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November 03, 2008 --- Vol. 14, No. 101November 2008

RCA orders market-based price cap on Cook Inlet utility gas

In an order issued Oct. 31 the Regulatory Commission of Alaska has approved Enstar Natural Gas Co.’s new Cook Inlet gas supply contracts with ConocoPhillips Alaska and Marathon Oil Co., provided that the contract gas prices comply with a commission-mandated price cap. The price cap will consist of an index calculated from the 12-month trailing average of daily gas prices in five gas production basins in North America. Prices will be inclusive of royalties and production taxes paid by the gas producers.

The price cap will remain in effect “as long as natural gas is exported from Cook Inlet or there are ongoing activities leading to the export of natural gas,” RCA said.

Because there is no spot market for natural gas in the Cook Inlet region, there has been a long and contentious debate regarding the appropriate price level for gas supplied to local utilities. Both the gas producers and Enstar have argued that prices should reflect prices elsewhere in North America, to encourage investment in new Cook Inlet gas exploration and development.

But, although the commission has accepted the principle of using a market index to set Cook Inlet prices, the commission says that a price cap using a production-basin index is needed to counterbalance the producers’ market power. The price indexes that had been proposed in the new contracts included some downstream “city gate” markets.

RCA has accepted, with one modification, the gas price tier structure in the new Enstar contracts — the price tiering specifies different price levels for base load gas, seasonal gas supplies to meet winter demand and for gas supplied during peak demand on the coldest winter day. However, the commission sees the tiering formula in the contracts as an interim step towards “fully unbundled” future gas supply contracts that include pricing for gas storage.

See full story in Nov. 9 issue of Petroleum News, available to subscribers online at noon, Friday, Nov. 7, at www.PetroleumNews.com

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