Leaning on the Consumer

We are accepting this proposal for one reason only: necessity. We see no alternative means for assuring an adequate supply of natural gas for California.

With those words, the California Public Utilities Commission this month approved a novel scheme for financing natural-gas production. Essentially, the plan forces the consumer to bear a large part of the cost of developing new gas supplies--without complete assurance that he or she will ever get any of the gas.

As the commission noted, the deal was negotiated out of desperation by Southern California Gas Co. (SoCal Gas), which is urgently searching for new sources to supplement its dwindling supplies. Beginning probably in October and continuing through 1982, SoCal Gas will levy a 50-c- monthly surcharge on the average household; the bite could rise to $2.50. Industrial users, of course, will pay much more--depending on the amount of gas they consume. The utility will periodically turn over the proceeds, which ultimately will amount to $313 million, to Atlantic Richfield Co. (Arco), the nation's ninth largest petroleum company. Arco will use the money to pay interest and other costs of borrowing funds to develop its big gas deposits on the North Slope of Alaska. In return for the advance of the money, SoCal Gas gets the exclusive right to negotiate for 60% of Arco's North Slope gas when it starts flowing in about 1980. SoCal Gas is assured of the supply only so long as it agrees to meet the very top price being asked for Alaskan gas.

There is a precedent of sorts for this arrangement. Since 1971, the Federal Power Commission has allowed interstate pipeline companies to borrow money, raise rates to consumers to pay interest and other fund-raising costs, then relend the cash to gas producers at no interest as an inducement to develop new supplies. But under that system, the pipeline company at least gets to deduct the interest expense when computing its tax bill.

By contrast, SoCal Gas will pay tax at the full 48% corporate rate on the money it receives by levying the surcharge. Thus, in order to get $313 million to pay to Arco, SoCal Gas will have to collect some $600 million from customers. In the unlikely event that the deal falls through, Arco would refund the SoCal Gas advances plus 7% interest. Then SoCal Gas would return the Arco refund to the consumers. The IRS would rebate the income taxes paid on the money raised for the Arco advance, so the consumers would get back the full $600 million--but of course they would not get the gas.

Hard Realities. The deal has aroused a storm of protest. Especially outraged are older persons on fixed incomes who may not live long enough either to use the new gas or get their money back. They have banded together with other consumer groups in a new organization called CAUSE (for Campaign Against Utility Service Exploitation). CAUSE is backing a bill in the California legislature that would set special low rates for both individual and industrial customers who use minimal amounts of gas. An effort is also under way in the legislature to enact an involved scheme under which taxes would be eliminated on the surcharge levied by SoCal Gas on consumers, so that SoCal Gas would not have to collect almost $2 for every $1 to be advanced to Arco. Nonetheless, the SoCal Gas-Arco deal reflects some hard realities: 1) the nation currently faces a severe shortage of natural gas--supplies this winter, in fact, are expected to fall 15% to 30% below demand; 2) developing new supplies is expensive; 3) federal controls, by keeping the price of gas artificially low, are pushing producers and users into odd methods of raising the money--at the consumer's expense.

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