A group of Washington hospitals, hoping to snare some of the windfall from falling energy prices, has decided to get into the natural-gas business.
The group's plan is to buy gas at bargain prices from Appalachia or Oklahoma producers or independent marketers and have it shipped here. But it's run into an obstacle in the form of the Washington Gas Light Co.
Federal rules that went into effect in the fall have allowed Washington Gas Light to buy cheaper gas from distant producers and have it shipped via pipelines to its Rockville city-gate station. From there, WGL sells the gas to all of its customers.
But increasingly, commercial and industrial customers are trying to cut out some of the middlemen: They want to negotiate their own cut-rate deals with producers and then merely pay a fee to pipelines and local utilities for delivering the gas to their doors.
"The hospitals are interested in cutting health-care costs," said Stephen H. Lipson, executive director of the D.C. Hospital Energy Cooperative Inc.
The cooperative comprises Capitol Hill Hospital, Greater Southeast Community Hospital, Hadley Memorial Hospital, National Rehabilitation Hospital, Providence Hospital, Sibley Memorial Hospital and Washington Hospital Center Corp. The hospitals could save some $2 million a year on natural-gas costs if only the utility would do as they ask.
The cooperative appealed to the chairman of WGL, Donald Heim. "We asked if we could arrange direct transportation. . . . Several weeks went by, and they said they didn't want to hear from us again, so we asked the court to intervene," Lipson said.
The group sued WGL in November on antitrust grounds for "abuse . . . of its monopoly power as the sole distributor of natural gas in Washington . . . " and parts of the surrounding area, according to the complaint. That suit is pending in U.S. District Court.
The natural-gas dispute is raising questions about whether rates would rise for remaining customers if major gas users cut their own deals; is pitting consumer advocates, industrial and commercial customers and utilities against each other, and is beginning to cause a headache for some state regulators.
The issue also raises questions about short-circuiting the traditional purchasing arrangements for natural gas. In simplest terms, those arrangements involve three business groups:
*The producers, who own the gas when it comes out of the ground.
*The pipeline companies, which buy gas from the producers and transport it over long distances.
*The distribution companies, such as WGL, which buy from the pipelines and route the gas to each customer within their "city gate" boundaries.
Carmen D. Legato, a lawyer representing the hospital group, charges that Washington Gas Light is protecting the profits it gets from selling gas that is more expensive than the cooperative could otherwise obtain.
Under pressure from a few large customers that could switch to fuel oil, WGL has offered lower rates to those customers to retain their gas business, but those rates still aren't as attractive as buying gas elsewhere and having it moved, he said.
"WGL has special arrangements with interruptible customers that it doesn't want to give up, and views producers as competing with them to eliminate the extra profit," Legato said.
At least two producers are frustrated they can't market cheap gas to the Washington area.
"It's WGL's negative attitude," said Ralph Bradley, president of Eastern States Exploration Co., a firm that produces gas in the Appalachian area and is based in Alexandria. "I realize they are a public utility, but they were just downright rude to us.
"I've had customers I would like to contact -- the University of Maryland and Ottenberg's Bakery. . . -- but in the case of WGL it's like fighting city hall. It's their pipeline."
WGL has little incentive merely to transport gas for a fee, unlike some other utilities, because it has few industrial customers that can threaten to use oil instead of natural gas, Bradley said. Some area utilities, such as Baltimore Gas & Electric Co., have more industrial customers and have been transporting gas for a fee for several years. For example, the Baltimore utility transports gas for Bethlehem Steel's plant at Sparrow's Point.
"Every other company has to chase No. 2 fuel oil [the primary competing fuel used by some large customers], and WGL doesn't have to," he said.
David Wilson, president of Gas Acquisition Services Inc., a Denver producer, said, "The distributors have had a history of overcharging large users to subsidize residential rates. . . . The competition scares them because the rates would no longer be protected."
WGL maintains that it is considering providing a transportation service, but that the decision is in the hands of the D.C. Public Service Commission.
"We're considering it, but don't feel we can go further with it," said Paul Young, director of marketing services for WGL. "The concern is that unpaid costs could increase rates of other customers.
"We would want them to pay for the value of the service, and not just for moving gas from point A to point B."
Unanswered questions about what customers would do if suddenly confronted with a shortage from their producer also abound. "What if someone purchases from a broker or a marketer and they go belly up, what happens then? They divorce themselves from dependability," said Young.
But the chorus of customers that want to cut costs is growing to include between 20 and 40 members of the Apartment and Office Building Association in the District. "Right now, there is no deal, and I think that is of great concern," said Bruce Oliver, a consultant to the association. "WGL is taking advantage of its monopolistic position to price high."
D.C. Examining Direct Purchases
The D.C. Department of Administrative Services, which says the city spends about $11.3 million a year on natural gas for its agencies, also is looking into the possibility of having gas transported.
