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AG witnesses sour on re-regulating FNG Say Fairbanks Natural Gas didn’t ‘over recover’ revenues through its rates, but recommend a cap tied to oil prices in Fairbanks Eric Lidji Petroleum News
Despite a profitable year and a salary bump for its president, Fairbanks Natural Gas is not collecting too much revenue and its rates should not be regulated, according to two witnesses testifying for the state Attorney General’s office on Oct. 31.
However, it may be appropriate for state regulators to cap the natural gas utility’s rates to keep them connected to fuel oil prices in Fairbanks, according to one of the witnesses.
The pre-filed testimony comes as part of an investigation into whether or not Fairbanks Natural Gas should once again be an economically regulated utility. Fairbanks Natural Gas will file testimony by Dec. 5. RCA is scheduled to rule by June 5, 2009.
The investigation is based on a May 2008 request from Rep. Jay Ramras of Fairbanks and 13 state lawmakers, all from Southcentral. Those 14 lawmakers chose not to be involved in the case, asking instead that the Attorney General’s office represent the public interest.
Their request came after Fairbanks Natural Gas posted $621,362 in net income in 2007, during a year of rate increases and a large raise for its president, Dan Britton.
But even with those factors, Fairbanks Natural Gas did not “over recover” revenues through its rates, or collect more than it should, according to Parker Nation, an analyst with the Regulatory Affairs and Public Advocacy section of the Department of Law.
Nation wrote in his testimony that Fairbanks Natural Gas had between $2.41 million and $2.65 million in expenses last year not offset by revenues collected through its rates.
“Essentially FNG is voluntarily forgoing its return on equity,” Nation wrote.
This disparity between the expenses and the reported net income comes primarily from the fact that Fairbanks Natural gas passes on its income tax burden to its owners.
Regulation and contracts Fairbanks Natural Gas started providing service in 1997 as an economically regulated utility, but state regulators exempted the company in 2003 to help it compete in the agile Fairbanks fuel market, which is dominated by unregulated heating oil companies.
Although Fairbanks Natural Gas is the only natural gas utility in Fairbanks, the company argued it didn’t have a large enough total share of the market to act like a monopoly, and would have to compete against fuel oil in terms of pricing to keep its customers.
Fairbanks Natural Gas expanded its operations in the years following the ruling, adding distribution lines to new subdivisions and businesses. The company currently supplies some 1,100 Fairbanks customers, both residential and commercial.
Because no gas pipelines connect Anchorage and Fairbanks, the company liquefies Cook Inlet natural gas, trucks it north and re-gasifies it into the local distribution grid.
This arrangement guaranteed Fairbanks would pay more than Anchorage for the same natural gas, but a string of circumstances over the past two years widened the gap.
Contractual problems in late 2006 brought Fairbanks Natural Gas within a week of losing its supply of Cook Inlet natural gas. With the help of state regulators, the company signed an emergency contract with Enstar Natural Gas, avoiding a break in service midwinter.
The Enstar contract runs through the end of the year, at which time Fairbanks Natural Gas will get its supply from Aurora Gas on a temporary basis until a long-term contract to buy North Slope natural gas from ExxonMobil picks up in April 2009.
The ExxonMobil contract requires Fairbanks Natural Gas to build a liquefied natural gas plant on the North Slope, and to travel farther to get gas to Fairbanks, but the company still expects supplies to be cheaper and more secure than the current Cook Inlet supply.
A disparity between cities As a result of the contractual tumult in 2006, Fairbanks Natural Gas ended up paying considerably more for its natural gas supply. To keep pace, the company increased its rates several times over the course of 2007. Rates nearly tripled between 2003 and 2008.
The Enstar contract created an odd disparity between Alaska’s two largest cities: natural gas customers in Anchorage pay among the lowest rates in the country, while natural gas customers 350 miles to the north in Fairbanks likely pay the highest rates in the country.
At the current residential rate of $23.35 per thousand cubic feet, natural gas in Fairbanks is the cheaper fuel when heating oil is around $3.10 per gallon or higher.
Because of the volatility in oil prices recently, natural gas started as the more expensive fuel when Fairbanks Natural Gas last increased its rates in January 2008, then became a much cheaper alternative this past spring and summer, and is currently the more expensive fuel once again, with average fuel oil prices hovering around $2.60 a gallon.
Fairbanks Natural Gas argues it still provides a competitive product, even with slightly higher prices, because natural gas is a cleaner burning fuel than heating oil, and because the gas boilers can be somewhat cheaper and easier to maintain than those for heating oil.
Price could be tied to oil Despite these assurances, state regulators have often worried many natural gas customers in Fairbanks can’t easily switch between gas and oil to take advantage of differences in prices between the fuels. The process is common and technically possible, but it can also be cost prohibitive or complicated, creating a class of “captive” customers in Fairbanks.
Because of this, state regulators could cap Fairbanks Natural Gas’ rates, allowing the company to retain some of the pricing agility that would be lost through full regulation.
The RCA didn’t impose a cap when it exempted Fairbanks Natural Gas from economic regulation in 2003 because of “the ease with which its customers can change fuels.”
But Cristina Klein, a consultant for the Attorney General and a former state economist, testified that while many of Fairbanks Natural Gas’ commercial customers have the resources to switch easily between fuels, “residential customers are essentially captive.”
Klein recommended capping Fairbanks Natural Gas’ residential rates at the average price of heating oil in Fairbanks, based on equivalent heat value, or British thermal units.
“This cap would offer residential customers the same protection that the ability to purchase potentially lower price fuel from the fuel oil suppliers offers to those customers with dual fuel capacities,” Klein wrote.
Klein also recommended that state regulators re-examine the question of whether to economically regulate Fairbanks Natural Gas should the utility eventually reach a 25 percent share of either the residential or commercial markets in Fairbanks.
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