We note there will be a continued need for this 
requirement, despite SDG&E's commitment to divest its gas-fired 
generation. Under the consent decree, neither SDG&E nor any 
affiliate is prohibited from acquiring additional gas-fired 
generating capacity in the future, although a cap is placed on the 
amount of capacity that can be acquired. n74 
n74 The Final Judgement (which was attached to the Applicants' 
March 10, 1998 filing) provides generally in section V.B.1 that 
the Applicants can acquire or control California generation 
facilities only if they do not own or control more than 500 MW of 
capacity in such facilities. Section V.C. sets forth certain 
exceptions to this limit.
e. Advance Posting of Information on GasSelect
     We required that SoCalGas publicize in advance on the 
GasSelect EBB its planned use of pipeline capacity to fill 
storage. Under condition 21-U, SoCalGas is to post daily on the 
GasSelect EBB information for the day pertaining to estimated gas 
receipts by receipt point, necessary minimum flows at each receipt 
point, estimated system send out, estimated storage injections and 
withdrawals, and estimated day-end system underground storage. 
Actual data on gas receipts and net storage injections and 
withdrawals are to be posted within one hour. Condition 22-V 
requires SoCalGas to post daily similar following next-day 
information, including capacity available at each receipt point, 
total confirmed nominations by receipt point, estimated system 
storage injections and withdrawals, estimated as-available storage 
capacity, and the status of system balancing rules.  

     Neither SoCal Edison nor Imperial criticize these conditions 
as inadequate to comply with the requirement that SoCalGas 
disclose its plan to use pipeline capacity to fill storage. We 
also note that in their motion for a supplemental order, the 
Applicants stated that under a Supplemental Affiliate Transactions 
Compliance Plan filed with the California Commission on January 
30, 1998, they will begin posting on the EBB use of pipeline 
capacity to fill storage no later than May 1, 1998. Accordingly, 
the Commission finds that the conditions comply with our 

D. Compliance Issues: Whether Divestiture Proposal is
     In their answers to the Applicants' compliance filing, SoCal 
Edison and Imperial have refocused their arguments on the 
deficiencies of the divestiture requirements in the DOJ Consent 
Decree and California Commission Decision. They argue that relying 
on divestiture of SDG&E's in-state generation focuses only on 
incentives for exercising vertical market power associated with 
owning gas-fired generation in California and ignores other gas-
fired generation. For example, Energy Pacific's interest in the 
480 megawatt gas-fired El Dorado Energy merchant power plant 
currently under construction in Nevada, coupled with the 
acquisition of other generation by the merged company allowed 
under the DOJ Consent Decree, may restore the capability of the 
merged company to leverage SoCalGas's Southern California gas 
monopoly into electricity markets. n75 
n75 Imperial filing of April 22, 1998 at 5. SoCal Edison filing of 
April 22, 1998 at 6 and 12.
     SoCal Edison argues further that the conditions address only 
one facet of the merged company's ability to exercise vertical 
market power, its ability to discriminate in favor of affiliated 
customers through preferential treatment or access to 
competitively sensitive information. SoCal Edison voiced this same 
concern on rehearing, arguing that the Commission has not 
addressed the merged company's ability to manipulate gas prices 
and delivery (and therefore electricity prices) through its 
monopoly over gas transmission, storage and distribution in 
Southern California without overtly discriminating against non-
affiliated users. n76 
n76 SoCal Edison filing of April 22, 1998 at 10.
     Imperial argues that the behavioral remedies discussed in the 
Merger Order require transaction-by-transaction oversight, which 
could prove difficult. Behavioral regulation does not limit the 
incentives for the merged company to exercise market power. To 
remedy the inadequacy of the divestiture requirement, Imperial 
asks that the Commission preclude the merged company's acquisition 
of generating resources beyond a specified "cap" capable of being 
bid into the PX, pending the effective implementation of 
structural changes in California. n77 SoCal Edison argues that the 
appropriate additional remedy is the requirement that Pacific's 
intrastate gas transportation and storage assets be turned over to 
a third party with no interests in southern California electricity 
markets. n78 
n77 Imperial filing of April 22, 1998 at 3-6.  

n78 SoCal Edison filing of April 22, 1998 at 19.
     Imperial also challenges the Applicants' claim that the 
planned divestiture of SDG&E's gas-fired generation would 
eliminate the market problems raised by the merger. It argues that 
the merged company could still acquire other gas-fired generation, 
citing the merged company's existing plans for acquiring such 
generation that is capable of being bid into the PX. This 
Commission should set a cap on such future acquisitions.  

