Saturday, Feb. 10, 2007 | Donald Felsinger has served as Sempra’s chairman and chief executive officer since Feb. 1, 2006. The company is the region’s largest energy provider, as the parent company of San Diego Gas & Electric. Sempra, which was formed from a 1998 merger, employs 14,000 globally and 5,000 in San Diego, and is one of the region’s three Fortune 500 companies. It is often criticized by environmentalists for two controversial projects under development: The $1.4 billion Sunrise Powerlink, a power line that would pass through Anza-Borrego Desert State Park, and a liquefied natural gas terminal under construction in Baja California.
Felsinger has worked with Sempra and its subsidiaries since 1972, working his way up through the ranks. He took Sempra’s reins with the threat of a $23 billion lawsuit hanging. That suit has been settled, but the company is still recovering from a tarnished image earned during the 2001-02 energy crisis, Felsinger says. He sat down with voiceofsandiego.org in Sempra’s 19th floor downtown conference room to talk about his company’s future, why the company is a “necessary evil” and why he has changed his tune on global warming.
Is global warming real?
It is. There’s getting to be almost unanimous consensus among scientists that the world is getting warmer. Scientists will still argue about causation, whether it’s manmade or whether it’s cloud cover that’s insulating the earth, but there’s no doubt. I think this latest report that came out, the majority of scientists have now gone from saying it’s likely to now it’s very likely that it’s manmade causation.
I think that debate is over. The earth is getting warmer. There will be people on the fringe who say it’s not from manmade [carbon dioxide]. The debate now is going to be focused what we do. …. You can see that debate, it’s happened very quickly over the past year. There are very few people now who will say “I’m not convinced the world is getting warmer.” People say it’s getting warmer. The debating is why it’s getting warmer and what ought to be done about it. Forget about what’s causing it, it’s getting warmer. What can we do as an insurance policy in spending the least amount of money that we have to spend without impacting the economy to take corrective action?
You said in the Union-Tribune in June 2006: “There definitely is a debate about global warming. And when you look at the opposing views, neither one has prevailed. The coal industry says there is no evidence of global warming. I don’t think the science supports either side, so you ought to take a position of moderation. It’s difficult to take sides between smart people.”
I’ll tell you what we have done. We have spent a lot of time looking at the topic, listening to the various scientists. Next week, we have the full board of directors at Sempra and the senior management team are going to engage in a four-hour discussion with two scientists. One is (Richard) Lindzen from M.I.T. and the other is (Veerabhadran) Ramanathan from UCSD, to look at what it is that they would espouse in terms of things that are done to address the impacts of global warming. It’s kind of an education process for our board and for our management team.
It’s part of a learning process we’re putting the entire company through as we’ve been marching down this fairly rapid path this past year with all the debate and discussion going on with global warming.
I think this entire company is in a position today is that we’re going to do something about global warming as a society. The question is what do we do? And what’s the most effective approach to deal with global warming? The approach would be — what do we do as a society to address this? That’s where the debate is going to go. As a company, we don’t have the answers, but we think what will make the most sense is to have a market-based approach. The market is probably smaller than all of us put together. But there’s no framework in the U.S., there’s no framework globally.
Why bring in Richard Lindzen from M.I.T.? He’s known as being one of the country’s biggest skeptics that humans are warming the planet.
He has a point of view that it’s as much meteorology as it is manmade CO2. And I think it’s important to have people on the extreme ends of this articulate why. Because at the end of the day what’s important here is what we do about it. I don’t know yet, but I think if I were to have a conversation with Lindzen, he’d say be careful how you spend your money, because you may spend it doing the wrong things.
But Dr. Ramanathan is not in the extreme. He’s in the very well-established, scientific majority.
This is a process that we’ve been engaged in for several months and will continue. These are the first of several speakers that will be addressing the Sempra management and the Sempra board. I wouldn’t take away anything from the fact of who these first speakers are. They were available.
