HOME PAGE SUBSCRIPTIONS, Print Editions, Newsletter PRODUCTS READ THE PETROLEUM NEWS ARCHIVE! ADVERTISING INFORMATION EVENTS PAY HERE

Providing coverage of Alaska and northern Canada's oil and gas industry
January 2009

Vol. 14, No. 3 Week of January 18, 2009

ANGDA considers gas supply cooperative

Cooperative would bring electric utilities together for negotiations; some utilities worry about initial exclusion of Enstar

Eric Lidji

Petroleum News

Hoping to coordinate large natural gas purchases, and tackle a range of other issues, a state agency is looking into forming a supply cooperative among several electric utilities.

With a decision to press forward, the Alaska Natural Gas Development Authority would spend up to $250,000 setting up the tentatively titled “Alaska Gas Supply Cooperative.”

As currently envisioned, the six electric utilities based along the road system of Alaska could voluntarily join the non-profit cooperative to take advantage of economies of scale.

Those electric utilities include Chugach Electric Association, Municipal Light & Power, Matanuska Electric Association and Golden Valley Electric Association, as well as two smaller utilities, Homer Electric Association and Copper Valley Electric Association.

Notably, none of those utilities are traditional for-profit companies. They are all member-owned cooperatives, except ML&P, which is owned by the Municipality of Anchorage.

The main goal of the Alaska Gas Supply Cooperative would be combining the fuel needs of those utilities in time to take advantage of a possible sale of North Slope gas in 2010.

This sort of “aggregation” is not uncommon in the Lower 48, but the models in existence typically rely on combining the needs of dozens of companies, rather than just a handful.

ANGDA believes aggregation is the best way to get a long-term and relatively low-cost supply of natural gas for the vast majority of the population of Alaska. The biggest challenge, though, is finding a model capable of uniting a group of territorial utilities.

Making the challenge even greater, ANGDA believes aggregation would yield the most benefits if it could be achieved before either of two open seasons planned on large natural gas pipelines in 2010. That would require making commitments by the end of this year.

The scale of that challenge, among other things, prompted skepticism among state budget officials. The proposed state budget for fiscal year 2010 includes $5 million for ANGDA, rather than the $25 million to $50 million the public corporation originally requested.

ANGDA says it needs the larger sum to push ahead on its plans for a spur line. The spur line would divert a small stream of in-state gas from a larger gas pipeline headed south.

ANGDA said a large appropriation would allow it to give the utilities enough information so they could to decide whether to commit to a billion-dollar decision about long-term gas supplies.

Even if the large pipeline or the smaller spur fails, though, the cooperative is still worth pursuing, according to Harold Heinze, chief executive officer of ANGDA.

“We think this is a good idea regardless. If we had one today, we think you’d be using it,” Heinze told utility representatives during an ANGDA board meeting on Jan. 14.

Once established, Heinze said, the scope of the cooperative could be expanded to help build more natural gas storage, a major deficiency in the Alaska gas system, or attempt supply solutions like coordinating the import of a tanker of liquefied natural gas.

ANGDA believes it can form the cooperative without statutory or regulatory changes, and hopes to make significant headway on the project before its March board meeting.

“We’re not asking the state for permission to do this,” Heinze said. “Under the law, this is a business decision.”

Where does Enstar belong?

Those utility representatives showed some interest in the idea, but also had reservations.

Chief among those is a proposal to initially exclude private companies from membership.

That would mean Enstar Natural Gas, the largest natural gas user in the state, would not be a founding company in the cooperative, although it could be allowed to join later.

As a gas supplier, rather than a gas user, Heinze said ANGDA felt, “Enstar might be on the other side of the negotiation in this transaction.” But he added that the cooperative would evolve at the whim of its members, who could extend membership as they saw fit.

Even though Enstar does not consume gas, it still faces the same “common problem” of a “looming shortage of natural gas,” according to Brian Davies, a consultant for ML&P.

“It would be, I think, really beneficial if somehow or other the biggest user could be included in this,” Davies said. “If they’re not included, then they become a competitor.”

From a legal standpoint, nothing prevents a cooperative from extending membership to a privately held company, like Enstar, according to Jim Walker, an attorney with MEA.

In fact, Walker added, some guidelines for nonprofits actually limit the sales to nonmembers, which could become a problem if the cooperative tried to sell gas to Enstar.

“I would encourage you to look at allowing investor-owned or privately owned membership,” Walker said.

