L.A. gas, electric utilities eye ventures in Mexico.

Mexicans signal growing interest in U.S. investment

Two of Los Angeles' largest utility companies are negotiating with the Mexican government to foster large-scale power generation south of the border -- unprecedented moves that herald Mexico's growing openness to powerful Yankee money.

Southern California Gas Co. hopes to sell natural gas to Mexican power plants, while SCEcorp wants its energy-investing arm to bankroll a coal-fired plant at an undisclosed location in Mexico, according to company announcements last month.

Several industry sources said they were pleased but not surprised by the news, saying it was further evidence that regulated utilities in America are building deeper alliances with power plants owned by other enterprises, often foreign.

The L.A. energy titans anticipate gaining revenues and profits from Mexico. And regulators will be watching to ensure that the utilities don't raise rates for Southland businesses and households to subsidize a risky Mexican venture.

"That's something we're going to aggressively pursue," vowed Deputy Director Erik Jacobson, of the state Public Utilities Commission's Division of Ratepayer Advocates, an in-house watchdog for business and residential customers.

Jacobson, who has been briefed by SoCalGas on its plans, said the issue is particularly sensitive with $7.5 billion-in-revenues SCEcorp. Its Southern California Edison Co. utility, which sells electricity to most L.A. County businesses, recently agreed to reimburse customers $250 million that the consumer watchdog said was improperly charging for power it buys at allegedly inflated prices from a sister company. The latter company is leading the negotiations in Mexico for SCEcorp.

From the companies' perspective, the proposed deals would thrust them into the long-guarded Mexican power system, and possibly land them lucrative additional sales directly to Mexican industries.

"There has been a change in policy in Mexican President Salinas' administration to import natural gas from the United States," noted Malissa McKeith, a Los Angeles attorney with law firm Baker & McKenzie's international practice. Also, she said, the increase in maquiladoras assembly plants and other industry along the border has generated more energy demand than can be supplied by Pemex, the government-run energy conglomerate.

Pemex was approached in January by $3.56 billion-in-revenues SoCalGas and the gas utility serving San Diego, San Diego Gas & Electric Co., concerning two proposals, said SoCalGas Special Projects Manager Steve Miller. The first was to lay a two-mile pipeline from San Diego's system to the Mexican border to join with a to-be-constructed Mexican pipeline running northward.

The second, more ambitious, proposal would have a bigger pipeline running from the SoCalGas system in Riverside County to the border. Within two or three years, between 150 million and 500 million cubic feet of gas would move south per day. At rates charged other utility buyers in America, that would equal revenues of roughly $8 million to $27 million a year, although Miller declined to indicate what rates would be offered the Mexicans.

Those revenues, however, would comprise less than 1 percent of the $3.56 billion posted by SoCalGas last year.

David Fleischer of Prudential Bache Securities nevertheless praised the strategy. "Sell it to any place you can if there's money to be made," said the New York-based securities analyst.

Mexico's power plants in North Baja are not connected to its main electricity grid or to pipelines from large gas supplies in the extreme south. Fleischer said it's cheaper for Mexico to buy Yankee gas than to spend hundreds of millions of dollars on a mammoth pipeline.

Theoretically, sales to Mexico could lower rates for American customers: Better use of the SoCalGas infrastructure means more revenue generated with a fixed overhead, and profits exceeding 12.7 percent on equity must be returned to customers.

"Generally, when they utilize their systems more heavily, it's beneficial to everyone," said John Vautrain, an engineering consultant at energy-economics firm Purvin & Gertz in Long Beach. He said most relief would flow to residential and small-business customers who heat and cook with gas, the core gas users who underwrite the utility's system. (Many large customers are equipped to switch to oil use when gas prices rise and therefore are charged lower gas rates.)

As for the other utility company, SCEcorp, only one paragraph of information about its Mexican proposal has been made public, in its fourth-quarter shareholders report last month.

Officials at its Mission Energy Co. subsidiary are talking with the Mexicans about investing $300 million in "a major coal-fired plant and associated coal reserves in Mexico." That was conditioned on certain agreements being reached by January, including a power-purchase contract with the Mexican national electric utility. No explanation of the time deadline was offered.

Officials at Mission and SCEcorp have not returned repeated telephone inquiries by the Business Journal. Press-shy Mission, based in Irvine, was formed in 1987 by Edison's holding company to invest in power plants and other projects that were either taboo for a regulated utility to own or held greater profit potential than regulators would permit Edison to enjoy.

In recent quarters, Mission Energy has been earning whopping profits of about 40 to 50 cents on each $1 in revenue. That caught the eye of regulators who already suspected Edison and Mission of "self-dealing" concerning power-purchase contracts at 13 Mission plants. "Non-standard" contracts rather than PUC-approved contracts were used. Edison has defended the contracts and said their "price provisions" are favorable to customers but decided to settle with regulators.