Increase not going to gas company

December 7, 2000

BY TERRY SAVAGE SUN-TIMES COLUMNIST

Like thousands of homeowners, when I opened my heating bill last week I was rocked by the amount due--and the heating season hadn't officially started yet!

Since I follow the futures markets, I wasn't completely stunned. In October 1999, crude oil prices traded below $10 a barrel; today they're at $29. Last fall, natural gas was $2.50 per thousand cubic feet; today it's at $8.50.

In a cruel double whammy, not only are prices rising, but Mother Nature seems to have decided this will be an especially cold winter.

So it's only natural that politicians and ordinary citizens should look to the "gas company" for relief. In northern Cook and Lake counties, the gas company is Peoples Energy, a publicly traded company that serves 835,000 customers.

The obvious assumption is that if gas prices triple, gas company profits will triple. So why shouldn't Peoples management allow customers to stretch out the payment of their bills over an extra 6 months instead of the current 12? That's one of several schemes the City of Chicago is asking the Illinois Commerce Commission to force Peoples to adopt.

Why not? Well, for starters, the obvious assumption that the gas company is raking in windfall profits is dead wrong.

Here are the facts.

Peoples Energy does not make money from rising gas prices. Peoples is a gas delivery company--a distribution company. The company simply passes along on a dollar-for-dollar basis the increase in price of the raw material it delivers--natural gas.

Peoples Energy does benefit when the volume of gas transmitted increases, because it charges a distribution fee, but the company is completely indifferent to the price of that gas.

This year, less than half of your monthly gas bill will be from those distribution fees. Yes, cold weather will increase the distribution charges on your bill, but the other, larger portion of your bill, which comes from higher gas prices, will rise much more sharply.

A cold winter should increase profits--unless bad weather causes a break in a pipeline and employees work an unusual amount of overtime to maintain the system's reliability in the brutal weather. That's why the company needs to make a profit--to keep growing, and fixing, its pipes and facilities.

We can see with ComEd what happens when a company doesn't reinvest in its infrastructure.

The really big winner in the rising gas-price market--and the winner doesn't even have to take the risk of drilling for gas, or building pipelines--is the City of Chicago.

Take a look at your gas bill. You'll see an 8 percent municipal utility tax, based on the total amount of your bill--the portion that comes from rising gas prices and the portion that comes from service fees paid on the volume of gas you use.

So when your gas bill goes up, city tax collections go up.

In fact, last year the city collected $62.5 million in taxes on the heating bills of its residential and business customers.

Assuming that your energy bill could be about 50 percent higher this year, the city could expect to collect an additional $25 million to $30 million in taxes on those bills.

(There's also a 5 percent State of Illinois tax on your gas bill. And municipalities outside Chicago also have a similar municipal tax, in addition to the state tax.)

Perhaps the City of Chicago should offer to rebate some of those higher taxes to struggling homeowners and businesses, instead of pushing Peoples Energy to extend its repayment period to 18 months from 12.

That extended repayment solution really does no favor to consumers. When next year's heating season comes around, customers will be faced with the unpaid portion of this year's heating season, and gas bills could be twice as high.

Let's suppose that all of Peoples Energy customers who are already using the 12-month interest-free extended payment plan signed up for that extra 6-month interest-free repayment. It would cost Peoples Energy an estimated $2 million to absorb the additional carrying costs, over and above the $8 million that the program already costs Peoples.

Taking that cut out of Peoples' expected $95 million in profits for the current year would force management to make some tough decisions: Which pipelines and storage facilities would you suggest they not maintain in the coming year?

If your answer is that Peoples should cut its $2 annual dividend to shareholders, you'd better think again. Nearly half of the shares of Peoples Energy are owned by big institutions--probably the mutual funds and pension plans that are running your retirement investment portfolio. And the other half are owned by individual investors--very likely elderly investors who count on that dividend to make ends meet.

Gas prices are up. There's no way around it. And those higher bills are going to be tough on people. So, yes, let's come up with a plan to deal with the hardship. But let's make it a plan that does not threaten our future delivery of gas or our retirement plans. Let's ask the city to put its windfall tax bonanza where its mouth is.

And that's The Savage Truth.

http://www.suntimes.com/output/savage/terry07.html

-- Martin Thompson (mthom1927@aol.com), December 08, 2000