Revenue in Mind, Cities Take Closer Look at Pipelines

A planned 130-mile-long pipeline that will carry crude oil to South Bay refineries may also bring cash to city coffers.

Several South Bay cities have been re-examining their methods of charging oil companies for running pipes beneath their streets since a group of four oil companies announced the pipeline plans on July 26. The line will run 130 miles from Santa Barbara oil fields south to Long Beach, passing through the South Bay cities of Carson, El Segundo, Gardena, Hawthorne, Lawndale and Manhattan Beach.

Depending on what formulas the various cities use, the oil companies could end up paying hundreds of thousands of dollars per year to each city.

To run pipes beneath city streets, companies have to pay what is known as a “franchise fee.” Until the past few years, fees generally have been nominal, usually just enough to cover a city’s administrative costs. Most cities used formulas developed in the 1940s and refined in the 1960s that do not consider land value and instead charge a small percentage of the company’s gross receipts from the pipeline, or an amount based on the pipe’s length and width. Under those formulas, annual fees ranged from a few hundred dollars to a few thousand.

Philosophical Differences

But philosophical differences have arisen over whether the fees should simply cover city costs or provide revenue.

Some officials, such as Torrance City Atty. Stanley Remelmeyer, say cities should consider surface land value in determining how much to charge companies. On the opposite side of the issue, a Mobil official says streets already have been dedicated to public use and cannot be used by cities to generate revenue.

The Torrance City Council took a middle path last week when it renewed Mobil Oil Co.’s 40-year-old franchise for a 10-inch pipeline connected to Mobil’s Torrance refinery. The council adopted a formula, developed in Carson and Long Beach, which assigns a minimal value to the land under which the pipes are buried and considers the length and width of the pipes. Mobil’s annual fee will increase from $169 to $6,054 for the next 25 years, adjusted annually for inflation.

Remelmeyer proposed a system that assigned higher value to the land and would increase Mobil’s annual fee to $14,585 for the 10,366-foot, 10-inch-wide pipe.

Carson is expected to use the Carson-Long Beach formula for the new pipeline, a city official said, but spokesmen for the other five South Bay cities involved say it is too early to determine what formula they will use.

Cities have plenty of time to think about which of the various formulas to use. A construction permit evaluation and an environmental review for the proposed pipeline are expected to take 18 months. Construction on the Southern California Pipeline System, which is being built by Atlantic Richfield Co., Chevron Corp., Texaco Inc. and Shell Oil Co., could begin late next year.

Al Greenstein, a spokesman for Atlantic Richfield Co., said, “It’s a little early in our project to give any definitive answers on what we will encounter.” Greenstein said he thinks most cities will follow Los Angeles County and the city of Los Angeles, both of which use formulas based on the length and width of the pipelines and do not consider land value.

Land Values

One city official, however, El Segundo Public Works Director Bill Glickman, said he has begun looking at the formula used in Carson and Long Beach.

“We have not negotiated a franchise in many, many years,” he said. “We have just started talking to people on another franchise application. We are looking at what they use in Carson.”

Greg McClintock, an attorney representing the Western Oil and Gas Assn., an oil industry group, said Carson, Long Beach, Torrance and Santa Monica are the only cities in the state that he knows of that use land values in determining fee formulas.

He said he expects most cities to continue using the length-and-width formula, but said the Carson-Long Beach formula is “the upper limit of what you would expect” in formulas using land values.

Torrance, which is not on the route of the pipeline, has applied the Carson-Long Beach formula three times in the last two years on franchise renewals, even though City Atty. Remelmeyer said the higher formula that was rejected last week would have been justified.

“In effect, the oil pipeline franchisee is leasing the land from the city for a certain period of time,” said Remelmeyer in his report to the City Council. “The value-of-the-land approach is expected to be more widely used in the future by governmental agencies in setting franchise fees for oil pipelines. This concept, also known as the standard appraisal method, had been used for some time by large private landowners” in determining what to charge companies for underground pipes.

Should Be Double

Remelmeyer said the city’s fee should be double what is charged in Carson and Long Beach because the value of land in Torrance is generally higher.

