Washington Gas Light Co., and many other natural gas utilities in the nation, are engaged in a fierce new turf battle with their old enemies--the heating oil distributors.
In dispute are those large commercial customers who can use either gas or oil for heating and who are known within the byzantine world of utility ratemaking as the "interruptibles" because they are subject to service interruptions during cold weather when WGL can't supply the needs of all its customers. The interruptibles include many schools, apartment buildings, hospitals, churches, laboratories, laundries and hotels.
The gas company's strategy is to cut rates for the interruptibles to make natural gas, which has been rising in price, more attractive than heating oil, whose price is falling.
But the heating oil distributors are fighting back, filing protests with regulators in Maryland, Virginia and the District of Columbia.
"The heating oil dealers have two concerns," said Charles J. Cicchetti, a Wisconsin rate consultant hired by the Mid-Atlantic Petroleum Distributors Association, a trade group. "They think WGL will undercut them by pricing below the reasonable cost of supplying gas to interruptibles and make up for those losses by charging them to WGL 'firm' customers."
In WGL parlance, the "firm" customers include everyone who isn't an interruptible customer. The gas company says its actions are aimed at protecting its firm customers from future rate increases.
"If we lose interruptible customers, then it raises the fixed cost for other customers and it would be necessary for WGL to seek a rate increase ," said WGL representative Paul Young. "What we are saying is that this interruptible concept provides a protective barrier against rate increases for firm customers."
At the center of this competitive struggle is a potful of money. WGL estimates that it takes in about $86 million a year from its interruptible customers, which is about 13 1/2 percent of the gas company's total annual revenues of $635 million.
Yet, the number of interruptible customers is surprisingly small. Of WGL's 560,000 customers, only 725 are interruptibles.
But because they are such large users of fuel and because they must shut down their gas systems in cold weather upon request, when WGL is having trouble meeting the needs of firm customers, the interruptibles traditionally have received a substantial break on the price they pay for natural gas.
Now WGL wants to give the interruptibles even more of a price break in order to make natural gas competitive with heating oil. And, in a particularly ingenious twist, the company has proposed that the interruptible rates change each month in response to marketplace conditions.
"The concept is to give WGL more flexibility . . . more freedom," saidYoung.
"We had a problem in the marketplace with large dual customers because oil prices were dropping, and they had the capability of shifting from gas to oil and they were starting to do that," Young said. "That is why we came in with these rates."
"Remember that if the large customers leave us, this could cascade to the firm customers," Young warned. He said the WGL dilemma is similar to the telephone company's problem, which set long distance rates at levels that would subsidize home service. "Now the phone company is losing that long distance subsidy and so they are raising local rates," Young said.
But the heating oil distributors say the gas company tactics will result in higher prices for firm customers.
"Logic says that if they lower prices for some customers the interruptibles , then the other firm customers will have to pay a higher rate," said Herb Triplett, senior vice president of marketing for Steuart Petroleum Co., a major fuel oil distributor in the Washington area.
In an attempt to block Washington Gas Light's plan, the heating oil distributors have hired Washington attorney Gary J. Klein to fight WGL before public utility commissions in Maryland, Virginia and the District of Columbia. Klein already has filed challenges in the two states, where the WGL interruptible rate change request is pending, and he said he will file a petition shortly with the District of Columbia Public Service Commission, which already has approved the new interruptible rate concept for WGL.
Officially known as the "permanent flexible interruptible rate," the rate plan was authorized by the D.C. commission as a part of the general rate increase that took effect March 5.
Here is what happened as of March 5 in the District as a result of the change in rates and rate design:
WGL increased "firm" customer prices for natural gas to 78.95 cents a therm, compared with 71.16 cents a therm previously in effect.
Interruptible customer prices stayed the same or declined. Prior to March 5, all interruptibles had been paying 68.6 cents a therm for natural gas, regardless of what grades of heating oil they had been switching to. But under the rate change, WGL instituted a sliding scale relating to the market price for various heating oil grades as a means of making natural gas more competitive. As of March 5, the price fell to 63 cents a therm for interruptibles using No. 6 grade heating oil as an alternate fuel; to 64.05 cents a therm for interruptibles using No. 4 heating oil as an alternate fuel, while interruptibles using No. 2 heating oil continued to pay 68.6 cents a therm. Prices for April and future months will vary, depending on market conditions.
In addition to the basic therm charges, WGL users pay a customer charge that is applied toward the cost of gas delivery, company overhead and profit. Under the current rate schedule, charges to District of Columbia customers range from $60 a month for interruptible users to $3.35 a month for residential non-heating apartment customers. Customer charges also vary in Maryland and Virginia, according to customer classifications.
The current fight between the heating oil distributors and the gas company is reminiscent of the hostilities that were commonplace between the two camps during the 1950s and 1960s before energy shortages and federal controls distorted market supplies and prices.
"Now that oil prices are coming down, the gas companies have competition again--for the first time in 10 years," said Triplett.
"And now that oil prices are coming down, customers are starting to switch back from gas to oil," he said. "The gas company doesn't want to give up those customers, obviously, so they have asked for the right to price their gas below the price of oil."
Triplett said the WGL actions are typical of what has been happening throughout the nation.
"This is going on not just in Washington, it's being done in Massachusetts, New Jersey, Pennsylvania, Florida," he said, adding that the result is that fuel oil dealers all over the nation are fighting for survival.
Gas company officials agreed that their rate strategy has the potential to drive some heating oil dealers out of business.
"Yes, it will kill them, but the world is upside down from what it was a few years ago with dropping oil prices," said WGL's Young.
"With a fixed commodity gas rate, we were like sitting ducks. Now, we have the flexibility to get back in the market in the District because we can price competitively and keep our interruptible customers and even get new interruptible customers," he said. Young was referring to some large energy users who now use heating oil exclusively but might be induced to switch to natural gas for their primary fuel if prices were competitive.
Meanwhile, heating oil dealers are trying to prevent WGL from winning the same rate in Virginia and Maryland as it has won in the District.
They are particularly outraged with the WGL plan to peg natural gas prices to the type of heating oil backup used by the interruptible customer.
"That is like an airline having rates for grandmothers, students and businessmen and figuring the rates on the basis of how much each can pay," said Cicchetti, the rate consultant who is a former chairman of the Wisconsin Public Service Commission.
"They would assume the student would pay only a little for the airline ticket because he could hitchhike to his destination, whereas the grandmother would pay a little more than the student because she couldn't hitchhike but she could drive to where she was going," he said.
"And they would assume the businessman would pay the most because he wouldn't have time to hitchhike or drive."