Alleged Overcharges Fuel Feud Over Gas From Canada

You may not have heard about it, but California is on the brink of war--trade war. The enemy, apparently, is Alberta. The precipitant is gas.

At this point you’re forgiven for thinking of “Duck Soup,” in which Freedonia and Sylvania are locked in battle. Zeppo Marx tells Groucho, Freedonia’s unstatesmanlike president, that a general in the field has reported a gas attack. Says Groucho: “Tell him to take a teaspoon full of bicarbonate of soda in half a glass of water.”

Would that the current outbreak might so easily be relieved. Would that it were so easily understood. Unfortunately, this conflict is as serious as it is tangled, because in the view of at least some responsible parties, Californians paid between $200 million and $567 million too much for natural gas from 1988 through 1990.

Because the gas comes from Canada, the dispute threatens to flare into an international incident. California regulators and Alberta’s provincial government are headed for a collision Oct. 1, and Alberta is threatening to bar California purchases on the spot, or non-contract, market.

Here’s the situation. For perhaps 30 years, Alberta has been selling natural gas to Northern California via Pacific Gas & Electric. The giant San Francisco-based utility owns the only pipeline leading from the Canadian province to California and uses it to import $800 million worth of gas from western Canada annually.

The sellers are a pool of 190 Alberta suppliers, mainly, who vote on a collective price and won’t undersell each other. It’s a classic cartel, facilitated by PG&E;’s Canadian buying arm, which doesn’t deal with anyone else.

The arrangement seemed to work. PG&E; delivered gas for somewhat less than the cost of gas brought in from the American Southwest, and got long-term contracts guaranteeing a secure supply.

But markets will be markets. A glut of Canadian gas helped drive gas prices in Alberta far below gas prices in California. At the same time, U.S. deregulation was forcing gas purveyors to compete. Nevertheless, PG&E; continued paying the Albertans only slightly less than California prices.

This fact has not altogether escaped PG&E;’s customers. The Sacramento Municipal Utilities District, for example, buys some of its electricity from PG&E; at a price pegged to what PG&E; pays for the gas it burns to generate that power. So SMUD is asking the California Public Utilities Commission to make PG&E; refund $24 million in what it considers overcharges.

But that’s nothing. The PUC’s Division of Ratepayer Advocates, whose job is to take the side of consumers, contends that PG&E; should be forced to refund to customers a total of $392 million for alleged overcharges in 1988, 1989 and 1990.

Others agree that PG&E; should have done a better job of buying gas for its customers. Michael Florio, senior attorney at a San Francisco consumer group called Toward Utility Rate Normalization, or TURN, figures that PG&E; ought to refund about $200 million.

Arlon R. Tussing, a respected utility consultant retained by SMUD, puts the number much higher. He says PG&E; paid $567 million too much for Albertan gas.

“It’s a monthly welfare check from Northern California to Alberta,” Tussing says. When PG&E; paid $2.22 per dekatherm (about 1,000 cubic feet) of Canadian gas, for example, other Western power companies paid as little as $1.35, according to Tussing.

Whether or not PG&E; overpaid in the past, California’s PUC has decreed that in the future, things will be different. Starting Oct. 1, PG&E; must make some room on its Alberta pipeline so other buyers and sellers can use it. No more cartel, and no more monopsony.

But Alberta says California would be abrogating PG&E;’s long-term contracts. Rick Orman, the province’s energy minister, says flatly that he won’t allow any Albertan spot gas to be purchased for California unless PG&E; lives up to its agreements.

PG&E;, which gets about half its natural gas from Canada, is thus taking heat from all sides. It’s even being sued in Canada by several gas producers for alleged failure to take all the gas it contracted to buy.

PG&E; says it did the best it could. Jerry McLeod, executive vice president for gas, says it tried to negotiate better prices with the Albertans and nearly provoked a border incident, complete with threats of a cutoff in supplies. That could have been disastrous, since for the time being, California has no alternative to buying at least some Canadian gas.

The market will solve this problem sooner or later. New pipelines opening up in the next few years, including another to Alberta being built by PG&E;, will bring more gas to California, forcing Alberta to lower prices. Deregulation will allow commercial buyers to bypass PG&E;, shopping for themselves.

Meanwhile, the dispute has resulted in a great deal of righteous rhetoric. But nobody’s hands are truly clean.

As a regulated utility that profits by return on investment--rather than by selling or transporting gas--PG&E; has had all the wrong incentives. Price appears to have been secondary; the utility mainly wanted to keep things running smoothly, which it did by signing long-term contracts with the Albertans. Prices are renegotiated annually, but the Albertans always get what they want--close to the California price.

California’s PUC, which in recent years has found free-market religion, didn’t put a stop to this or give PG&E; different incentives. Alberta’s provincial government, happy with its gas royalties, hasn’t complained until now either. It likes high prices and a guaranteed market, and has backed the producers’ cartel.

What’s to be done? Talk. PG&E; says it already knows it ought to sell both the pipeline and its Canadian gas-buying subsidiary, and renegotiate its contracts with gas producers in Alberta.

And California’s PUC has agreed with Alberta and British Columbia, another gas supplier, that, generally, the gas market should be freer--more buyers, more sellers and an open pipeline.

But the thorny question remains: Were there overcharges? And if so, who will pay for them? Given the circumstances, it doesn’t seem far-fetched to assume that PG&E; will get socked with at least part of the bill.