Public, private utilities argue merits of Fairbanks gas plans

AP Photo/Eric Engman/Fairbanks Daily News-Miner

The battle over natural gas territory in the Fairbanks North Star Borough continued Sept. 16 when Regulatory Commission of Alaska hearings commenced in Anchorage.

Fairbanks Natural Gas, or FNG, and the borough-owned Interior Alaska Natural Gas Utility, or IGU, filed new service area applications with the commission in April to supply natural gas to customers in the high and medium-population density areas of the borough. Those areas include North Pole, the area surrounding Eielson Air Force Base, and portions of Fairbanks outside the city core, which is already served by Fairbanks Natural Gas.

FNG currently trucks natural gas to Fairbanks from Point MacKenzie and serves about 1,100 customers in Fairbanks. About 460 of those are residential, 620 are small commercial and 28 are large commercial customers. In 2012, roughly one-third of the gas FNG sold was to its large commercial customers.

A ruling deadline for the proposals, originally set for Oct. 19, was amended to Dec. 20 when the Regualtory Commission and the competing utilities agreed to extend the decision-making process because of the lengthy nature of the hearings and the complexity of the issue at hand.

The commission had set aside Sept. 16-20 for the IGU and FNG oral arguements, but the slow pace of the proceedings, combined with the appearance of 15 scheduled witnesses between the parties, meant they were still going on through Oct. 3.

Formed in November 2012 to spur investment in gas infrastructure in the borough, Interior Alaska Natural Gas Utility officials have questioned FNG’s commitment to expanding gas service to areas of the borough where fuel oil, wood and coal are the primary heat sources for residents and businesses.

The need for a new energy supply in the borough is undisputed. A June 2012 study of energy consumption and associated costs in the Fairbanks area by Northern Economics found that residents burning fuel or heating oil spend an average of about $5,000 per year to heat their homes at the current fuel oil price of about $4 per gallon.

By expanding the availability of lower cost natural gas, the study estimated energy cost savings for the area of nearly $300 million annually by 2021, the soonest it’s thought build-out could be completed.

Additionally, the area would reduce its nitrogen oxide and sulfur dioxide emissions from 2,200 tons per year to about 200 tons per year by moving away from primarily liquid and solid fuels. Fairbanks is known to have some of the worst winter air quality in the nation.

FNG President and CEO Dan Britton has said the borough-owned IGU lacks capital and has financing and build-out plans that are unrealistic.

In April the Legislature passed Senate Bill 23 to help fund the process of getting liquefied natural gas from the North Slope to the Interior. Under SB 23, the state-run Alaska Industrial Development and Export Authority is authorized to issue $150 million in bonds to fund gas distribution infrastructure.

Another $125 million in loans is available from the state Sustainable Energy Transmission and Supply fund, with a final $50 million capital appropriation going directly towards a North Slope liquefaction plant. In total, building the North Slope plant, trucking the LNG to Fairbanks and developing distribution infrastructure is expected to cost about $425 million.

“(IGU doesn’t) have any financing sources,” Britton said in an interview. “There are available AIDEA funds — we’ll be using some of those. If they’re successful, they may, but that’s a limited amount of money and they’re making the representation that they’re going to do a different build-out than us, unconditionally. That’s not the reality of how it can happen.”

Both parties’ plans call for first gas to be delivered in late 2015 with transmission line build-out mostly completed by 2021. First gas is expected to cost customers about $15 per thousand cubic feet, or mcf. FNG estimates that rate will drop to $13 per mcf by 2021.

Operating as an unregulated utility, FNG sells gas at about $23 per mcf now. It will become regulated in July 2014.

Comparably, fuel oil containing the same amount of British thermal units as a mcf of gas sells for about $30 in Fairbanks.

IGU Chairman Bob Shefchik acknowledged in an interview the challenges IGU faces as a startup, but said the state assistance and the fact that it does not have a goal of maximizing profits make it a viable candidate.

“You need a plan to manage negative cash flows while you’re putting your capital out and before gas is delivered and that, above all, is the biggest challenge,” he said.

In its April application to the Regulatory Commission, IGU stated that it expected to receive $481.7 million in loans from the Energy Transmission and Supply fund. Those loans would have a 50-year term and carry a 1 percent interest rate, according to the application.

IGU has since revised its financing plan.