Several utility companies are working with the Natural Resources Defense Council, urging action on global warming now — Pacific Gas & Electric among them. Why has Sempra been absent from that discussion?
You pick and choose where you want to have your input. Let me back up. We think that there needs to be a healthy discussion and debate about how we spend money to deal with global warming. To that end, there’s probably a lot of different ways you can approach this. We recently gave a grant to UC Davis. And we asked that $100,000 of that grant be set aside to put on forums with regulators, politicians and industry to talk about how best to address the issue of dealing with global warming. We just pick a different arena to spend our time in.
PG&E’s CEO, when that story came out two weeks ago, argued that it’s better for utilities to push for action now. Utilities are the No. 2 cause behind transportation of CO2 emissions. He said to push for action now before contributing to eventually more serious regulations. Do you agree with that? Is it a matter of sooner rather than later because the penalty you would pay would be less severe?
I don’t know. I really don’t know. Various people are promoting different time lines and different outcomes for different reasons. … I think the industry wants certainty. If I were the CEO of Duke Power that had some of my generation from coal, I would want to have a seat at the table to determine what the outcome is, because that would provide certainty for the investments I’d made.
Our carbon footprint is so small. We don’t own any coal-fired power plants. We have a small contract that provides coal-fired power to SDG&E, and it’s about 3 percent of the total mix. It’s a contract that goes away.
We’re not investing in coal-fired generation. The power plants we own and operate are by far the cleanest of any in the U.S. What we want is a system that’s sustainable, one that doesn’t penalize us for the fact that we’ve already made investments in clean generation, that (recognizes) we’re out contracting for 20 percent of our energy from renewables.
You have to take a look at each individual circumstance and understand where people are in that. If you’re an equipment manager that’s making wind turbines or solar panels, you’re going to push for more rapid deployment and an outcome that’s more beneficial for your industry. Because of where we are and what we’re planning on doing, we want a sustainable outcome. And that’s one of the reasons that I felt uncomfortable looking at continuing to develop coal-fired power plants because no one could explain to me what the regulations would be 10 years from now.
Sempra had until recently proposed though to invest in coal-fired power plants in Idaho and I believe the company owned two coal-fired plants in Texas. And were those divested because of the state regulation prohibiting the importation of coal-fired power or because of the long-term uncertainty around coal?
There were two main reasons, one is that our strategy to become a natural gas infrastructure player — and the things that we wanted to do with in the natural gas infrastructure arena, we didn’t have the money for.
And it so happened that because natural gas prices were so high, that they [pushed up the] price of the coal-fired power plants. And so we had an asset over here, whose value was being inflated by high natural gas prices. And when I ask myself the question, “If I’m going to be successful at developing natural gas infrastructure, the reason I’m doing that is because at the end of the day, the investment I’ll make in natural gas infrastructure are going to bring the prices of natural gas down.” When I start bringing liquefied natural gas into Costa Azul, that’s going to be about 10 percent of the western U.S. market. So when you bring in, on day one, new supply that’s 10 percent of that market, you’d expect prices to drop. And when the price of natural gas starts to drop, not only with the plant that I’m building in Mexico, but the one in Louisiana and all the others I’m building, the price of natural gas will fall and that’s the intent. When the price of natural gas falls, the price of the coal-fired power plants will start to fall. And so from my standpoint, it was a timing issue. …
And since coal-fired power plants were not part of our long-term strategy, the sense was to sell these things, take the money off the table because later, if I ever want to get back in that business again, I go back and buy them at a cheaper price. That was a pure economic decision, driven by the fact that we were going to be a natural gas infrastructure player.
Jumping back with one last global warming climate change question: Would you support national caps on greenhouse gas emissions? Is that where the certainty you talk about comes from?
