Pacific Enterprises

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Pacific Enterprises

633 West Fifth Street
Los Angeles, California 90071
U.S.A.
(213) 895-5000
Fax: (213) 629-1225

Public Company
Incorporated: 1907 as Pacific Lighting Corporation
Employees: 42,000
Sales: $6.92 billion
Stock Exchanges: New York Pacific

Pacific Enterprises was formed in 1988, two years after Pacific Lighting Corporation bought Thrifty Corporation, which owned drug, discount, and sporting-goods stores. Pacific Lighting’s main business had been Southern California Gas Company, the largest gas utility in the United States, supplying about 15 million people in a 23,000-square-mile territory that includes the Los Angeles area. Pacific Enterprises also engages in oil and gas exploration and drilling.

Pacific Lighting Corporation was founded in San Francisco in 1886 as Pacific Lighting Company by C.O.G. Miller and Walter B. Cline. Both men, who had worked for Pacific Gas Improvement Company—owned by Miller’s father—saw an opportunity to start their own business when their employer decided not to use the newly invented Siemens gas lamp. Miller and Cline began buying Siemens lamps in San Francisco and soon expanded into the southern California utility business, buying a half interest in a gas manufacturing plant in San Bernardino, California. Their business flourished, and in 1889 Pacific Lighting Company bought three Los Angeles-area gas and electric firms with combined assets of more than $1 million. Miller and Cline created a subsidiary, Los Angeles Lighting Company, to consolidate the three formerly competing firms. Pacific Lighting’s attention remained focused on the Los Angeles area for most of the next century.

Pacific Lighting supplied the gas and lighting for the small but rapidly growing city of Los Angeles. Los Angeles Lighting immediately began to make needed improvements in the Los Angeles gas system, also dropping its prices. The company faced stiff competition from numerous small utilities during the 1890s, however, that retarded its growth. To help increase profits, Los Angeles Lighting began importing and selling coal and selling gas-powered appliances, hoping to stimulate the demand for gas. Pacific Lighting then bought a controlling interest in Los Angeles Electric Company in 1890, and in 1904 it combined all of its Los Angeles lighting and electric operations to form Los Angeles Gas and Electric Company (LAG&E). In 1907 Pacific Lighting Company was incorporated and changed its name to Pacific Lighting Corporation.

Pacific Lighting’s gas sales increased tenfold between 1896 and 1906 as Los Angeles expanded. Sales grew further, after the San Francisco earthquake of 1906 caused many to move from northern California to Los Angeles. The city grew so fast that LAG&E could not meet demand, and some parts of the city went without gas for days during cold spells in the winter of 1906 to 1907. Seeing an opportunity, a group of Los Angeles businessmen created the City Gas Company in an effort to win LAG&E’s disaffected customers. The City Gas Company could not match the resources of the older LAG&E, however, and in 1910 it sold out to Pacific Light and Power, which owned Southern California Gas Company, one of LAG&E’s largest competitors. A conservatively run company, LAG&E concentrated on supplying its service area and collecting its rates while rivals Southern Gas and Southern Counties Gas Company of California worked on new gas technology.

By 1915 the Los Angeles utility industry was dominated by LAG&E and three other firms. These utilities were extremely unpopular with the public and had to continually fight off the threat of municipal ownership and government regulation. LAG&E and the other utilities fought Los Angeles’s attempts to build a municipal electric system by trying to block the financing and by launching time-consuming lawsuits. In 1917 the utilities came under the jurisdiction of the newly formed California Public Utilities Commission (CPUC).

Because LAG&E supplied Los Angeles’s densely populated downtown area, where operating costs were low, a municipal utility would not be able to match LAG&E’s rates. This situation slowed the momentum of the municipal ownership movement, and the battle remained stalemated throughout the 1920s. Meanwhile, southern California continued to grow rapidly, and LAG&E put its resources into expanding its services, spending $10 million to build a new electric plant and enlarge its substations. To fight off municipal ownership, LAG&E began a public relations campaign and sold stock.

After the Great Depression began in 1929, the tide shifted toward municipal ownership of utilities, partly because cash-starved citizens hoped municipal ownership would lower their bills, and partly because of the anti-corporation political climate. In 1929 the city of Los Angeles announced it was going to buy LAG&E electrical properties. The city had contracted to buy a share of the hydroelectric power produced by the new Hoover Dam and wanted to use LAG&E’s power grid to deliver it. The company’s electric properties provided one-sixth of its revenue, so it fought the move as long as it could. LAG&E, however, needed to renew its gas franchise, and the city would do that only if LAG&E agreed to sell its electric properties. LAG&E sold the properties in 1937 for $46 million.

