Providing coverage of Alaska and northern Canada's oil and gas industry
June 2016

Vol 21, No. 26 Week of June 26, 2016

KBPL rate challenge

Cook Inlet gas pipeline stakeholders question doubling of shipping fees


Petroleum News

Several businesses and Alaska’s attorney general have submitted statements to the Regulatory Commission of Alaska, questioning a proposed rise in the fees charged for shipping gas through the Kenai Beluga Pipeline. The pipeline company has applied to the commission for a rate rise from 29.15 cents to 63.98 cents per thousand cubic feet of gas, a more than doubling of the existing rate.

The line connects gas fields in the southern Kenai Peninsula to Enstar Natural Gas Co.’s gas transmission system in the northern part of the peninsula, to the Cook Inlet Natural Gas Storage Alaska, or CINGSA, storage facility near Kenai and, by running under the waters of Cook Inlet, to the gas transmission network on the west side of the inlet.

The tariff filing has come as the result of a settlement between various stakeholders in the pipeline infrastructure, agreeing with the formation of the Kenai Beluga Pipeline as the consolidation of what had been four different but interconnected pipelines.

Given the pipeline’s location at the core of the network of gas transmission lines transporting gas from the various gas fields in the Cook Inlet basin, much of the gas used by Southcentral Alaska gas and power utilities passes through at least some portion of the line. An increase in the rates on the line would, therefore, increase the delivered cost of much utility gas.

Investigation requested

Daniel Dieckgraeff, director of rates and regulatory affairs for Enstar, the main Southcentral gas utility, has sent a letter to the commission saying that Enstar, either by itself or through its suppliers, ships considerable volumes of gas on the Kenai Beluga Pipeline. The request for a significant rate increase warrants a suspension of the tariff filing and a careful investigation of the pipeline’s revenue requirement, Dieckgraeff wrote.

Tony Izzo, general manager of Matanuska Electric Association, said that MEA’s customers will feel “the full brunt” of any increase in the pipeline tariff because the utility obtains all of its gas from Hilcorp Alaska LLC, a direct shipper of gas on the KBPL and an affiliate of the pipeline company.

“KBPL’s proposed 119 percent increase is staggering and warrants suspension and investigation by the commission,” Izzo wrote. “MEA opposes this increase and is also concerned about the rate shock that could result from such an increase.”

Homer Electric Association, in a complaint to the commission about the proposed rate increase, says that it uses the KBPL to transport gas to its gas-fired power station at Nikiski on the Kenai Peninsula, as well as to and from the CINGSA facility. HEA has requested a formal investigation of the rate rise.

Postage stamp rate

At the core of HEA’s complaint is the fact that the pipeline’s rate is a postage stamp rate, a rate that remains the same regardless of where or how far a shipper wants to transport gas through the line. The idea behind this rate arrangement is to remove the shipping cost from consideration when deciding the routing for gas transportation, thus encouraging shippers to make routing decisions based on shipping efficiency rather than cost. But the system can work to the disadvantage of shippers that only use short sections of the line, causing these shippers to incur high costs per mile of gas transportation. In fact, Enstar has already built a short pipeline bypassing part of the KBPL for shipping gas between the CINGSA storage facility and Enstar’s nearby pipeline system.

As part of its rationale for the shipping rate increase, KBPL has said that the use of bypass lines will reduce the gas throughput in its line, thus increasing the unit cost of shipping gas. The pipeline company says that, in addition to the Enstar bypass line, Furie Operating Alaska has plans to build a bypass line to deliver gas from its East Foreland gas processing plant to HEA’s power station in Nikiski.

HEA, in its commission filing, says that it was never party to the agreement to institute a postage stamp rate on the KBPL and that the use of this rate arrangement has substantially increased its gas transportation costs. The proposed new postage stamp rate presents a 700 percent increase relative to what HEA used to pay to ship gas from CINGSA to HEA’s Nikiski plant, HEA told the commission.

Cost of new compression

Another point of contention is the recovery from pipeline rates of the cost of new compression added to the KBPL on the Kenai Peninsula to increase the capacity of the pipeline to ship gas east to west under Cook Inlet. This extra capacity ensures that the gas transmission network can adequately deliver utility gas to wherever it is needed during periods of peak winter demand in Southcentral Alaska. The pipeline company has told the commission that the cost of the new compression is one of the factors in the proposed rate rise.

But HEA, in its filing, has told the commission that it does not need east-to-west gas transportation services and that the cost of this service should be borne by the businesses using the service.

HEA has also accused KBPL of making “speculative assumptions” about future shipment volumes when estimating the future unit cost of shipping gas - the cost calculations assume a drastic drop in Enstar shipments from CINGSA because of the new bypass line; the calculations assume that Furie will build its bypass line to ship HEA gas; and the calculations assume no liquefied natural gas exports from ConocoPhillips’ Nikiski LNG facility in 2016, HEA says. HEA also questions the pipeline company’s assumptions about the amount of working gas needed to be stored to maintain flexibility in pipeline operations - the cost of the working gas and its storage factor into the pipeline’s shipping rates.

Bruce Webb, Furie senior vice president, has told the commission that his company has supported the consolidation of the KBPL and the institution of the postage stamp rate, arrangements that have greatly simplified and improved the movement of gas across the Cook Inlet. Furie does not have any agreements for the construction of a bypass pipeline but is concerned about the magnitude of the proposed rate increase and the possibility that such a large rate hike might encourage parties to explore bypass opportunities, Webb wrote in a letter to the commission commenting on the proposed KBPL rate increase.

Other questions

Tesoro Alaska Co., operator of the oil refinery at Nikiski, a major industrial user of Cook Inlet natural gas, has told the commission that KBPL has failed to demonstrate that the scale of the proposed rate rise is justified. Deficiencies in the tariff filing include a “huge unjustified downward adjustment” to pipeline throughput; the inclusion in the rate without justification of new compressor costs; a lack of supporting evidence for administrative and operating expenses; excessive dismantlement, removal and restoration costs; and an unjustified reduction in the anticipated life of the pipeline from 25 to 20 years, Tesoro said.

The state attorney general’s Regulatory Affairs and Public Advocacy Section also questioned the shortening of the pipeline’s anticipated economic life, saying that a depreciation study is required to justify a change of this type. The attorney general requested a tariff suspension and investigation, citing several issues relating to the information that KBPL provided in justification of the rate rise.

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