Gas Co. Asks to Recover Savings From Customers

TIMES STAFF WRITER

Rates for Southern California Gas Co. customers have fallen in recent months, but they will rise again under an unusual two-pronged request submitted to state regulators Friday.

The Gas Co. asked that its 5 million customers repay about half of a record $223 million in natural gas cost savings the utility achieved for them in the volatile market of the last year. The average increase would amount to $1.52 per month, or about 3% on a typical monthly bill of $46.

But the Gas Co. said it would reduce its request to about $30 million if the state Public Utilities Commission agrees to continue an incentive program that has brought the utility millions of dollars and to change the rules for how much of the windfall goes to the company and how much to consumers. That would drop the monthly increase to about 44 cents on a typical bill.

Although such rate increases may seem relatively modest, they follow a winter season in which bills rose sharply--and that made it admittedly awkward for the Gas Co. to seek tens of millions of dollars more from its own ratepayers.

"To claim a huge reward for good performance in a year when ratepayers are paying at record levels did not look good," said Mike Florio of the Utility Reform Network, or TURN, a consumer watchdog group. "I think it speaks to the company's sense of reality that they did not try to squeeze every last nickel out of ratepayers. . . . It could have been a big, ugly fight."

While other gas and electric utilities have been battered by the natural gas market, the Gas Co. has thrived under a state incentive program that rewards utilities whenever they can purchase gas for less than market rates. By aggressively buying and selling, the Gas Co. managed savings in the last year that were almost 10 times the highest previous totals.

However, PUC officials raised questions about whether the Gas Co. should be entitled to its roughly 50-50 split with customers, which would amount to $106 million for the year ended in March. During recent negotiations, the company agreed to a compromise with the PUC's consumer protection arm and TURN.

'In for the Long Haul, Not the Quick Buck'

The Gas Co. now is willing to accept a smaller share of the savings for the last year--about 14%--and for future years.

"We're in this for the long haul, and not the quick buck," said Jim Harrigan, the company's director of gas acquisition. "We want to see [the incentive program] continue in the future" so it can benefit ratepayers and the company alike.

During a push for deregulation in the mid-1990s, the PUC created a program for the state's three major gas utilities--Southern California Gas, San Diego Gas & Electric and Pacific Gas & Electric--that was designed to give them added motivation to obtain the fuel at the best price for customers.

The program replaced contentious PUC reviews that determined whether the utilities bought gas at reasonable prices, and sometimes resulted in the companies having to pay back millions of dollars to customers.

By most accounts, the program achieved its goals at the Gas Co. During the first six years, the savings amounted to $75.7 million--$33.2 million of which went to the utility, and the rest to benefit customers.

But no one envisioned what would happen in the natural gas market over the last year, when prices along the California border skyrocketed. The Gas Co. used its purchasing power and storage and pipeline capacity to become a big player in the regional market.

In a trading room at its Los Angeles headquarters, the company conducts about 14,000 transactions a year, buying, selling, lending and trading gas. Last winter, when prices rocketed, one deal alone achieved savings of $70 million.

Harrigan said the company bought gas options in October and November.

"We looked at it as an insurance policy," he said. "Those were bought at between $6.50 [per million British thermal units] and $8--and the price ran to $10." Those prices allowed the Gas Co. to essentially apply the difference to the PUC's incentive program.

The PUC rules allow the Gas Co. to hedge to protect customers from price volatility, but they prohibit speculation in the marketplace. Harrigan said it is difficult to draw the distinction, but he added, "We recognize when we are incurring risk, and have tight controls over it."

The option purchases, he noted, were initiated by company Chairman Edwin A. Guiles and done in consultation with PUC officials. The options, he said, protected customers from December through March, when the Gas Co. achieved the lion's share of its $223 million in savings.

'I don't think . . . anyone anticipated savings this large," said Richard Myers, program supervisor at the PUC's Energy Division.

As the savings mounted through the winter and beyond, PUC officials reassessed the incentive program and questioned whether ratepayers should receive a larger share of the rewards. It was only fair, they reasoned, since customers pay for the pipeline capacity and other assets that allow the utility to beat the market.

On Friday, the Gas Co. filed a request with the PUC for its full share of the savings along with its proposed settlement with the agency's Office of Ratepayer Advocates and TURN. The agreement, which requires approval from the full commission, would divert more of the savings to customers.

Rather than the current 50-50 split, the proposed system would give the utility a maximum 25% of the savings.

"The sharing is not nearly as beneficial to the shareholders," said Anne Smith, the Gas Co.'s vice president for customer services and marketing. "We would have loved to preserve the current [split], but in the interest of ratepayers, we think this is a good deal."

Although the typical monthly winter bill for Gas Co. customers rose to $80 from $50 a year ago, the price has been dropping in recent months. June's gas cost of 52.1 cents per therm is about 26% over that of June 2000. But that is far lower than at San Diego Gas & Electric, which saw gas costs rise to $1.43 from 34 cents a year ago.

Executives of SDG&E;, which like the Gas Co. is a unit of Sempra Energy, said they have no figures for their incentive program, which runs until July. Pacific Gas & Electric had no gas cost incentive savings this past year.

The Gas Co.'s large savings and aggressive trading have raised concerns that its activities may have driven market prices higher.

Although Florio of TURN praised the company for a job well done, he said, "I think one of the reasons they settled is to avoid a big fight" over whether its actions affected the market to the detriment of others.

"We could have spent three months and not come to a conclusion," he added.

Brian Cherry, PG&E;'s director of regulatory relations, said: "Until we can see the details behind the transactions, we are not certain as to what impact, if any, they had on prices at the California border."

Said Smith of the Gas Co.: "We do firmly believe our actions did not cause prices to go up for other customers." The market, she said, "is almost like a race. Some came out better than others."

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