"Of course the city wants to save taxpayer dollars," said Linda Boyd, a spokeswoman for the city government. "But one of the obstacles is getting the gas from the city gate to the agencies and the limited access to pipelines."
Ten industrial customers in Frederick County, Md., have been unsuccessful in negotiating a deal with Frederick Gas Co., a WGL subsidiary. "We are exploring all remedies and avenues," said a lawyer for the Western Maryland Industrial Group, whose members are staying anonymous in hopes of winning over the utility.
Ray Ottenberg, president of Ottenberg's Bakery in the District, has all but given up. "I am being told they want to be helpful, but nothing has happened."
Much of the transportation dilemma has grown out of a combination of gas oversupply, plummeting energy prices, and contracts pipelines signed in the late 1970s for high-priced gas at a time of natural-gas shortages.
In the last several years, some industrial customers that have equipment that can switch between natural gas and other fuels have pressured utilities and pipelines into transporting cheaper gas bought from other producers, experts say. Those cost savings, however, are not available to customers who have no fuel alternatives.
But after a federal court found such arrangements discriminatory against distribution companies -- which couldn't get pipelines to transport cheaper gas to them -- the Federal Energy Regulatory Commission had to change its rules to allow equal access to gas transportation services.
Now the issue of transportation by the distribution companies themselves to any end user is falling squarely in the laps of state regulators, who will have to weigh the effects of allowing large gas users to bypass the system.
Critics say rates for residential customers will rise when the large customers strike their own deals, while others argue that the overall price of natural gas will fall to all consumers.
At the local level, regulators are facing political pressure to allow utilities to let industrial customers who can switch to other fuels merely pay a fee to the distribution company for transporting gas.
"The industrial consumer wants direct access to the gas -- it's a jobs issue -- if they don't get this gas transportation, they are going to move their factories," said Charles Gray, assistant general counsel to the National Association of Regulatory Utility Commissions. "Commissioners are obligated to keep rates just and reasonable. But they are also sensitive to keeping jobs in the community: It's going to be a difficult position."
So far, about eight states have compelled local utilities to transport natural gas, including California. Regulators in Virginia, West Virginia and Maryland are starting to look at the implications of transportation, while the D.C. Public Service Commission still is considering whether it has the authority to compel the utility to buy lower-priced gas and have it transported for customers.
Regulators say that as long as customers pay their fair share toward the cost of the distribution system as part of the transportation service, there is no problem. "The transportation idea is ideologically pure as long as business customers pick up some of the costs," said one District PSC official.
"You've got to structure the rate correctly so that the people who are transporting pick up their fair share of the costs," said Tom Gorak, an assistant people's counsel for the state of Maryland, who represents consumers before the state Public Service Commission. "If that is so, there is no problem."
The hospital cooperative argues that forcing WGL to transport gas will mean lower prices for all consumers.
"As the hospitals cease buying gas from WGL, WGL will cut back on its purchases of its most expensive gas from its most expensive suppliers and, as a consequence, the mix of gas that is available for use by remaining customers will be proportionately less expensive," he said.
Virginia Warns of Price Impact
But according to a memo by the Virginia State Corporation Commission, "Bypass could have a significant and undesirable impact on the captive customers of a local distribution company and result in substantial cost shifts to those customer classes."
In Virginia, the Commonwealth Gas Pipeline Corp. was compelled to transport gas through pressure from three companies, Reynolds Metals Co., Owens Illinois Inc. and James River Corp. Now, Reynolds Metals Co. wants to hook directly into the pipeline, which crosses its property, cutting out the local distribution company, Columbia Gas Services Inc., which has agreed to transport the gas to Reynolds.
"The cost of paying twice is absurd," said Edward L. Flippen, a lawyer representing Reynolds. "We pay enormous costs for a big distribution system that is unnecessary to serve us -- we have access to the pipeline."
Paul R. Bigley, chairman of Commonwealth Gas Pipeline and president of Columbia Gas, calls that unfair. "You just can't have it both ways and say 'I'll take it cheap when it's here and go back to the utility when it's not.' "
Some consumer advocates agree that the advantages of allowing companies to bypass the normal distribution system will accrue only to the largest customers, leaving the costs of the system on the shoulders of residential customers.
"The point is the transportation rate will make a very small contribution to the fixed costs of the system," said Edwin Rothschild, assistant director of the Citizen/Energy Labor Coalition, a D.C. consumer advocacy group.
Stanley W. Balis, an energy lawyer, faults the Federal Energy Regulatory Commission for creating the problem by allowing the use of transportation fees instead of giving pipelines the right to buy cheaper gas for all customers on the system -- both those who have a choice of fuels and those who don't.
"The idea that we are going to let Mrs. Jones at the burner tip negotiate with Exxon to purchase gas from Texas is ludicrous; she's locked in, and they know that," he said.