     As we explained in the Merger Order, a vertical merger is 
unlikely to impair competition unless the merged company has the 
incentive and ability to affect prices or quantities in the 
upstream and downstream markets. n79 This incentive substantially 
depends on the amount and type of generating capacity owned or 
controlled by the merged company. For example, the profitability 
of raising rival generators' delivered gas costs depends both on 
the revenues SoCalGas forgoes in the upstream market from 
withholding gas or raising those generators' delivered gas costs 
and the revenues acquired in the downstream market through higher 
electricity prices. After SDG&E's gas-fired plants are divested, 
with less marginal and inframarginal capacity on which to collect 
higher downstream revenues, the incentive to raise rivals' costs 
will be diminished. 
n79 79 FERC at 62,561.
     As noted in our Merger Order, divestiture of SDG&E's gas-
fired generation plants is another method of eliminating the 
vertical market power problem. n80 In our view, divestiture 
substantially lessens the incentive to exercise market power 
through raising rivals' costs. The merged company has other 
generation interests and can, under the divestiture requirement, 
acquire additional generation outside California. However, the 
Commission does not believe that such interests provide the same 
incentive the merged company would have to raise its rivals' costs 
as is provided by ownership of the amount and type of SDG&E's 
generation. Thus, we do not agree with Imperial's argument that a 
capacity cap is necessary. 
n80 79 FERC at n. 58.
     As to SoCal Edison's proposed remedy, we reiterate that the 
divestiture requirement would largely reduce the incentive for the 
merged company to raise electricity prices by raising gas prices. 
Moreover, we note that the divestiture was a condition required by 
DOJ, one of two federal antitrust agencies. n81 
n81 Gulf States Utilities Company v. FPC, 411 U.S. 747 (1973) 
(Commission does not implement antitrust laws, though it must 
consider antitrust implications of matters before it).
E. Whether It Is Necessary to Convene A Trial-Type Evidentiary 
     SoCal Edison and others argue that the Commission should have 
convened a trial-type hearing so that the parties could conduct 
discovery to identify the various ways in which the merged company 
could exercise market power and to explore what remedies would 
work. n82 They say that the courts require us to conduct a hearing 
when a case involves anticompetitive consequences. n83 SoCal 
Edison also argues that this Commission must conduct an 
independent investigation examining whether the conditions imposed 
by the California Commission and by DOJ will remedy the market 
power problems raised by the proposed merger. It says again that 
we should convene a trial-type hearing before an administrative 
law judge. n84 SoCal Edison claims that no agency, including this 
Commission, has examined the evidence to determine the measures 
necessary to eliminate vertical market power concerns. It says 
that a hearing is necessary for the Commission to develop an 
evidentiary basis upon which to conclude (as is the Commission's 
responsibility) that the conditions articulated in our Merger 
Order will remedy the vertical market power created by the merger. 
A hearing, they assert, would allow the Commission to judge the 
efficacy of the conditions imposed by the California Commission 
and explore whether additional remedies, including structural 
modification, are needed to mitigate the anticompetitive concerns 
not resolved by that Commission.
n82 SoCal Edison's Request for Rehearing at 26-31.  

n83 Id. at 27-28, citing City of Huntingtonberg v. FERC, 498 F. 2d 
778, 779 (D.C. Cir. 1974); Michigan Public Power Agency v. FERC, 
963 F.2d 1574, 1581 (D.C. Cir. 1972); Gulf State Utilities Co. v. 
FPC, 411 U.S. 747, 763 (1973); Cajun Electric Power Cooperative, 
Inc., v. FERC (Cajun), 28 F.3d 173 (D.C. Cir. 1994). 

n84 Id. at 15-18.
     We do not agree. It is well established that we are required 
to hold an evidentiary hearing only when there is a genuine issue 
of material fact, and even where there is such an issue, we need 
not hold an evidentiary hearing where the issue can be resolved 
based upon a written record. n85 SoCal Edison thus puts the cart 
before the horse with its argument that we must hold a hearing "to 
allow the parties to conduct discovery to identify the full range 
of anticompetitive mechanisms" n86 the merged company could use. A 
trial-type hearing is not required in order to permit parties the 
opportunity to uncover factual disputes.
n85 Cajun, 28 F.3d at 177; Louisiana Energy and Power Authority v. 
FERC, No. 97-1098 (D.C. Cir., April 24, 1998).  