While being questioned by FNG attorney Mark Figura before the commission, Shefchik said in his testimony that he realized the IGU’s financing plan needed to be adjusted to 30-year loans with a 3 percent rate after a summer meeting with AIDEA officials.

“We did draw the conclusion that we needed to develop a plan that served at least the core of North Pole with ‘three and 30’ money in order to advance the first couple of years of the project and then work to stretch the rest out — that the project didn’t change but the change in the financing terms of years and dollars would change the scope that could be reached in the first two or three years,” Shefchik testified.

IGU also scaled back the miles of transmission pipe it plans on using after an AIDEA-led design charrette. Initially, IGU proposed installing more than 1,000 miles of pipe, but Shefchik said in April that number could change. The utility has since settled on a 663-mile plan to potentially serve 12,000 customers in the disputed area.

FNG plans to install about 300 miles of pipe outside of its existing service area, while continuing to serve more customers in its current service area, Britton said in his testimony.

The difference in distribution miles can be explained by IGU’s desire to provide “to the meter” service, Shefchik said, while FNG would run lines “street-side”.

Britton said FNG charges a small fee for installing service lines to buildings within 100 feet of the street. The company covers the remaining installation cost, which would remain the same in the expanded service area.

According to Britton, FNG plans to reach 8,000 potential gas customers by 2021 by combining private investment through its parent company Pentex Alaska Natural Gas Co. with the $150 million in AIDEA bonds.

To feed the foreseen demand, AIDEA has proposed partnering with a private entity — which FNG has submitted a proposal for — to build a liquefaction plant capable of producing 9 billion cubic feet, or bcf, of gas annually. Construction of the nearly $200 million plant would coincide with initial build-out of the Fairbanks-area distribution system.

The private utility produces about 900 million cubic feet at its Point MacKenzie liquefaction plant annually, Britton testified. The plant has a 1.4 bcf capacity.

Britton told the commission that FNG has had a goal of expanding the gas distribution system in Fairbanks since its inception in 1998, and that it did so until 2006 when gas supply constraints in Cook Inlet stifled further expansion. The company has not expanded significantly since 2006 because it cannot make investments without knowing if gas will be available for customers.

“The real risks and challenges are associated with LNG production. When you’re building your LNG production you’re doing so prior to the market being established,” Britton said while being questioned by his attorney Figura. “If you build it, they will come, to a certain extent.”

Britton said he would be “ecstatic” when Figura asked him what his response would be if IGU or another entity came to FNG with additional gas supply.

A recently signed contract with Cook Inlet gas producer Hilcorp and the development of a $35 million, 5.2 million-gallon LNG storage facility in Fairbanks will allow the company to serve 900 more customers in its existing service area, Britton said. The customers are on FNG’s distribution grid, he said, but a reliable gas supply hadn’t been available before to serve them.

FNG revised numbers in its proposal a few days prior to the Regulatory Commission hearings. It originally estimated new customers would demand an average of 190 mcf of gas per year and reduced that number to 125 mcf. The decrease in the gas demand estimate could influence the final cost of FNG’s project and ultimately change the delivered price.

According to figures provided to the commission by FNG, its residential customers average gas usage in 2012 was 131 mcf.

Fast track issues

Prior to directly questioning Britton, Commissioner Robert Pickett said he took issue with both applications.

“I feel like the commission is in a rather challenging position looking at the two applications that have significantly morphed, that have some fairly serious errors, omissions and arguably some misrepresentations. And I’m going to give the benefit of doubt in this because of the timing issues and that kind of stuff,” Pickett said. “But when we get to the decisional stage, quite frankly, if not for the statutory deadlines, and of not for the critical needs in Fairbanks and these types of issues, I would support dismissal of both applications without prejudice and refile and get it straight.”

Commissioner Paul Lisankie concurred with Pickett’s sentiment before he questioned Britton.

Shefchik said in an interview that FNG has taken advantage of its unregulated status by pricing its gas as high as it could to fully capitalize on the market. The strategy reduced the company’s incentive to invest in new infrastructure and expand its customer base because it would see diminished financial returns, he said.

Along the same line, IGU lead attorney Robin Brena repeatedly questioned Britton about FNG’s “duty to serve” new and existing customers.

