Tensions Well Up in a Company Town

Bobby White
Thursday, May 6, 2010

(Note: See Antonia Juhasz's comments on this article on WSJ's website.)

Bobby White
Wall Street Journal
Thursday, May 6, 2010

(Note: See Antonia Juhasz's comments on this article on WSJ's website.)

RICHMOND—Chevron Corp. has long had a complicated relationship with this East Bay city. The oil company's huge refinery provides jobs and tax revenue, but the city contends that Chevron hasn't always paid its fair share.

Now, the city and the oil company are taking their dispute over tax obligations to Richmond voters with competing initiatives on November's ballot.

Contra Costa Times/ZUMA Press
Richmond city officials question whether Chevron should be paying more in taxes for its Richmond refinery, in a 2007 photo.

The measures center on utility taxes, levies on energy consumption that are assessed in many cities in California and elsewhere around the U.S. Richmond officials say Chevron should pay more in utility taxes than it has in past years, while the company has hinted it might shutter its operations in the city if it has to pay more.

Richmond's city council last May proposed a measure to eliminate a provision in a law that created a unique system for calculating Chevron's utility tax. While the city assesses a 10% tax on energy use for most residents and businesses, Chevron's tax liability is based on a complex formula that ties a fixed sum to inflation, but doesn't take into account the company's actual energy consumption.

If Richmond's measure passes, Chevron says it could end up paying nearly $30 million annually in local utility taxes, about $10 million more than what it expects to pay for the fiscal year ending in June.

So last month, Chevron announced a competing ballot initiative to cap its annual utility-tax payments at $20 million. The measure also proposes cutting in half the taxes that residents pay for their utilities, which currently amounts to an average of about $200 to $250 annually.

The dueling ballot measures underline the fragile state of affairs between Richmond and Chevron. Both sides have much at stake in maintaining their relationship. Chevron employs about 2,700 people in this city of about 100,000, making it Richmond's largest private employer, according to the city's finance department. In a city with 19% unemployment, Chevron also is the city's single-biggest tax contributor, putting in 30% to 50% of Richmond's $132 million general fund budget last year.

Meanwhile, Chevron's Richmond 250,000 barrel-a-day refinery, which it has operated for more than 100 years, is the company's second-largest in California and third-largest nationwide, according to Argus Research.

Tom Butt, a Richmond city council member, says Chevron's ballot measure could lead to the city losing $8 million to $10 million from its general fund budget. "If that's the kind of disdain Chevron has for the city, then it has to be challenged," he says.

Mike Coyle, general manager of Chevron's Richmond refinery, says the oil company already pays some of the highest corporate taxes in California. Richmond's ballot measure would put the company at a competitive disadvantage, he adds, since refineries in nearby Martinez and Benicia either don't pay or pay lower utility taxes than in Richmond.

"There needs to be an environment in the city that welcomes business, not discourages it from operating," Mr. Coyle says.

The ballot measures aren't the first time that Richmond and Chevron have disagreed. Over the years, the two have sparred over issues such as a business-license fee, air pollution and a refinery expansion.

But the rival ballot initiatives are making for one of the nastier clashes, say local leaders. "This back and forth has gotten out of hand," says Judith Morgan, chief executive of Richmond's Chamber of Commerce. She adds that if Chevron pulls out of the city, it "could have a devastating effect on businesses and the community."

The tax dispute is rooted in a clause in Richmond's 1983 utility-tax law. The provision allows Chevron to limit its utility taxes by using a formula that includes a set dollar amount and variables based on the consumer price index of gas and electricity costs. City officials say Richmond feared Chevron would oppose the utility-tax law if it didn't offer the concession.

In 2006, Richmond residents elected the city's first Green Party mayor, Gayle McLaughlin, who partly campaigned on increasing taxes on Chevron. Following her election, Richmond launched an audit of Chevron's utility-tax payments.

Contra Costa Times/ZUMA Press
Richmond Mayor Gayle McLaughlin campaigned partly on raising taxes on the refinery.

Around the same time, Chevron jettisoned the 1983 formula and for two years paid utility taxes based on actual usage, a step that the company says it took to calm critics.

Meanwhile, Chevron appeared to be losing support in city government. In the 2008 election, two city council members who had been supportive of the refinery lost their re-election bids. That same year, Richmond's audit of Chevron alleged that the company had underpaid its utility taxes for fiscal 2006 and 2007, though the mayor and city council members say they don't know by exactly how much. While the audit's findings are sealed, Mayor McLaughlin says that Chevron unfairly excluded from its tax calculation natural gas that the refinery used to manufacture other products. She says the audit "showed the city would be getting quite a bit more" if the audit's interpretation of the tax formula were followed.

Chevron's Mr. Coyle says the city's desire to tax raw materials used to manufacture other products seemed "over the top." The formula, he adds, allows the company to more reliably estimate its tax obligations in advance.

The city threatened to sue Chevron over the alleged underpayment. In an out-of-court settlement, Chevron agreed to pay the city nearly $30 million, but the company didn't admit to any underpayment. The city also agreed to allow Chevron to use the special tax formula through fiscal 2013. Mr. Coyle says Chevron settled the suit to avoid a prolonged dispute that could damage its relationship with Richmond.

Last May, the city council moved ahead with its utility-tax ballot measure to permanently eliminate the special provision for Chevron. This month, the seven-member city council plans to hold a vote to formally declare opposition to Chevron's measure. Chevron officials declined to discuss their campaign activity around their ballot measure.

In Richmond, residents are divided over the tax issue.

John Spradlin, manager at La Perla Delicatessen on Richmond's west side, says he doesn't support increasing taxes on Chevron. He worries the effort could drive Chevron to sell the refinery.

"When you get tough with Chevron, that impacts the community," says Mr. Spradlin. "We lose out on services and funding."

Other residents like Mike Parker, a community-college instructor, disagree. "The city can't afford to give special perks to corporations as large as Chevron," says Mr. Parker.

Write to Bobby White at bobby.white@wsj.com

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