n86 Filing of July 25, 1997 at 26.
     SoCal Edison claims that we must "ordinarily" convene an 
evidentiary hearing in cases of mergers that may have 
anticompetitive effects. n87 It argues that the record is 
insufficient for us to issue final approval, claiming that we have 
not "conducted any independent investigation" into whether the 
various changes in circumstances that occurred after our Merger 
Order resolve the concerns we raised in that order. n88 SoCal 
Edison appears to argue that the only way to conduct an adequate 
investigation is to convene a trial-type hearing.
n87 Id. at 28, citing, e.g., City of Huntingtonberg v. FERC, 498 
F.2d 778, 779 (D.C. Cir. 1974); Michigan Public Power Agency v. 
FERC, 963 F.2d 1574, 1581 (D.C. Cir. 1992); Gulf State Utilities 
Co., v. FPC, 411 U.S. 747, 760-763 (1973).  

n88 Filing of April 22, 1998 at 15-18.
     We do not agree that such a hearing is needed or that it is 
the only way to carry out an adequate investigation and to make 
valid findings. We have solicited comments at every stage of this 
proceeding, and SoCal Edison and others have had several 
opportunities to present their arguments that the merger is not 
consistent with the public interest. We have examined the 
conditions imposed by the California Decision, along with all the 
other relevant circumstances. We have discussed these 
circumstances and the intervenors' arguments concerning these 
circumstances at some length in this order. This is a sufficient 
basis for our decision.  

     Moreover, "mere allegations of disputed fact are insufficient 
to mandate a hearing; a petitioner must make an adequate proffer 
of evidence to support them." n89 Although SoCal Edison claims 
that there is "record evidence" that codes of conduct will not 
resolve the market power problem, n90 it does not say what that 
record evidence is. As the court noted in Cascade Natural Gas 
Corp. v. FERC, a hearing is not required in the absence of an 
adequate proffer of evidence revealing a material factual dispute, 
and even then, the hearing required may be a "paper" hearing. That 
case is particularly apt because of the strong parallels with this 
one in the kind of arguments raised:
n89 Woolen Mill Association v. FERC, 917 F.2d 589, 592 (D.C. Cir. 

n90 Filing of July 25, 1998 at 26.
while petitioners claimed in general terms the theories upon which 
they claimed unfair competition and undue discrimination, the 
Commission and other parties responded in kind. There were no 
underlying disputes over specific material facts that required a 
hearing. n91
n91 955 F.2d 1412, 1425-6 (10th Cir. 1992). Also see Amador Stage 
Lines, Inc. v. U.S., 685 F.2d 333, 335 (9th Cir. 1982) (material 
issue raised, but paper rather than evidentiary hearing 
sufficient), and Cities of Batavia, et al. v. FERC, 672 F.2d 64, 
91 (D.C. Cir. 1982) (same).
     The cases cited by these intervenors do not support the 
proposition that competitive issues must be decided based on 
evidentiary hearing -- in fact, summary disposition, as well as 
paper hearing procedures, can be acceptable. Huntingtonberg 
specifically left it up to the Commission to decide the nature of 
the further procedures ordered on remand, noting only that "some 
form of hearing" was needed. n92 The Michigan case raised the 
question of whether summary disposition -- disposition with no 
hearing -- was appropriate. In fact, the court found that summary 
disposition of allegations of anticompetitive behavior was 
acceptable. SoCal Edison quotes the court's statement that the 
Commission must hold a hearing when an application presents an 
"obviously direct and anticompetitive risk...." However, the court 
in Michigan did not say that a paper hearing could not be 
adequate. Similarly, in Gulf States the Supreme Court said that 
summary disposition of allegations of anticompetitive behavior 
could be acceptable as long as the agency explains why summary 
disposition is warranted.
n92 498 F.2d at 789.
The Commission orders:  

   (A) The requests for rehearing are hereby denied. 

   (B) The Applicants' proposed disposition of facilities is 
hereby approved, as revised with respect to the restrictions on 
abuses of affiliated relationships, as discussed in the body of 
this order.  

   (C) Within 30 days after issuance of this order, the Applicants 
shall file revisions to their codes of conduct and restrictions on 
the sharing of information, as discussed in the body of this 
By the Commission.
                                         /s/ Linwood A. Watson Jr.
                                         Linwood A. Watson, Jr.
                                         Acting Secretary

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