“We have a duty to serve our customers effectively, to ensure the longevity of the utility and ensure that there’s reliable service out into the future,” Britton testified.

When asked by Brena if FNG has a duty to serve over a duty to “optimize profit,” Britton said the company must have a balance of duties that “results in sustainable economics.”

Brena further asked Britton why FNG did not expand as Pentex claimed it would when Pentex applied with the Regulatory Commission to purchase FNG in late 2006.

In its Commission filing, Pentex stated that it planned to invest more than $18 million in 155 miles of main gas lines so it could serve 5,800 customers by 2013.

Between 2007 and 2013, FNG installed 8.2 miles of new service line and Britton testified that a gas supply shortage in Cook Inlet, where the company currently gets is gas, made infrastructure investment unfeasible.

Britton acknowledged that FNG did not write a letter to the Department of Energy clarifying its need for gas when the department extended ConocoPhillips license to export gas to Japan from its Kenai Peninsula plant in October 2010.

“We were told originally from Conoco that they were under contractual obligations, that that facility was bound contractually to the export license for the Japanese market, and they were not capable of selling and that they felt there was tax consequences and that they didn’t have sufficient facilities to necessitate LNG trade or filling,” Britton told the commission.

When asked by FNG counsel Figura what IGU has done to secure a gas supply, Shefchik said it has looked casually at supply possibilities from Canada, California and Arizona, but has been directed to rely on AIDEA’s proposed North Slope production facility for gas.

Large-volume customers

While being questioned by friendly counsel, Britton testified that FNG had made continued attempts to secure industrial gas customers in the Fairbanks market. He said the small size of the residential market — the combined population of Fairbanks and North Pole is about 35,000 people — makes large-volume customers vital to the viability of a nearly $200 million North Slope liquefaction plant.

Britton likened potential industrial customers to “anchor tenants” in a real estate development.

“The industrial customers are a known and immediate market of gas to be sold,” he said in response to Figura.

By 2025, Britton said he expects industrial demand to account for 20 percent of the market. IGU officials have said their focus is making sure borough residents get gas first, and Britton has questioned the feasibility of that approach.

The three obvious potential large-volume gas customers are Golden Valley Electric Association, Flint Hills Resources oil refinery and the University of Alaska Fairbanks.

Flint Hills, once interested in gas, has said it has found alternative energy sources and will not need gas unless its production increases.

Electrical cooperative Golden Valley President and CEO Cory Borgeson was scheduled to testify as a witness on behalf of IGU, but had not testified in time for this story. In his prepared written testimony, Borgeson wrote that “as a public utility, IGU will be able to attract public support and financing on terms more favorable than would a private for-profit utility.”

In his testimony, Britton said his company has continued to negotiate terms on a potential gas contract with Golden Valley and will do so in the future if FNG is awarded the service area. In the past, Borgeson has said Golden Valley is willing to work with anyone to secure gas in order to produce cheaper electricity for its customers.

According to Golden Valley, 43 percent of its electricity is produced by burning fuel oil annually.

 UAF Chancellor Brian Rogers also testified as a witness on behalf of IGU. The university is an interruptible customer of FNG — it burns gas from the utility during the low-demand summer season.

While being questioned by IGU’s Brena, Rogers said IGU has the public’s interest in mind and that being a public entity it will have the best chance to serve the most customers, benefiting the community both economically and through air quality improvement.

“We would be a larger customer if we had an assured supply at the prices being laid out in these — in both proposals actually,” Rogers told the commission.

He added that about 80 percent of the student body at UAF comes from Interior Alaska, meaning the gas would provide an economic benefit to current and potential students and allowing some to spend money on tuition and not heat, and complete their coursework.

When questioned by Figura, Rogers said he had no doubt FNG would be willing to sell gas to the university of it had sufficient supply.

The university recently announced plans for a $245 million upgrade to its 50-year-old combined heat and power plant to primarily burn coal. Construction would be funded primarily through state appropriations and be completed in 2019 on the university’s current timeline.

The university currently burns a combination of coal, fuel oil and natural gas.

Figura asked Rogers if the money the university is asking for would be better spent on a North Slope LNG plant that would potentially benefit the whole community and provide gas to the university.

Rogers said he has a responsibility to meet the immediate needs of the university and could not answer the question.

Elwood Brehmer can be reached at [email protected].

10/07/2013 - 9:14am