I think the real solution is a worldwide cap-and-trade program. CO2 has no boundaries. I mean, a unit of CO2 whether it comes from the U.S., Mexico or China, it’s in the atmosphere and it does damage. So what we need is a worldwide program to deal with CO2 emissions. If you can’t get to a worldwide program, then get to a national program and then state-level programs, which is where we are. I think we’re in the first step, the California program that’s coming along that will be developed and whether it’s a cap-and-trade that the governor has proposed, or whether it’s an absolute cap, we’ll have a program. … The ultimate solution for the Earth is a global program. It will take us a while to get there.
But we have one though. The Kyoto Protocol.
Yeah, but nobody’s a member — China, India and the U.S. I mean China is building, what, a coal plant a week? So we can do all we want here. But until India is brought along and China is brought along, in some way we can’t even catch up. We’re still losing ground. And so, if we’re going to address this, we need to find a way to get all the countries in the world signed on and involved and create a framework where there can be a program in place where the dollars that are spent go to the area of highest value and the largest CO2 production.
You often hear about the nuclear energy renaissance. Do new nuclear plants play any role in this company’s future? Any appetite for that?
Well, there is, but probably at a different level. We have been on a path to not make any new investments in San Onofre. … As these units have come up for major maintenance in terms of replacing steam generators, we ask ourselves ‘Should we be in this business?’ I mean, it’s very expensive. There are a lot of issues around disposal of nuclear waste and they don’t have technology for a solution and it will be years before we have a solution. Should we, in fact, continue to want to put money into this technology and it became pretty obvious … with the issue of fuel diversification, the issue of global warming, that it probably made sense to stay there. And so we have made the decision to stay there. … Now going forward, would we make an investment in a green-field nuclear plant someplace? Probably not. Not because I think it’s the wrong thing to do, but we have so many other opportunities that have more near-term impact in terms of natural gas.. There will be other companies that make investments in nuclear energy. And I think that’s probably the right thing to do. I think that done properly, nuclear energy is a good outcome for the U.S. … But it’s a long path to go on.
Are you confident the company will achieve its renewable energy goals by 2010?
If it doesn’t — I think we will — but if we don’t, it won’t be for a lack of trying. Because I have authorized the people that run SDG&E that if they have to … we will co-invest in those assets to get them going. The issue is really the one everyone’s waiting for — is there going to be a pathway to get that power into San Diego?
That decision (on the Sunrise Powerlink) will come at the end of this year, beginning of next year. But developers are loathe to start breaking ground and making investments until they know there’s a pathway here. … But as I said if we don’t get there it’s not because we didn’t try. And I have been assured by the people that run SDG&E that they’re going to do everything possible to make that renewable goal a reality.
Talk about the Sunrise Powerlink. It was originally going to save customers $447 million. It was revised last month to $85 million, then to $200 million. Why that variability?
The reason for the change is that we made a mistake. I say “we” — when you look at an investment that’s a billion-and-some-dollars over the life of the project, there’s some very complicated models.
You have to take into account what may or may not come online in terms of renewables; what will gas prices be one year, five years, 15 years out. And one of the contractors that we hired outside of the company did some modeling, made an input error, a mistake, and the number went from savings of $400 million down to $200 million and we knew it was $200 million; we found this mistake that was self-reported. Because we’re in a regulatory process … we ended up reporting new information in segments that confused the public. We knew it was going to happen. And I think there are some people that liked the fact that we had to report in segments because it confused the public and it kind of made us look stupid. We did look stupid, that objective was achieved. But we knew going into it that the change was from $400 million to $200 million and changing it to $80 million from $200 million was an unnecessary step, but it was the way the process worked and that’s what happened.
The path of that power line has obviously opened the company up to criticism. Why build it through Anza-Borrego Desert State Park? Why not go around the park and avoid that line of attack from environmentalists?
I will assure you that if there was any way not to build this through the park, we would not build it through the park.
There’s no other way to get here. There is no other way that makes any sense whatsoever. From a cost standpoint and an environmental standpoint. I have been in meetings with our people and keep pounding this over and over again: Is there any other way to get the power from Point A to Point B without going through the park … and it just doesn’t make any sense. I think at the end of the day, the hearing process will demonstrate that.