Though stung by the loss of LAG&E’s electric operations, Pacific Lighting continued to grow as a gas utility. Pacific Lighting ran its operations conservatively, initially expanding its services only to regions that could be served by existing gas generating plants. As natural gas became more widely available in California, Pacific Lighting’s gas operations expanded.

Pacific Lighting acquired control of the gas distribution systems of Southern Counties Gas in 1925, Santa Maria Gas Company in 1928, and Southern California Gas in 1929. These companies had expanded more aggressively than Pacific Lighting, particularly around Los Angeles, in some cases quadrupling output during the 1920s. Part of this expansion came from the rapid growth of Los Angeles, and part from new uses for gas, such as space heating and water heating. By 1930 Los Angeles led the United States in natural gas consumption, and Pacific provided gas to half the population of California by 1930. It was the largest gas utility in the United States, serving nearly two million people. Pacific Lighting made broad policy decisions for its new subsidiaries, leaving the day-to-day operating decisions to the management of those firms.

Natural gas was a more efficient and less expensive fuel than manufactured gas. Because Pacific Lighting and its subsidiaries had switched to natural gas during the 1920s, both gas rates and gas consumption dropped. To compensate for the loss in volume, Pacific Lighting successfully promoted gas for industrial use. Industrial customers were attracted to the low rates and ease of handling associated with natural gas as well as to the fact that natural gas did not require storage facilities. Industries used natural gas primarily during the summer to absorb Pacific Lighting’s excess capacity, while during the winter Pacific Lighting required industries to use more energy from other sources. To maintain natural gas sources as the fuel became more scarce in the Los Angeles area, Pacific Lighting built longer pipelines, aided by improvements in technology.

Pacific Lighting worked on advertising campaigns with other gas utilities during the Great Depression to counter the belief that gas supplies would soon run out and to push the sales of gas-fueled appliances. This successful campaign helped the company weather the Depression, despite decreased use of its gas by industry.

In 1933 an earthquake caused extensive damage to Pacific Lighting’s gas pipeline system, as did torrential rains in 1938. In an attempt to help recoup some of the losses suffered during the 1930s, Pacific attempted to combine Southern Counties Gas and Southern California Gas. The request was denied by California regulators, however, on the grounds that two companies, even if owned by the same holding company, would produce more competition than would one company.

During World War II Pacific Lighting diverted energy to defense manufacturers and converted an old gas plant to the manufacture of war-related chemicals. The demand for natural gas increased dramatically during and after the war, and Pacific Lighting sought new means of keeping pace. Because new defense industries drew yet more people to southern California, conditions for the company during the late 1940s and 1950s were similar to those during the 1920s, requiring large capital outlays for new construction.

In 1947 Pacific Lighting spent $25 million to build the Biggest Inch pipeline, which brought large amounts of natural gas to California from southern Texas. Demand grew so quickly that an extension to the large gas fields of the Texas panhandle was built in 1949. The company also built vast underground storage areas in southern California. Over the next ten years Pacific Lighting greatly increased the volume of its interstate delivery system, and out-of-state gas made up 90% of the company’s supply. In addition, the company had promoted gas-powered appliances so effectively that 90% of all cooking ranges and 98 % of water heaters and home heating systems in southern California used natural gas. To meet demand, Pacific Lighting offered industries low rates in exchange for using other energy sources when demand peaked on cold winter days.

By 1950 the cost of bringing gas to customers had doubled since the years before World War II, but rates had risen only 15%. Pacific Lighting repeatedly sought unpopular rate hikes during the 1950s, and it increased its public relations efforts to help improve its image. Prices stabilized in the early 1960s as a result of regulatory changes that gave Pacific Lighting and its suppliers greater pricing flexibility. By the mid-1960s Pacific Lighting had become the largest gas supplier in the world, and its prices were among the lowest in the United States. C.O.G. Miller died in 1952, and his son Robert Miller became chairman.

In 1965 Pacific Lighting restructured its pipeline subsidiary, Pacific Lighting Gas Supply Company changing its name to Pacific Lighting Service and Supply. In 1967 the firm moved its headquarters from San Francisco to Los Angeles.

In 1970 Pacific Lighting received regulatory permission to merge Southern California and Southern Gas into one company, called Southern California Gas Company. Pacific Lighting created another subsidiary in 1972, Pacific Lighting Coal Gasification Company, to build a coal gasification plant.

