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AG: FNG should be regulated Public advocate believes Fairbanks Natural Gas isn’t competing against fuel oil prices in the Interior, should be regulated Eric Lidji For Petroleum News
Almost a decade after regulators gave the utility permission to set its rates at will, an economist representing the state Attorney General’s office believes state regulators should once again subject Fairbanks Natural Gas LLC to traditional rate regulation.
“The rationale for FNG’s economic exemption is negated by its pricing behavior,” economist Christina Klein wrote in testimony to the Regulatory Commission of Alaska.
Additionally, Klein said the RCA should consider shrinking the Fairbanks Natural Gas service area if the company cannot supply all the potential customers in the region.
The RCA is currently investigating whether pricing restrictions implemented in 2008 have effectively protected Fairbanks Natural Gas customers from monopoly pricing.
Because Fairbanks Natural Gas hasn’t changed its prices since 2008, even when those prices were more expensive than heating oil, Klein said the company could no longer claim to need the rate-setting agility afforded by exemption from economical regulation.
Between November 2008 and October 2010, the Fairbanks Natural Gas residential rate of $23.35 per thousand cubic feet exceeded the average monthly heating oil price in the region. The large commercial rate of $22.66 per mcf topped local heating oil prices for a 17-month stretch from November 2008 and March 2010, Klein noted in her testimony.
In the two years since then, natural gas has been priced below heating oil, but largely because “heating oil prices have remained very high during this period,” Klein wrote.
While Fairbanks Natural Gas offered “reasonable” explanations, according to Klein, those have been redacted from her testimony, as have other details, particularly concerning the Fairbanks Natural Gas customers able to easily switch between fuels.
Even considering those factors, though, Klein said Fairbanks Natural Gas “did not behave competitively for a very long stretch of time,” thus upending its rationale for exemption.
Reasonable, not competitive The question hinges, in part, on “dual fuel” customers, or those able to switch between heating oil and natural gas. With enough dual fuel customers, Fairbanks Natural Gas would presumably need to beat heating oil prices to avoid a mass exodus, but “the percentage of customers who are dual fuel and who actually switch fuels appears to be too low to force FNG to drop its prices to retain those customers,” Klein wrote.
Fairbanks Natural Gas acted “reasonably,” but not “competitively” in his pricing habits, according to Klein, adding that the company could charge excessive prices in the future.
But another consultant, Parker Nation, testified that Fairbanks Natural Gas may have “over-recovered” revenue beyond what it needed for a set rate of return beyond its costs.
Because over-recovery requires regulators to first set a revenue requirement and a rate of return, the distinction is inherently muddled for unregulated Fairbanks Natural Gas. But by estimating company costs using financial statements, and applying various rates of return, Nation said Fairbanks Natural Gas might be over-recovering by 4.5 to 9.2 percent.
With regulation, Fairbanks Natural Gas customers would pay a rate tied to the cost to provide service, a distinction that guarantees “reasonable” rates, but not necessarily lower rates. Additionally, ratepayers would have to pay for rate cases every three to five years.
And if unregulated heating oil prices in the future ever fell far enough below the regulated natural gas price for dual fuel customers to flee, Fairbanks Natural Gas could request a rate increase on its few remaining customers to make up for the lost revenue.
Service area concerns Just like the old joke where the food is bad and the portions are small, Klein also argues Fairbanks Natural Gas might be turning away potential customers in its service area.
Between 2008 and 2012, Fairbanks Natural Gas added 16 customers. Its market share in the Fairbanks North Star Borough is currently between 1 percent and 6.7 percent by class.
Without a long-term fuel supply, Fairbanks Natural Gas cannot serve all the potential customers in its service area. Although the company signed a supply agreement with ExxonMobil in 2008 to purchase Prudhoe Bay natural gas, it needs to build liquefaction facilities on the North Slope before it can leave its current Cook Inlet supply source.
Because of this limitation, and because no other utility can currently provide natural gas service in the Interior, the question is moot. But Klein said the RCA should revisit the matter, either as part of a future rate case or if another company enters the market.
FNG ‘willing’ to be regulated The regulation question might be a technical one.
In October, Fairbanks Natural Gas announced it “might be willing to accept full economic regulation by the RCA, if the new regulatory status were subject to a reasonable phase-in, and if certain other agreements could be reached.” Asked by Interior policymakers why it would willingly accept regulation, Fairbanks Natural Gas President Dan Britton described economic regulation as an inevitably, especially as the company begins applying for state grants or tax credits. Additionally, he said, the cost to keep revisiting rate regulation had negated some of the financial benefits of being exempt.
“We’re just trying to shorten the process,” he said.
A recurring issue Although the Alaska Public Utility Commission initially subjected Fairbanks Natural Gas to economic regulation when it certificated the utility in 1997, the Regulatory Commission of Alaska exempted the company in 2003. At the time, regulators said Fairbanks Natural Gas needed to be able to change its rates quickly to compete against the swarm of unregulated fuel oil companies dominating the Interior heating market.
Fairbanks Natural Gas remains a small player in the Interior marketplace, but the regulation question perennially dogs the company. The RCA first reconsidered the question in late 2006, as part of its investigation into a supply contract between Fairbanks Natural Gas and Enstar Natural gas Co, but chose not to pursue economic regulation.
The issue returned in May 2008. After Fairbanks Natural Gas posted its first profitable year, a group of state lawmakers asked the RCA to investigate reinstating rate regulation.
In those proceedings, public advocates worried some Fairbanks Natural Gas residential customers could be “captive,” or unable to economically switch between natural gas and heating oil should one fuel or the other become a better deal. Through a deal with the Attorney General’s office, Fairbanks Natural Gas avoided rate regulation by tethering its residential rates to its large commercial rates, a more competitive customer class.
In approving the deal, the RCA decided to revisit the matter this year.
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