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May 2013

Vol. 18, No. 20 Week of May 19, 2013

Interior plays spar on service areas

Fairbanks Natural Gas, Interior Alaska Natural Gas Utility each tell the Regulatory Commission of Alaska to be wary of the other

Eric Lidji

For Petroleum News

The battle over bringing liquefied natural gas to the Interior is getting testy.

In an increasingly complicated tangle arising from longstanding disputes, three entities competing to market North Slope natural gas supplies are accusing one another of being unfit to serve a less-densely populated section of the Fairbanks North Star Borough.

The Regulatory Commission of Alaska is considering cases from two competing entities interested in providing natural gas distribution to North Pole, Eielson Air Force Base and areas in between: Fairbanks Natural Gas LLC and Interior Alaska Natural Gas Utility.

In one case, the for-profit Fairbanks Natural Gas wants to expand its existing service area in Fairbanks and believes regulators should reject the Interior Alaska Natural Gas Utility application because it lacks concrete sources for supplies and financing. In the other case, the Interior Alaska Natural Gas Utility wants a certificate to serve a similar section of Fairbanks North Star Borough and believes regulators should reject the Fairbanks Natural Gas application because the company has not met its targets for expansion in the past.

And from the sidelines, the for-profit Spectrum Alaska LLC is asking to join the proceedings, saying the outcome will impact its plans for a North Slope LNG facility.

In Alaska, regulated utilities have exclusive rights within a service area.

Eight years without expansion

The IANGU believes Fairbanks Natural Gas is trying to lock up the local market.

The RCA certificated Fairbanks Natural Gas in 1997 and has expanded its service area twice — in 1999 and 2005. The service area now covers an area bounded by the Fairbanks International Airport, the University of Alaska Fairbanks and Fort Wainwright.

The various growth projections Fairbanks Natural Gas has made publicly since becoming certificated never came to pass. For instance, Fairbanks Natural Gas said in 1997 that it expected to have more than 4,000 customers by 2002, but today the company serves only around 1,100 customers. Although regulated utilities are generally required to provide service to all eligible and interested customers with their service areas, Fairbanks Natural Gas serves the same customer base it served in 2005, at the time of its most recent expansion, the IANGU noted in comments to the Regulatory Commission of Alaska.

This lag suggests Fairbanks Natural Gas is not “fit, willing and able,” the three-fold test regulators use to determine if a utility can provide service, according to the IANGU.

“Thousands of residents within its existing service area have been waiting for FNG to provide gas service for over a decade and a half. FNG should fulfill its existing commitments to serve before it is permitted to expand those commitments to a new service area which IGU is proposing to serve,” IANGU attorney Robin Brena wrote.

While Fairbanks Natural Gas expects to serve some 1,926 residential and 53 commercial customers within the proposed expansion area, IANGU believes it can serve some 12,839 residential and 527 commercial customers within the same area. And while Fairbanks Natural Gas proposes to spend $47.2 million building out storage and distribution into the expansion area, the IANGU is proposing to spend nearly $500 million. “At best, FNG’s proposal lacks the necessary vision to adequately provide gas service to the potential customers either within its existing service area or the new service area,” Brena wrote.

What about supplies?

Fairbanks Natural Gas called the comments “erroneous.”

Criticizing Fairbanks Natural Gas for failing to meet its growth projections is “unwarranted,” according to the utility, because constrained supplies out of Cook Inlet over the past decade prevented the utility from adding customers. After Fairbanks Natural Gas lost a supply contract with Aurora Gas in 2006 because of those constraints, the Regulatory Commission of Alaska cautioned the utility against further expansion.

The commission ultimately required Fairbanks Natural gas to file bi-monthly updates about its supply situation, a requirement the utility continues to uphold today.

In 2008, Fairbanks Natural Gas secured a long-term gas supply from the North Slope, but it has been unable to utilize the contract so far because of the lack of infrastructure.

The utility says it has worked hard since then to improve the economic climate for natural gas in the Interior, including lobbying for tax changes and working to create a recent public-private partnership with the Alaska Industrial Development and Export Authority to finance a liquefied natural gas facility on the North Slope to serve a trucking operation.

“The North Slope LNG plant will be the result of the hard work that FNG has been doing for the last 10 years,” the company wrote in comments on May 13. “FNG and its related companies cannot develop the LNG plant by themselves. They need support from the State. But the State would not be supporting an LNG plant if not for the efforts of FNG.”

As far as the discrepancies between the competitors, Fairbanks Natural Gas claims IANGU is making a bad comparison. The 12,839 residential customers IANGU expects to serve is a projection to 2021 while the 1,926 residential customers Fairbanks Natural Gas expects to serve is a projection to 2015, according to Fairbanks Natural Gas. By 2021, Fairbanks Natural gas said it expects to serve some 8,549 residential customers.

But Fairbanks Natural Gas called the difference “meaningless.” Both entities “propose to serve all the customers in the new area who can be served economically and who will actually want gas service. FNG estimates that there are 8,549 such customers. IGU projects that there are 12,839. Whichever projection is correct will apply to both applicants,” Fairbanks Natural Gas wrote. “If there are 8,549 potential customers in the new service area, IGU will be limited to serving that many customers. In the unlikely event that there are 12,839 potential customers, FNG will be happy to serve them all.”

Supplies and financing

Then Fairbanks Natural Gas shifted from defense to offense.

The utility said regulators should reject the IANGU application as incomplete because the municipal utility does not yet have financing in place or a gas supply contract.

In its application, the IANGU said it would borrow nearly $500 million at low interest to fund an infrastructure build out, but the utility has “no documentary support from a lender willing to extend credit on these extraordinarily generous terms,” according to Fairbanks Natural Gas. As a municipal entity, the IANGU believes it can secure low-cost financing through avenues not available to a private company like Fairbanks Natural Gas.

Additionally, the IANGU has said it would seek a supply contract when plans for a North Slope LNG plant become “more defined.” Fairbanks Natural Gas accused the utility of assuming “that gas will be available, in the quantities it desires, and at a price it wishes to pay. These assumptions are subject to considerable doubt.” This “considerable doubt” comes from the recent rise in North Slope gas prices, according to Fairbanks Natural Gas.

Spectrum wants in

While the two players battle it out, Spectrum Alaska wants its positions to be heard.

The Regulatory Commission of Alaska recently issued the company a certificate to build a liquefied natural gas plant on the North Slope. In its application, Spectrum said it intended to serve the North Slope transportation market, but would consider other markets in the state. Presumably, those markets could include the Interior because Spectrum called itself “a competitor for natural gas sales” in the proposed expansion area.

In its request to be made a party to the Fairbanks Natural gas proceedings, Spectrum said the case should consider the relationship between the soon-to-be-rate-regulated Fairbanks Natural Gas and its non-rate regulated supply affiliate Polar LNG LLC. It also asked regulators to consider making Fairbanks Natural Gas an open access distribution utility.






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