Despite the new pipelines, by the late 1960s gas supplies were dwindling again. Paul Miller, who became president of Pacific Lighting in 1968, sought additional supplies across an increasingly wider area, including Alaska, the Canadian Arctic, and the Rocky Mountains. In 1970 the company created a subsidiary, Pacific Lighting Gas Development Company, to find new gas sources. It soon signed a contract with Gulf Oil Canada to purchase large amounts of gas from a new pipeline that the company was building in Canada’s Northwest Territories. Pacific Lighting also got involved in the Alaska Natural Gas Transportation System approved by the U.S. government in 1976, although more than a decade passed before any gas from the project was transported to southern California.

The 1970s energy crisis presented grave problems. Energy needs were increasing while Pacific Lighting’s gas suppliers began cutting back the company’s supplies. Pacific Lighting considered bringing in liquid gas from overseas, working with Pacific Gas & Electric, another California utility. The two firms began construction of a liquid natural gas plant at Little Cojo Bay, California, in 1979, although construction was halted in 1984 because the natural gas shortage had eased. The shortage ended because of conservation efforts and because of a federal law passed in 1978 that partially deregulated prices for new gas finds. The deregulation led to higher prices that in turn caused widespread complaints, however, and the company launched another public relations campaign on radio and television to explain why prices were rising.

The price increases, fuel shortages, and slowing population growth in southern California convinced Pacific Lighting executives to begin diversifying. At first Pacific Lighting’s new affiliates were gas-related, but soon the company branched into real estate, air conditioning, agriculture, alternative energy, and retailing. In the early 1970s Southern California Gas began two major solar energy research projects. More importantly, the company moved into gas and oil exploration and development. In 1975 Pacific Lighting Exploration Company invested in drilling in the Dutch sector of the North Sea. The ventures into agriculture and air conditioning were sold off in the late 1970s and early 1980s. In 1987 the firm sold its real estate operations for $325 million, believing the money could be more profitably invested elsewhere.

In 1983 Pacific Lighting bought Terra Resources, which owned oil and gas property in 18 states. In 1988 it bought Sabine Corporation, a Dallas, Texas-based exploration firm. By the late 1980s oil and gas exploration provided 11% of Pacific Lighting’s revenue. Pacific Lighting still wanted to move into areas unrelated to the utility business, however, and in 1986 it bought Thrifty Corporation, a chain of Los Angeles-based retail stores. The purchase brought Pacific Lighting 500 Thrifty Drug Stores, 27 Thrifty Jr. drugstores, and 89 Big 5 sporting goods stores. Pacific acquired Thrifty in a stock swap valued at $886 million, or 25 times Thrifty’s annual earnings.

Thrifty had been founded in 1919 by two brothers, Harry and Robert Borun, with their brother-in-law, Norman Levin. Initially the firm sold drugs and sundries wholesale. After the stock market crash in 1929, the firm opened its own cut-rate drugstores. By World War II the firm operated 17 stores in the Los Angeles area. In the 1950s, with strip malls appearing and Thrifty’s sales dropping, the firm switched to larger stores with a broader selection. In the 1970s, with competition increasing, Thrifty adopted a more aggressive marketing strategy, switching from low-end promotions to a policy of total discounts. By the mid-1980s the firm feared a hostile takeover. When Pacific Lighting offered to buy Thrifty, the company reluctantly accepted, partly because Pacific Lighting had a reputation for allowing its subsidiaries great freedom.

Pacific Lighting moved further into retailing in the next two years, buying more sporting-goods retailers in the Midwest and in Colorado, more than 100 Pay’n Save drugstores, and 37 Bi-Mart general merchandise stores. These purchases made Pacific Lighting the second-largest sporting-goods retailer in the United States and the largest drugstore chain in the western United States.

To reflect its increasing diversity, Pacific Lighting changed its name to Pacific Enterprises in 1988. Paul Miller retired in 1989, and James R. Ukropina became chairman and CEO, ending 103 years of leadership by the Miller family.

In buying Thrifty, Pacific Enterprises had decided to trade short-term profits for long-term growth. The purchase left Pacific Enterprises short of funds, however, while its retail operations suffered from price wars, shoplifting, increased competition from supermarkets, and changing economics. The company also failed to find any large oil or gas deposits. To pay its stock dividends, Pacific Enterprises borrowed money or raised it by issuing stock, worrying some Wall Street analysts. To deal with the situation, Ukropina restructured management and temporarily cut back on oil and gas drilling. Revenue for 1990 was $6.92 billion, though the firm suffered a net loss of $43 million because of write-offs relating to its retail and gas and oil exploring operations.