To avoid a dispute that could derail the effort, ANGDA recommends that membership be limited only to utilities until a framework is established for the cooperative, according to Tony Izzo, an ANGDA consultant and formerly the chief executive officer of Enstar.

Once that framework exists, Izzo said, it makes sense for all major players to be involved.

“Critical mass and economy of scale logically dictates that you would want to have the largest volume,” Izzo said.

If the utilities together can create enough demand, a cooperative might be able to negotiate directly with the state to buy royalty gas from the North Slope, according to Kate Lamal, ANGDA board member and vice president for power supply for GVEA.

“Volume does matter in negotiations,” Lamal said.

Other early reservations

The other reservations and considerations involve several ongoing Railbelt energy issues.

Coordinating long-term supply arrangements won’t have much impact without a broad plan for identifying and managing the resources in the Cook Inlet, according to Brad Evans, chief executive officer of Chugach Electric, the largest electric utility in Alaska.

He wants a policy shift toward consumers, even at the expense of larger state revenues.

“The state’s got to look out for the people that live here,” Evans said.

While Evans preferred negotiating as a group to negotiating individually, he added that, “Gas always comes down to price. You don’t sign up for something you can’t afford.”

To get those players to negotiate, though, ANGDA needs to offer assurances that no one party, including ANGDA, drives the agenda, according to Davies, the ML&P consultant.

“That would have to be very clear. That if you sign up for this, you are signing up for participation in an entity that did not have an agenda for a particular solution,” he said.

Each utility faces unique challenges with gas supplies, according to Walker, with MEA.

For example, MEA recently decided to not renew its contract to buy electricity from Chugach Electric, and now must build its own power plant before 2015. While that plant will most likely be fueled by natural gas, the utility has yet to make a final decision.

“We’re still trying to figure out what it is we’re going to build,” Walker said, explaining that until MEA makes a decision, the utility cannot commit to a long-term gas supply.

As envisioned, the cooperative would serve the needs of the Railbelt utilities, which mostly use natural gas. By expanding the cooperative to other fuels, it could also help small rural utilities that depend heavily on diesel, according to Marilyn Leland, president of the Alaska Power Association, a trade organization representing most of Alaska.

“I realize your name is filled up with gas all over the place ... but this would be something that would help the entire state, not just the Railbelt,” Leland said.

Heinze said ANGDA is focused on gas because recent reports have suggested that the existing gas infrastructure grid would result in the lowest end-cost to consumers.





Funding light in the legislative tunnel

Although ANGDA approaches the upcoming legislative session with concerns about its funding level, the public corporation sees hope in one pre-filed bill, according to Heinze.

House Bill 44 sponsored by Incoming House Speaker Mike Chenault, R-Nikiski, would pre-approve ANGDA and several other state agencies to issue bonds for energy projects.

Currently, state agencies must get legislative approval before issuing bonds.

The bill would specifically allow ANGDA to issue up to $250 million in bonds.

“This would be providing the board with some very good authority,” Heinze said.

During a special session this past summer, state lawmakers didn’t give ANGDA a $25 million appropriation supported at the time by the administration of Gov. Sarah Palin.

But sinking oil prices in the fall ate a projected revenue surplus and with the release of its proposed fiscal year 2010 budget, the state tempered its initial financial support, setting aside only $5 million for ANGDA, rather than the requested $25 million to $50 million.

If the Legislature cuts funding entirely for the coming fiscal year, Heinze said: “We will live with ourselves, but we will probably have failed” in the goal to hold an open season.

If the Legislature approves only that $5 million budget item, Heinze said ANGDA could probably still prepare for an in-state open season by diverting all its funding resources.

Should ANGDA get the big appropriation it wants, or if it successfully sells bonds early enough in the year, Heinze said it “will have a very aggressive next level of activity.”

ANGDA recently hired a project manager to help with the final push to an open season on the spur line, but based the contract on the project manager’s ability to secure funding.

“If he doesn’t get the money, he doesn’t work,” Heinze said.

—Eric Lidji


Petroleum News - Phone: 1-907 522-9469
[email protected] --- https://www.petroleumnews.com ---
S U B S C R I B E

Copyright Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA)Š1999-2019 All rights reserved. The content of this article and website may not be copied, replaced, distributed, published, displayed or transferred in any form or by any means except with the prior written permission of Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA). Copyright infringement is a violation of federal law.