The two pipelines that supply natural gas to the Washington area are buying more than half a billion dollars' worth of decontrolled gas at prices three times higher than their average costs and passing the increase on to homeowners and others.
The controversial purchases --the first major impact of complete deregulation of gas prices on thearea -- will increase homeowners' bills by more than 5 percent during this winter's heating season, according to data supplied by the pipelines. For a typical homeowner, the decontrolled gas will add more than $40 to yearly $750 gas costs.
At the same time, Columbia Gas Transmission Corp., the Washington area's main supplier, has such a large gas surplus that it is trying to sell its excess gas at lower prices than it is paying for decontrolled gas.
These moves have triggered protests by the Maryland People's Counsel, the Baltimore Gas & Electric Co., a consortium of large corporations that use gas including Koppers Co. and W.R. Grace & Co., the utilities commissions of New York and North Carolina, and such industry critics as Sen. Howard M. Metzenbaum (D-Ohio), an outspoken opponent of gas decontrol.
Accusing the pipelines of fraudulent and abusive practices, their opponents have asked the Federal Energy Regulatory Commission to prohibit the passing on of allegedly excessive gas prices and to order refunds. Protesters contend that the pipelines failed to engage in competitive bargaining over gas prices and that they artificially manipulated their sales and purchases to increase profits.
Moreover, since there is no U.S. shortage of natural gas today, critics say the pipelines easily could buy sufficient supplies at moderate prices. As evidence, they cite Columbia's failure to purchase low-cost gas that was available last summer from its regular Appalachian suppliers, as well as the company's efforts to sell off its current surplus.
"Columbia appears to be oblivious to the realities of the marketplace," Stanley W. Balis, a Washington lawyer, charged in a protest filed for Charlottesville and Richmond, which operate municipal gas systems. And, he added, Columbia's customers are "subsidizing" the company "to the tune of $5 to $6" per thousand cubic feet of gas. The Maryland People's Counsel, a state consumer agency, asserted in a separate petition that Columbia is seeking to bolster its profits and "exploit its customers."
The pipelines call these allegations "innuendo" and insist their purchases make economic sense by assuring future gas supplies for consumers. Washington Gas Light Co., which has 555,000 customers in the Washington area, buys 85 percent of its gas from Columbia. The other 15 percent comes from Transcontinental Gas Pipe Line Corp..
Pipeline spokesmen point out that most of the profits from high-priced sales of deregulated gas go to producers, such as Amoco, Exxon, Gulf and Superior. The pipeline companies usually do not profit from such sales, but act as conduits or middlemen for getting gas from producers to buyers. Their revenues come chiefly from transportation fees, which are not tied to the cost of the gas they buy. Gas costs are passed on to their customers.
But pipeline profits figure in the controversy. Columbia and Transco both have financial interests in the production of high-cost, deregulated gas, and both pipelines buy some decontrolled gas from themselves at high prices. Washington Gas Light also has an interest in deregulated gas production, but does not purchase gas from itself.
The controversy provides an indication of the impact national gas decontrol may have in the Washington area. Home heating bills have climbed steeply in recent years because of inflation and congressional legislation. Gas company officials have estimated that across-the-board decontrol could nearly double homeowners' monthly heating bills, although some energy specialists say that the increase would be smaller.
So far, only a few sources of natural gas have been fully deregulated -- chiefly gas produced from very deep wells, drilled three miles underground. This is the deregulated gas that is entering the Washington area in increasing amounts.
In removing price restrictions on such gas, Congress sought to spur gas production from high-risk ventures.
Under the 1978 Natural Gas Policy Act, the cost of price-regulated gas is scheduled to rise steadily until 1985, when price ceilings would be lifted on about 60 percent of the nation's gas. Cost limits would remain on other older gas wells. The Reagan administration has given extensive consideration to accelerating decontrol, a politically touchy proposition, but it has stopped short of announcing such a move.
Decontrolled gas, from deep wells and other deregulated sources, now accounts for about 3 percent of the nation's supplies,according to industry estimates.
Columbia and Transco are among several pipelines buying expensive, decontrolled gas, setting off increasing legal challenges.
During the current six-month period, Columbia expects to purchase nearly $255 million worth of deregulated gas at prices averaging almost $8 per thousand cubic feet, including $3 million for gas it is buying from itself. Transco estimates that it will purchase nearly $306 million worth of decontrolled gas at an average price of about $7 per thousand cubic feet, including $65 million of gas from a wholly owned Transco subsidiary.
These prices compare with costs averaging between $2 and $3 per thousand cubic feet for the two companies' purchases of price-controlled gas.
Meanwhile, Columbia has taken several steps to reduce its gas surplus. For 44 days last summer it halted some purchases of low-priced gas from producers in the Appalachian region. It is seeking federal approval to sell billions of cubic feet of gas to buyers that are not among its regular customers, including gas distributors based in Delaware, Pennsylvania, Texas and Louisiana.
Opponents contend that the pipelines agree to pay exorbitant prices for deregulated gas because they are sheltered from the normal economic pressures of a competitive marketplace. The pipelines can simply pass the higher prices to their customers through automatic pass-through provisions, their critics say.
In addition, the pipelines' opponents charge that the companies are profiting at consumers' expense by selling high-priced gas to themselves and artificially creating a market for their corporate affiliates' expensive gas. Columbia's attempts to sell off current supplies of lower-priced gas are intended to create such a market, critics assert.
The pipelines dispute these charges, contending that they are seeking to guarantee long-term gas supplies for consumers by buying the cheapest gas available in a competitive marketplace.
"There is no way that we can meet our long-term needs without buying the deep, deregulated gas," says H. William Chaddock, Columbia's vice president for communications. "We have to tie down our supplies today."
Despite Columbia's current surplus, pipeline officials contend that the company will face a shortage of gas starting in 1985 unless they obtain long-term contracts for additional supplies now.
Columbia officials attribute their current surplus -- 166 billion cubic feet on top of the 1.1 trillion the company expects its customers to buy -- to the economic recession, conservation and other factors. Although critics have urged Columbia to use this surplus to help meet customers' future gas needs, pipeline officials say this would be too costly.
The company would have to borrow money at today's high interest rates to pay for gas not needed for several years, Chaddock explained. It is less costly, he said, to sell off surplus gas now and purchase more gas later, when it is needed. Columbia officials also defend on economic grounds the pipeline's practice of purchasing high-priced, decontrolled gas from itself on economic grounds. They maintain that the company's own gas production helps assure future supplies for its customers. The company, they say, is entitled to recover its costs and a reasonable profit from these ventures. And, they assert, Columbia charges its customers less for its own high-cost gas than it is currently paying other producers.
Transco officials give similar arguments for buying deregulated gas.
"You do the best you can to keep the price down. You buy what's available," says Transco spokeswoman Barbara Johnson. "Our supplies are running out."
Washington Gas Light Co. has not yet announced whether it will protest the pipelines' high-priced gas purchases in the FERC proceedings, although officials say the company is studying the issue.