Another look at regulation for FNG

Lawmakers ask the RCA to consider rate regulation after Fairbanks’ lone natural gas utility posts its first profitable year

Eric Lidji

Petroleum News

Following a request from a bipartisan group of Alaska lawmakers, state regulators will consider reinstating economic regulations on the lone natural gas utility in Fairbanks.

Led by Rep. Jay Ramras, R-Fairbanks, the group of 12 representatives and two senators, including both Speaker of the House John Harris and Senate President Lyda Green, asked the Regulatory Commission of Alaska on May 5 to investigate whether or not to regulate the rates Fairbanks Natural Gas LLC charges nearly 1,100 customers in Fairbanks.

“Because of their position in the Fairbanks market, it seems that FNG has matured into a healthy profitable gas monopoly,” the letter reads.

The lawmakers make that claim because Fairbanks Natural Gas had its first profitable year in 2007 after a decade in the red, and also greatly increased the salary of the company’s president, Dan Britton, while raising rates for its customers.

Economic deregulation allows a company to adjust rates at will, without the lengthy and expensive process of dealing with state regulators, but still keeps company balance books in the public record.

The company said that while it made money last year, it made less than it could have under regulation, which would have set a rate of return designed to recuperate infrastructure investments over the past decade.

Fairbanks Natural Gas earned $621,362 in net income in 2007.

“Nor does mere profitability for one year justify a change in the current regulatory scheme,” the company wrote in reply to the lawmakers’ letter.

Company began under full regulation

Fairbanks Natural Gas began providing service in 1997, under full regulation.

From the start the company operated under an unusual business model for Alaska, buying Cook Inlet natural gas, liquefying it at a plant at Point McKenzie and trucking it 300 miles up the Parks Highway to Fairbanks.

The RCA decided to partially deregulate Fairbanks Natural Gas in 2003, allowing the company to change rates as long as it notified both the state and customers. This allowed Fairbanks Natural Gas to quickly adjust rates, both up and down, to keep pace with fuel oil, a completely deregulated market covered by several competing companies in Fairbanks, where it is the dominant home heating product.

But in the fall of 2006, Fairbanks Natural Gas came within a week of running out of gas after its supplier at the time, Aurora Resources, terminated its contract.

Through an emergency contract negotiated at the time, Fairbanks Natural Gas began buying its natural gas supply from Enstar. However, state regulators put a timeline on the arrangement and told Fairbanks Natural Gas to look for another supplier.

It was during the proceedings surrounding the emergency contract that Ramras first asked the RCA to consider once again regulating the rates of Fairbanks Natural Gas, citing the near loss of supply and the failure to notify customers as a major reason.

Ramras is a commercial customer of Fairbanks Natural Gas through his businesses.

When the RCA closed the book on the emergency contract in late March 2007, it decided not to economically regulate Fairbanks Natural Gas, saying that competition with fuel oil provided enough incentive for the company to charge reasonable rates, although acknowledging that the competitive pressure eased during periods of high oil prices.

The RCA did, however, require Fairbanks Natural Gas to notify customers of any potential supply shortages in the future, to conduct regular financial audits and to maintain accounting records as though it were completely regulated.

Gas vs. oil in Fairbanks

Natural gas customers in Fairbanks most likely pay the highest natural gas rates in the country, but even so natural gas in Fairbanks has historically been priced below fuel oil by energy content, except for a brief period of time last year.

That remained true even as rates dramatically increased over the past six months.

By example, residential Fairbanks Natural Gas customers paid $8.56 per thousand cubic feet of natural gas in 2003. Today, that price has nearly tripled to $23.35 per mcf. But the equivalent amount of fuel oil by British thermal units, a measurement of energy, currently costs around $30.50 in Fairbanks, according to conversion rates from the U.S. Energy Information Administration.

Plans for new supply from North Slope

Under the new set-up, Fairbanks Natural Gas plans to build a liquefaction plant on the North Slope and truck the gas 550 miles down the Dalton Highway to Fairbanks. Although the trip will cost more than traveling up the Parks Highway, and will require a new multimillion-dollar plant, Fairbanks Natural Gas believes the operation will still be cheaper than trying to secure a guaranteed supply from the tight Cook Inlet market.

Ramras and the lawmakers questioned the wisdom of building a new liquefaction plant at a time when the “potential” for a bullet line or spur line to ship North Slope natural gas to communities along the road system is “real” within the next “5-12 years.”

“Will the cost of an antiquated North Slope LNG facility be spread to FNG ratepayers over 30 years? The facility may become obsolete after a pipeline is built but survive as a burden on the FNG rate payers,” Ramras writes.

Fairbanks Natural Gas said it could no longer afford to wait.

“From a practical perspective, the ‘possibility’ of a pipeline to Fairbanks in ‘5-12 years’ does not allow FNG to ignore its customers’ present needs and their needs for the next 5-12 years,” the company wrote in response to the letter from lawmakers.

Instead of focusing on regulation, Fairbanks Natural Gas believes the RCA should worry about supply. With less than seven months to go, Fairbanks Natural Gas still does not have a supplier of natural gas for the three months between the end of the contract with Enstar and the beginning of the new one with Exxon.

“Unless FNG obtains a source of gas beginning January 1, 2009, there will likely be little utility service left to rate regulate,” the company wrote.

That might create some problems with the timeline of the current docket. The RCA asked the lawmakers to designate a spokesman by June 20, but gave itself until June 5, 2009, to issue a final ruling on the matter.

— Eric Lidji can be reached at 907-770-3505