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The great rate debate.

Arkla Gas Officials Face Dilemma: Raise Residential Rates Or Lose Industry

Mike Means, the president and chief operating officer of Arkansas Louisiana Gas Co., has spent the past few months breaking the news gently.

Officials of Arkla Gas have requested a sizeable increase in natural gas rates that would generate $22.9 million a year in new revenue for the company.

Now, to drop the other shoe.

The bulk of the proposed 8.8 percent overall rate increase would fall on the shoulders of the residential ratepayers. They would cough up an extra $5 per month should the Arkla Gas proposal be approved by the state Public Service Commission. Meanwhile, some large industrial customers in the state would get a rate decrease.

That's a red flag to residential consumers, the PSC staff and the media.

So, Means and other Arkla Gas officials have tried to soften the blow by explaining their side of the story to focus groups and members of the media as the case proceeds slowly through state regulatory channels.

It's a difficult task.

"Things are hard on folks right now, and I expect that when there is more notoriety on this, when we file our testimony and we go to hearings, you'll probably hear folks complaining about the pinch," Means says. "I do believe we've given good service, and folks will back us up that respect. It's just that they will perceive it as just one more hit they're taking in tough economic times.

"I understand that. I just hope that people will put it in perspective. In a lot of cases, the gas bill is no more than the water bill. It's a fairly good value."

Up A Five-Spot

Arkla Gas Co. is one of the retail gas distribution arms of Arkla Inc. The natural gas company serves more than 500 communities in Arkansas, northern Louisiana, Oklahoma, Kansas and Texas.

This rate filing with the PSC affects 330 communities served in Arkansas.

According to statistics provided by Arkla Gas officials, Arkansas residential customers currently pay an average of $34.05 per month on their gas bill.

Under the current cost-sharing formula between residential customers and large business customers, residential customers could expect to pay an additional $3.49 per month. That puts 58 percent of the cost-sharing burden on residential ratepayers and 42 percent on larger customers.

The Arkla Gas proposal to the PSC, filed Feb. 18, would increase the burden on the residential ratepayers to 61 percent and increase the average monthly gas bill to $39.20.

That's a $5.15 per month increase over current gas bills.

And that's too much, says Shirley Guntharp, a deputy attorney general assigned to the case.

"We do not think there should be an increase in the rates at all," Guntharp says. "But, if so, not at the expense of ratepayers. We were glad the PSC staff's recommendation was substantially below Arkla's."

At a Sept. 14 meeting of the parties involved, the PSC staff agreed that Arkla Gas was entitled to a rate increase. However, the state regulators recommended an increase far below what Arkla Gas officials had in mind.

The PSC staff countered the utility company's proposal with an increase in rates that would generate about $7.89 million a year in revenue. That is well below the $22.9 million Arkla Gas executives had asked the PSC to approve.

Kenny Henderson, staff attorney and spokesman for the PSC, says the commission staff's recommendation is based strictly on an independent review of the rate proposal. The burden on the residential ratepayers was not taken into consideration, he says.

"It has nothing to do with residential," Henderson says. "Rate design is a separate issue. We simply determine what |revenue~ they are entitled to."

Means says he and others at Arkla Gas were disappointed but not surprised at the PSC staff's recommendation. Arkla Gas has until Oct. 5 to file its rebuttal.

The PSC staff counters with surrebuttal Oct. 26. The case hearing is Nov. 2.

"They're at the other side of the spectrum from what we're at," Means says. "It's what we're used to. It's not a surprise."

In A Nutshell

Means emphasizes that the complex rate case boils down to two basic elements:

* An increase in natural gas rates to produce more revenue.

* A cost shift from industrial users to residential users.

The increase in rates is 8.8 percent. Considering Arkla Gas has not requested a rate increase in five years, that figures out to a 1.7 percent per-year increase since then. Such an annual increase is below the rate of inflation, Means points out.

"During that time, we've reduced our employment and had cost-saving programs," Means says. "That's how we've managed that small increase during that period."

Arkla Gas has reduced its number of employees from 2,333 in 1985 to 1,622 through two early-retirement programs, a voluntary severance plan and attribution. It has meant a payroll savings of more than $27 million per year.

Also, the company has reduced its lost-and-unaccounted-for-gas cost in Arkansas by more than $8 million annually since 1985.

Then why does Arkla Gas need the extra revenue?

Cost increases have been unavoidable.

Annual investments to replace old pipe have gone up. The cost of pipe installation in 1992 is five times the cost 40 years ago.

Employee health care costs, equipment costs, payroll taxes and workers compensation have risen.

Also, several unseasonably mild winters have stung Arkla Gas. Lower sales brought on by warmer weather have cost the company about $23 million in profits from 1988-92.

It all adds up to a need for an increase in rates, company officials believe.

The second part of the equation is the stickler.

"The other element is the shift in costs from the industrials to the residentials and small commercials," Means says. "We believe it's necessary to be done because these industrials have alternatives that weren't available to them previously."

Because of federal deregulation, big industrial users can turn their backs on higher-than-the-norm natural gas rates by choosing one of three options:

* Bypass the gas company's role in distributing the gas. Because of deregulation, industries near a pipeline can construct a line that ties directly into the pipeline. Also, industries can amortize the line over a three- to five-year period to save costs.

* Seek alternative fuel supplies. Larger customers are turning to propane, fuel oil and coal instead of natural gas.

* Go elsewhere. Because natural gas costs impact an industry's total unit cost, a non-competitive gas rate may cause the company to shut down the plant and move it to a more competitive area. That means a loss of jobs and money to any community.

Option No. 3 is the extreme, Means admits.

However, more and more industries may choose to bypass natural gas distribution companies. As that occurs, the remaining customers will be asked to absorb those costs in future rate cases.

Captive Customers?

"What we're trying to achieve is competitiveness and fairness," Means says. "There's a balance between our industrials and residentials that we're seeking. We want reliable, safe service for residentials.

"The other side is we've got an industrial class that's telling us that they've got alternatives. And we need to be competitive.

"... The most important issue is that the federal government has deregulated the business and the industrial users have a choice. If we're not competitive, they will make a choice that will make them competitive."

Opponents of the rate increase say any break for larger industrial customers is coming at too great an expense to John Q. Public. Arkla Gas currently has more than 400,000 Arkansas customers, most of whom do not have the options available to larger natural gas users.

"Residential ratepayers are captive customers," says Deputy Attorney General Guntharp.

Her office presented as testimony the opinion of economist Basil Copeland Jr., a former PSC staff member.

He suggested Arkla Gas officials more equitably distribute the revenue requirement, even if that means a slight increase for some of the company's large industrial customers.

The Arkansas-based company has similar rate cases pending in Kansas and Oklahoma. The proposed rate increase for residential users in Oklahoma is 25 percent compared with the 15 percent proposed increase for residential customers in Arkansas.

"We've got a bigger mountain to climb in Oklahoma," Means says.

It's no molehill in Arkansas.
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Title Annotation:Arkansas Louisiana Gas Co.'s request to increse natural gas rates
Author:Webb, Kane
Publication:Arkansas Business
Date:Sep 28, 1992
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