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Seeking more clarity on Cook Inlet gas RCA wants input on the scope of a standard gas supply contract and on the question of regulating Cook Inlet gas storage facilities Alan Bailey Petroleum News
Faced with increasing concerns about the future sustainability of Cook Inlet utility gas supplies for Southcentral Alaska residents, the Regulatory Commission of Alaska is trying to clarify a couple of key regulatory issues that impact the challenges of bringing new natural gas online from the Cook Inlet basin. One of the issues concerns the contractual terms, especially for gas pricing, that the commission will accept in new utility gas supply agreements; the other issue is the question of whether the commission will regulate gas storage facilities.
To address the question of acceptable contracts, the commission is considering specifying contract language and terms that would spell out the form of contract that the commission would approve. And as a starting point in investigating the question of gas storage regulation, the commission has sought legal advice from the state Attorney General’s office.
On April 2 the commission posted two notices on its Web site, inviting public comments on what it has determined so far. Comments on either notice must be submitted to RCA by 4 p.m. on May 1.
Regulatory impasse The standard gas supply contract concept stems from years of wrangling over new Cook Inlet utility gas supply agreements, with no end in sight over broad consensus on what constitutes a reasonable utility gas price level for Southcentral Alaska, and with no new supply contracts approved for several years.
“I think it’s fair to say that the approach that has been used (to date) has not resulted in a satisfactory result at all when you consider the fact that there has been no gas supply agreement approved by the commission since 2001 that is currently supplying gas to utility customers,” said RCA Chairman Robert Pickett at a March 25 RCA public meeting.
Regulated public utilities that supply gas or electrical power to Southcentral Alaska consumers have to obtain RCA approval of their tariffs, including approval of the prices charged to consumers for energy supplies. The cost of natural gas that the utilities buy from Cook Inlet gas producers forms the dominant component of those prices. And RCA has a duty to ensure equable price levels for consumers.
But RCA does not regulate the gas producers. So, when a utility needs a new source of gas, the utility has to go through a tortuous process in which it first negotiates new supply contracts with producers and then seeks RCA approval for the tariff changes that result from those contracts. Thus, an RCA approval hearing for any new supply contracts has become the norm as a prerequisite for commission approval of the tariff changes.
If the commission rejects the contracts, the utility has to negotiate new contracts and then try again for approval, a process that can take several years to unfold and which can end up costing many millions of dollars. And because there is no spot market to determine an equilibrium gas price in the small Cook Inlet utility gas market, a market dominated by medium- or long-term supply contracts involving a relatively small number of producers, no one can agree on an equitable price level.
Gas war The situation, recently characterized by RCA Commissioner Kate Giard as the “Cook Inlet Gas War,” has reached an impasse, with various price formulas involving North American gas market price indexes proposed, but none of these formulas succeeding in bridging the gap in price expectations between those who produce the gas and those who need the gas or regulate the prices.
At the March 25 RCA meeting Commissioner Janis Wilson said that, although it would be possible to continue using the existing procedure involving commission approval of the gas supply contracts, there are three alternatives that might help break the regulatory impasse: Craft a regulation in the form of a standard supply contract, to provide clarity on contract terms acceptable to the commission; defer utility tariff approval until the pricing from new contracts flows through into the cost of utility energy; or persuade the Alaska Legislature to enact a statute specifying the standard of review and acceptance criteria for gas supply agreements.
The deferral of tariff approval would place regulatory risk firmly on the shoulders of the utilities, while a supply-agreement statute could not now be enacted until the 2010 legislative session, Wilson said. And the commissioners agreed to move forward on the option of developing a standard contract.
Hence the April 2 notice on the commission’s Web site.
Scoping document The notice introduces a document, also published on the Web site, which outlines the background to the standard contract proposal and describes some of the scoping issues that the public may want to comment on. Issues include whether to only specify contract language for some of the more important contract components, rather than develop a complete standard contract; the merits of different gas pricing formulas; and whether gas pricing should be unbundled into different prices for different service levels, such as providing peak gas supplies during cold winter weather.
And during the March 25 meeting the commissioners reflected on some of the broader issues relating to the feasibility of the standard contract proposal. For example, although the commissioners envisage a process in which a new gas supply contract would be approved without a hearing if the contract complies with terms of the standard contract, there is no guarantee that anyone will actually agree to the terms in the standard contract.
“I have no illusions … in that we may never see somebody come in with … a standard form contract with the pricing, but at least we have established something on a broader record,” said Commissioner Anthony Price. Companies will be able to use the standard contract as a basis and then argue the case for any divergence from it, he said.
And by developing the standard contract as part of a regulation docket rather than going through a contract approval hearing, businesses will not be deterred from participation in the docket by the threat of legal discovery, Price said. Hopefully the utilities, the gas producers and the state would all provide input.
The state, in the role of land proprietor and royalty owner, has never participated in the gas supply contract hearings, Wilson commented.
Gas storage And, while approved gas supply contracts and their pricing formulas are keys to ensuring adequate future Cook Inlet gas supplies, the operation of gas storage is also critically important.
As old Cook Inlet gas fields deplete, causing gas supplies to come more into line with gas demand, gas storage enables businesses to store excess gas produced during low summer demand for use when demand climbs during the winter. Current storage facilities operating in the Cook Inlet basin are owned by gas producers who use the facilities to store their own gas, so that individual producers can meet their contractual commitments for winter gas deliveries.
But Alaska’s Division of Oil and Gas has been discussing with some businesses the possibility of opening new storage facilities that could offer gas storage services to third-party entities, thus increasing market flexibility and creating new market opportunities that might encourage more producers to enter the Cook Inlet natural gas industry.
Regulation? But should RCA regulate new storage facilities, to ensure appropriate access for all would-be users, along the same lines as the regulation of a gas pipeline operated for public use? That is a key question for any business considering setting up a gas storage facility.
The April 2 gas storage notice published on the RCA Web site requests public comments on preliminary opinions on storage regulation presented by Robert Stoller and Stuart Goering, state assistant attorneys general, during the March 25 RCA public meeting.
Stoller and Goering said that, although storage operated by a public utility would likely come under regulation, storage operated under other circumstances might or might not be regulated, depending on the exact situation. For example, RCA would not in general have jurisdiction over a storage facility at the upstream end of a pipeline system, where a gas producer operates the storage for its own use and does not hire out any of the storage capacity. On the other hand, a storage facility would likely be regulated if it is operated by a pipeline company at the downstream end of a pipeline to ensure continuity of gas supplies in the event of a pipeline shutdown.
Potential complications include any land-lease stipulations requiring third-party access to the facilities.
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