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December 2008

Vol. 13, No. 52 Week of December 28, 2008

One-year reprieve for Enstar gas supplies; RCA rejects contracts

Enstar might not get the peace of mind it wants, but it should get the natural gas it needs.

In rulings on Dec. 22, state regulators once again rejected a pair of gas supply contracts between Enstar and two Cook Inlet producers, but allowed Enstar to buy gas from the producers under the contracts and recover the new expense through its rates.

The apparent contradiction highlights the complexity of the regulatory battle.

In the short term, the rulings mean Enstar will have enough natural gas next year to supply around 400 Anchorage businesses that have been in limbo for nearly a month.

“We do plan on purchasing gas in 2009,” Enstar spokesman Curtis Thayer said.

Still, the rulings from the Regulatory Commission of Alaska only give Enstar a one-year fix on gas supplies. The rejected contracts would have covered Enstar for five years.

In a three-page ruling, the RCA chose not to approve those two supply contracts Enstar negotiated separately with ConocoPhillips and Marathon, saying the contracts did not include necessary revisions the commission required in ruling back in October.

However, in a separate nine-page ruling, the RCA allowed Enstar to buy gas supplies from ConocoPhillips and Marathon and pass the cost onto customers through rates.

The apparent contradiction comes from a previously unused provision in the Enstar tariff.

Enstar only needs regulatory approval for supply contracts that increase the average cost of all gas supplies purchased by the utility. Enstar believes the revised ConocoPhillips and Marathon contracts will lower the average cost the utility pays for gas in 2009.

That’s 2009 costs, not 2008. Enstar rates are still set to jump around 22 percent next year.

The reason is two existing Enstar gas contracts based on summer oil prices. This past summer oil prices hit record highs. The gas contracts will be priced again next summer.

The new ConocoPhillips and Marathon contracts go into effect on Jan. 5.

Pricing issue unresolved

The decision closes a chapter of the long regulatory debate, but the book is still open.

Gas producers, state regulators and Enstar have been arguing for years about how best to price new gas supplies from Cook Inlet. Because the local market is based around a few producers and a few large customers, there is no local spot price for natural gas.

Enstar needed new gas supplies to cover a shortfall in the coming year.

After state regulators rejected an eight-year contract in 2006 that would have covered the shortfall, Enstar submitted two five-year contracts with ConocoPhillips and Marathon.

On Oct. 31, the RCA approved those new contracts, but required Enstar to go back to the producers and negotiate a price cap based on five North American production basins.

But ConocoPhillips and Marathon refused to implement the price caps.

Instead, Enstar submitted new contracts designed to lower its current average cost of gas, using the provision available to the company since 1987, but never used until now.

The ConocoPhillips contract is $8.91 per thousand cubic feet of gas, or 5 cents below the average, while the Marathon contract is $8.93 per mcf, or 3 cents below the average.

Giard criticizes Irwin

Alongside the two rulings, RCA Commissioner Kate Giard issued a statement criticizing the Department of Natural Resources for its comments on the proceedings in the case.

Although DNR was not a party to the case, Commissioner Tom Irwin wrote the RCA on Dec. 11 saying, “The State’s best interest is achieved if the Commission approves both of the proposed gas supply contracts” even if they didn’t offer a long-term solution.

“Long-term solutions must reflect the cost to find and develop the new resources that will be required to meet the public demand for gas supply,” Irwin wrote, saying that costs to explore and produce gas in Cook Inlet are typically higher than in the Lower 48.

In her statement, Giard said Irwin’s comments about the high cost Cook Inlet environment “reflects a disappointing lack of awareness of recent RCA case history.”

Giard said concrete information about Cook Inlet production costs are not on the record.

“It is elementary that knowing the cost to produce gas is necessary to truly hit the bulls-eye in setting gas prices,” Giard wrote. “We have been denied this information.”

Giard said DNR could start requiring leaseholders to give cost data to the RCA, and the Legislature could enact a statute requiring production costs to factor into gas prices.

—Eric Lidji






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