The Carson-Long Beach formula, conceived in 1983, considers a square foot of land to be valued at $7.50 and subsurface use to account for one-fourth of the land value. Because different size pipelines--usually 4 inches to 20 inches--take up different amounts of space, a sliding scale is applied to the linear footage to determine the amount of land used by the pipeline.

The formula backed by Remelmeyer in Torrance would have made the average land value $15 a square foot and would have set the subsurface value as one-fourth of that. It considered the pipeline corridor width to be three feet for pipes up to 12 inches in diameter. He and other city officials considered this formula to be a compromise between the Carson-Long Beach system and a more costly one adopted by Santa Monica.

The Santa Monica formula uses the fair market value of the land next to the pipeline, rather than a predetermined figure, and considers the subsurface to be 50% of the land value. The city also sets a fixed pipeline corridor width of five feet, no matter how wide the pipe. Under this formula, Mobil would have paid Torrance $48,590 for the recently renewed franchise.

Santa Monica tried to impose this new formula in 1981 on the renewal of a Shell Oil franchise for a 3.9-mile, 10-inch pipeline. Shell refused to pay the $237,000 fee and filed suit in U.S. District Court, claiming that it was so excessive that it placed an unconstitutional burden on interstate and foreign commerce. The court has not yet ruled in the matter.

The city, awaiting the court ruling, has not tried to impose this formula on other oil companies.

10-Year Franchise

In an earlier case in which Torrance used the Carson-Long Beach formula rather than a costlier system, the oil company made certain concessions to the city. Union Oil agreed to dedicate 43,200 square feet next to its tank farm on Lomita Boulevard for street widening and to landscape the tank farm’s frontage at a cost of $270,000.

The 25-year franchise, awarded last year, cost Union Oil $58,973 annually rather than the $148,429 Remelmeyer proposed for the several pipelines totaling more than 97,000 linear feet and ranging from 4 to 12 inches in diameter. Union had been paying about $2,000 a year under a previous formula based on gross receipts.

In another case earlier this year, Four Corners Pipeline Co. was given the lower of the two proposed formulas after it agreed to take a 10-year franchise for its oil line rather than one for 25 years.

In the Mobil case last week, Remelmeyer argued that there was nothing to warrant the use of the lower Carson-Long Beach formula to the franchise renewal.

Mobil officials--and the City Council--disagreed, saying that in the past 15 years the company has dedicated nearly 12 acres valued at more than $1.3 million for street extensions and bike paths. Officials said the company has also invested more than $1 million in landscaping around its refinery.

In addition, officials said, the company is leasing to the city 3.5 acres of land for the Torrance Mounted Posse for $1 a year and has offered to give four acres valued at $400,000 to the city Fire Department for a training facility. In the last five years, a Mobil foundation has contributed $28,100 to the Parks and Recreation Department, city officials said.

Discriminatory, Unfair

Luci Swindoll, Mobil’s manager of right of ways and claims, said that the Remelmeyer formula was “both discriminatory and unfair,” and that if a street-value formula has to be used, the Carson-Long Beach formula was fairer.

Still, she is adamant about a land value not being used at all.

“City streets, which have already been dedicated to various transportation needs, are, by virtue of their dedication, unavailable for any income-generating uses, including sale or rental,” she said. “Since the street surface has no commercial value, how can one base a rental formula on the subsurface of the same street?”

Councilwoman Katy Geissert said that although Mobil’s contributions were a factor in deciding for the lower formula, the Remelmeyer formula was rejected because it went too far. “We should be somewhat consistent” in applying fees, she said, “rather than picking and choosing along the way.”

Air Standards

Councilmen Dan Walker and Tim Mock favored the higher formula. Walker accused Mobil of too often violating air quality standards at its Torrance refinery and said the time was right to adopt a higher formula.

(Both the Los Angeles County district attorney’s office and the U.S. attorney’s office are conducting investigations into charges by air quality officials that Mobil has violated clean-air laws. Mobil has admitted to some of the allegations and is cooperating with the investigation.)