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FNG asks to stay course on deregulation Company president says regulation would only increase rates, prevent FNG from attracting needed capital investment, recouping losses Eric Lidji Petroleum News
Regulating Fairbanks Natural Gas would lead to increased rates and would prevent the company from attracting outside investment, according to a top company executive.
In testimony filed with state regulators on Dec. 12, Fairbanks Natural Gas President Dan Britton said his company took losses for many years in an attempt to provide cheaper fuel to its customers. But that business model, he said, depends on the company recouping its losses in the future by easily adjusting its rates without the cost of regulatory approval.
Britton’s testimony came as part of an on-going Regulatory Commission of Alaska investigation into whether Fairbanks Natural Gas should be economically regulated.
Fairbanks Natural Gas is the only natural gas utility in Fairbanks, an energy market dominated by several unregulated heating oil companies that compete for prices on a weekly basis. To compete in that market, state regulators economically deregulated Fairbanks Natural Gas in 2003, letting the company change rates without permission.
The current investigation is the second concerning Fairbanks Natural Gas’ rates in recent years. Both cases began in part based on requests from Rep. Jay Ramras, R-Fairbanks.
The initial investigation began after Fairbanks Natural Gas lost a gas contract in the fall of 2006, coming within days of running out of gas. The RCA placed watchdog measures on Fairbanks Natural Gas, but ultimately decided not to reinstate economic regulation.
The current case is based on a May 2008 request from Ramras and 13 state lawmakers from the Southcentral region. The lawmakers felt state regulators should investigate the regulatory status of Fairbanks Natural Gas after the company posted a profit in 2007.
Those lawmakers chose not to be involved in the case, instead deferring to the Attorney General’s office. In testimony filed in late October, a pair of witnesses for the Attorney General recommended against reinstating economic regulation for Fairbanks Natural Gas, but proposed installing rate caps or market thresholds to temper rates in the future.
Britton argued against those ideas, saying that if Fairbanks Natural Gas is regulated as soon as it becomes profitable, the company could not recover losses incurred until now.
He said the company needs constancy in order to attract new capital investment.
Are customers held captive? A major concern of regulators and the Attorney General’s office is whether Fairbanks Natural Gas customers are “captive,” in other words, whether the technical costs of switching between oil and gas may keep customers locked in to one fuel or the other.
While Britton acknowledged that some residential customers might have difficulty switching, he argued that all Fairbanks gas customers originally paid to switch from oil.
He also said Fairbanks Natural Gas has “approximately 1 percent of the overall Fairbanks residential market” and can’t exercise market power without scaring off new customers.
The gas-to-oil price ratio Because no gas pipelines currently connect Fairbanks and Anchorage, Fairbanks Natural Gas buys and liquefies Cook Inlet gas before trucking it north to Fairbanks.
This unique arrangement is costly. The company loses around 20 percent of its gas in liquefaction, and transportation expenses change constantly with the price of diesel. Still, Fairbanks Natural Gas managed to underprice heating oil in Fairbanks for many years, Britton said, saving customers millions of dollars while taking losses year after year.
The contractual problems of 2006, though, prompted a series of rate increases. By June 2007, natural gas prices in Fairbanks topped prices for heating oil for the first time.
With oil prices fluctuating wildly over the past year, natural gas was the cheaper fuel in Fairbanks over the summer, but is now around 45 percent more expensive than oil.
Britton claims those increases came from unexpected costs, not from deregulation.
Because Fairbanks Natural Gas took losses in the past to remain competitive, Britton believes rates would increase under regulation, which sets a fixed rate of return. The comment echoes a point made by one of the Attorney General’s witnesses in October.
Fairbanks Natural Gas is currently working to switch its supply of gas from Cook Inlet to the North Slope, a move that would require building a major liquefied natural gas plant.
In a small setback, RCA recently denied Fairbanks Natural Gas’ request for a refund as part of a recent settlement agreement between Enstar Natural Gas and Aurora Gas.
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