Dispute over who should pay for SoCalGas HQ nears showdown.

State regulators may vote this week on whether Southern California Gas Co. may raise rates for its business and residential customers to pay for moving its headquarters to a new highrise in downtown Los Angeles last year.

The selection of a brand-new office tower in an expensive section of L.A. -- at an estimated rent of $531 million over the next 20 years -- has been sharply criticized by staff members and by a regulatory judge employed by the state Public Utilities Commission. The San Francisco-based PUC sets the rates California utilities may charge.

PUC Administrative Law Judge Gregory Wheatland published an opinion in April that said SoCalGas failed to prove it made a "reasonable" selection when it signed a 20-year lease for 553,000 square feet of a to-be-built office tower at Fifth Street and Grand Avenue.

The 52-story highrise was then erected and named the Gas Company Tower for its anchor tenant. Last fall some 1,500 employees relocated to the tower from their aging headquarters building three blocks south and SoCalGas is trying to recoup the higher costs at the newer facility.

Wheatland complained that cheaper alternatives were not seriously studied by SoCalGas. He said businesses and homeowners who buy natural gas from the utility, and are required by state law to reimburse it for all of its "reasonable" expenses, should be protected.

The judge also claimed the advice of SoCalGas' real estate consultant, a prominent downtown leasing agent, was tainted owing to his separate "personal financial interest" in the mega-deal.

Wheatland recommended SoCalGas only be allowed to pass on $5 million a year to customers. It had requested hiking rates $13 million a year to cover higher rent, operating costs and other expenses the natural-gas utility says were absolutely necessary.

The judge's opinion, however, is only advisory. The final decision is up to PUC commissioners, who are scheduled to rule on the matter June 3.

In the broad picture, SoCalGas's request for money is almost insignificant. It amounts to only a one-half percent rate hike when spread over the bills of 4.6 million business and residential customers. And every three years it may request a PUC review of some of the expenses, to cover issues like inflation or new needs.

Still, the issue is significant to the $3.3 billion-in-revenues utility. If regulators deny SoCalGas money it has already committed to spend, it would have to tighten its belt or tap profits. Those are unpopular with its parent company, Pacific Enterprises, and PE's shareholders.

Also, the issue is important to maintain prestige and credibility for the century-old utility, which is entrusted by the PUC to operate a monopoly-like distribution system for most of Southern California in return for trustworthy behavior and reasonably priced natural gas for its somewhat captive consumers.

PUC Judge Wheatland was not convinced.

"SoCalGas has failed to demonstrate by clear and convincing evidence that it gave serious consideration to occupying anything other than the highest grade of office space," concluded Judge Wheatland. He also scorned its request to recover $18 million for new furniture, $11,000 per employee on average.

Gas company officials declined to comment on the issue until after the commissioners rule. "Anything we say today would be speculative," said SoCalGas spokesman Dick Friend, citing the "political sensitiveness" sensitivities" associated with the quasi-legal proceeding.

SoCalGas has strongly defended its site choice in documents filed during the complex, five-year-long rate case. Downtown was most central to employee homes and to its vast service area, stretching from Fresno to the Mexican border, it has contended. The per-square-foot rates it secured, rising from $21 to $35 a year until 2010, are comparatively favorable, according to independent experts.

And the gas company hired a relocation consultant, Cushman Realty Corp. of downtown L.A., to advise on all alternatives. Cushman's 1987 report that found the to-be-built downtown project would be cheaper over the next 20 years than five different suburban sites evaluated.

Cushman's findings were later disputed by the PUC's Division of Ratepayer Advocates. It came up with a hypothetical West Covina project, of comparable size and quality, that could be built for $163 million in current dollars ("net present value").

The judge, however, shot down that figure. He placed the cost at $230 million, close to the estimates of SoCalGas officials. Still, that's 5 percent cheaper than the current-dollar cost of the Fifth-and-Grand choice, the judge noted.

Also, said the judge, SoCalGas should sell its 15 percent stake in the tower -- a bonus received for signing the lease -- to its parent company. Then the stake's $34 million current value ought to be refunded to customers over time, he opined.

SoCalGas based its arguments largely on the real estate studies of Cushman and its principal, John C. Cushman III, who considered an expert on leases in the L.A. area.

While advising SoCalGas, Cushman was a business partner with the building's developer, Maguire Thomas Partners, in a Pasadena hotel project. He was also the listing agent on the tower, and its companion building. The latter, 73-story First Interstate World Center, was built by Maguire on land purchased from Cushman after securing a large lease by SoCalGas' parent company, Pacific Enterprises.

"Cushman expected to earn substantial commissions" on both deals, said Wheatland. He claimed Cushman "had a significant personal financial interest in the success of the MTP leases and a strong fiduciary obligation to MTP not to disrupt the transaction," he said, citing several Cushman-MTP documents detailing their financial obligations to each other.

The judge claimed Cushman "clearly was not motivated or inclined in 1987 to search aggressively for a more cost-effective alternative," he said.

SoCalGas officials argued that Cushman was objective and had no conflict of interest. They said he would have earned lease commissions on whatever building was chosen.

SoCalGas has staunchly defended Cushman's integrity. "John Cushman is widely respected in his profession," said Chairman and Chief Executive Richard Farman in an interview last year. "There was no conflict of interest," he said. "Ultimately we, not Cushman, chose our location."

Cushman himself has defended his work and integrity in interviews with the Business Journal.

The judge, however, also faulted Cushman's report for coming too late.

SoCalGas had already agreed not to hold talks with any other office building in the L.A. metropolitan area, under a December 1986 letter-of-intent agreement to sign with Maguire. Cushman and SoCalGas, however, insist the judge misinterpreted the agreements' terms.

Overall, Wheatland agreed with SoCalGas' assertions only rarely. For one, he said the budget for furniture assemblers was reasonable. But he disagreed on most major issues, like whether one-quarter of the leased footage was surplus. He also hacked away at SoCalGas' reimbursement requests, cutting the $18 million asked for all new furniture to $12 million.

"Certainly, every person who would plan a move to a new home or office would aspire, if they could afford such luxury, to have all new furnishings. But this desire for optimum 'ensembles' must be tempered by a cost-conscious pragmatism," wrote the judge.