Anytime we build stuff, whether a power plant or a receipt terminal or a gas pipeline or power line, they all have controversy around them. Power lines tend to have more controversy because of their nature. They pass by more homes and different areas of the service territory. And so they get more visibility. They come with a whole host of issues in terms of perceived impacts on property value, perceived impacts on health, perceived impacts on just the view. But the process we go through in every one of our projects is so open and so many people get to weigh in with their point of view, that at the end of the day when a route is selected, I have extreme confidence that was the best route.
This route ends up getting changed many, many times with input from residents, from community groups, from state and federal agencies and regulators. It’s never a perfect route because somebody is always going to be affected, but it’s the nature of infrastructure that somebody doesn’t like the outcome. And they’re usually the loudest voice at the end. If there were a better route, an easier route, we would have found it. And if there is a better route it will come out of the regulatory process.
That gets at one topic I wanted to talk about — the company image and perception in the community. The company’s image obviously took a hit during the energy crisis. Has it recovered from that?
Recovering. I came to work here in 1972 and I can’t think of anytime when we just had a great run of years with no issues. We had high prices in the 80s. There’s always been an issue where we’ve been concerned about our image.
The only time I can recall when people really liked us was when we were about to be taken over by Southern California Edison. People came out and said, “Well, they may be sons of bitches, but they’re our sons of bitches” And so I think there’s a certain element of that. We’re a very public company. We bill somebody every month for something of a necessity.
They really appreciate the employees that we have that go in their homes and help with gas issues or leaks or electrical problems, but the fact is that we’re so visible in our billing every month. And we have these projects that are in the media — that almost every day of the week there’s some project that we’re working on and there’s a story about us. We’re a natural target. And so all we can do is do the very best job we can. Be credible in how we go about the work we do. Be as public as we can with information when we have it. And try and get people to understand that we live here, too. It’s amazing, we have 5,000 employees here in the San Diego area. We’re very concerned about how this image issue of the company is dealt with in the community and the things we do to help improve that.
Now it was probably a low point for all the energy companies and utilities in California during the energy crisis. I think all of us lost tremendous credibility when we had these tremendously high prices. We had outages — they didn’t know who to blame, whether it was politicians, the regulators or the utilities. And we suffered from that. We suffered a lot. And if you go out and take a look at how people felt about Sempra or the local utilities, it was very negative. And it bothered me. It still bothers me because that’s not who we are. It’s not what we’re about. We do things that improve people’s lives. We create a foundation that drives this economy in terms of its energy supply. Our employees are all committed to the communities where they live. They like to go out and work and do things as a company or individuals. …
And I’ve got (former San Diego Regional Chamber of Commerce CEO) Jessie Knight, who I hired, on a fairly tight leash. I said I want some baseline data as to how we’re perceived today. And I want to see real things that we do to better communicate our story, to better work with the community with which we do business; work with people that are opposed to what we’re doing. At the end of the day, we all have the same objective and that’s to have a secured, energy supply and to fill the cost for the people that are our customers. And it’s all about the path we take to get there and how we present ourselves in that process. It’s a primary objective of mine is to improve our image. I think it can be better. I know who the company is and what it stands for and I’m not satisfied.
Share with me your vision of the future of the company.
It was pretty obvious about 10 years ago that SDG&E could never be a player — and would probably end up, if we didn’t grow, being acquired. And the only way to keep from being acquired would be to create a footprint that was big enough in size and scale that we could ride out some of the things I thought would happen in the industry, with deregulation and the opening up of global markets and domestic markets.
And that’s been fairly true. Had SDG&E been a standalone company, we would not be here today, because we wouldn’t have survived some of the turmoil that took place in the early 2000s. My vision was to create a bigger company, create job opportunities, to grow the business in San Diego. We’ve been fairly successful at that.