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Vol. 18, No. 52 Week of December 29, 2013
Providing coverage of Alaska and northern Canada's oil and gas industry

RCA chooses muni for gas

Interior Alaska Natural Gas Utility gets distribution certificate; FNG app rejected

Eric Lidji

For Petroleum News

State regulators are allowing a new municipal utility to offer natural gas service to sections of the Fairbanks North Star Borough, and have rejected a similar application from Fairbanks Natural Gas LLC, the privately held distribution utility in the region.

The Regulatory Commission of Alaska has given the Interior Alaska Natural Gas Utility the go ahead to offer natural gas distribution throughout much of the borough, including the city of North Pole. The decision sets in motion the last mile of the Interior Energy Project, a state-backed effort to expand natural gas service to the Interior by late 2015.

The RCA said it made its decision “in the context of the entire project.” With that in mind, the RCA said it denied the Fairbanks Natural Gas application because the utility “failed to demonstrate a viable build-out plan for the proposed expanded service area.”

Specifically, according to the RCA, the Fairbanks Natural Gas application expected Golden Valley Electric Association to be a major customer, even though the regional electric cooperative “had no plan to be an industrial customer” of Fairbanks Natural Gas.

Trucking LNG

The Interior Energy Project hangs over the ruling.

The state agency managing the project, the Alaska Industrial Development and Export Authority, had testified during the proceedings that the distribution build-out would impact demand from a North Slope liquefied natural gas plant as well as the cost of gas.

The project aims to truck North Slope LNG into the Interior by late 2015.

AIDEA is expected to choose a private sector partner for the LNG plant in January. The three candidates are MWH Americas Inc., Spectrum Alaska LLC and Pentex Alaska Natural Gas Co. LLC, which is the parent company of Fairbanks Natural Gas.

“We are here to work with all the utilities as this project moves forward. We look forward to working with (Interior Alaska Natural Gas Utility) and the other utilities to help make this project a success for Fairbanks,” AIDEA spokesman Karsten Rodvik told Petroleum News.

The Fairbanks Natural Gas proposal imagined “essentially full conversion to natural gas in 2025” and included 3 billion cubic feet per year going to GVEA starting in 2015. The RCA said, “There is no support in the record for the assertion that (the local oil refinery) Flint Hills or others are potential industrial customers of (Fairbanks Natural Gas).”

While Fairbanks Natural Gas testified it would build out its grid without an industrial customer if it had enough supply and funding, the utility “did not present any revisions to its build-out plan to reflect a build-out without industrial load,” according to the RCA.

Additionally, GVEA Chief Executive Officer Cory Borgeson testified that his utility expected to need less than 3 bcf per year because of a coal plant coming online in 2015.

The testimony doomed the Fairbanks Natural Gas proposal in the eyes of the RCA.

Even so, the RCA said it made “no negative finding” about how Fairbanks Natural Gas has served its existing area. Noting the “significant customer base available” in that area, the RCA said it “expects” the utility to expand its service “as gas becomes available.”

The Interior Alaska Natural Gas Utility has often said Fairbanks Natural Gas’ inability to serve all the customers within its existing service area should disqualify it for expansion.

Fairbanks Natural Gas said its inability to expand as envisioned was the result of supply shortages in Cook Inlet, and would be solved by the same North Slope gas supply underpinning its proposal to expand into other areas of the Fairbanks North Star Borough.

The RCA approved the Interior Alaska Natural Gas Utility plan for several reasons.

The Interior Alaska Natural Gas Utility based its design on AIDEA models, committed to building out its system within six years and promised to invest all profits in plant.

Among the criteria for any utility application is the ability of the utility to pay for its proposed operation. The RCA said the Interior Alaska Natural Gas Utility had “sufficient financial backing” for the project using loans, bonds and grants and municipal financing.

Fairbanks Natural Gas had often claimed that the Interior Alaska Natural Gas Utility lacked the financial wherewithal to complete its build-out — 663 miles in six years.

Under state statute, Interior Alaska Natural Gas Utility is exempt from regulation. The utility has said it would voluntarily accept regulation, but the RCA said the Fairbanks North Star Borough Assembly must first approve that distinction for it to become applicable.

Throughout the proceedings, the Interior Alaska Natural Gas Utility asked regulators to attach conditions to any certificate it issued for the region. Those conditions would have required either successful utility to commit to targets for scheduling, costs and construction standards, as well as mandatory annual reporting to ensure compliance.

The RCA declined to attach those conditions to the Interior Alaska Natural Gas Utility certificate, but said, “We construe its advocacy for those conditions as commitments to abide by the conditions it requests,” adding that the utility “has pledged to fulfill the promises it made to the people of the (Fairbanks North Star Borough). The citizens, voters, and media of the community will participate in holding its leaders accountable.”

The decision requires Interior Alaska Natural Gas Utility to maintain five days’ worth of liquefied natural gas supplies in Fairbanks to protect the area from supply disruptions.

The RCA decision also addressed some procedural issues.

A major issue in the case was whether the applications were mutually exclusive.

While not identical, the proposed service areas greatly overlapped, and both Fairbanks Natural Gas and the Interior Alaska Natural Gas Utility asked for exclusive certificates, largely because it would be impractical for the utilities to build competing infrastructure.

Throughout the deliberations, the RCA avoided calling the two projects “mutually exclusive,” a designation with regulatory consequences. Specifically, the RCA is allowed to divvy up two “mutually exclusive” service areas, giving some sections to one utility and some to the other. Also, while public utilities are exempt from certain regulations, the exemption is waived when a public utility directly competes against a private utility.

The prospect of dividing the service area came up in this case, but the RCA ruling granted only one certificate to make it easier to integrate into the Interior Energy Project.

The RCA also addressed its timing, which had been a point of criticism.

In an editorial in the Fairbanks Daily News-Miner in early October, Gov. Sean Parnell said the questions in the service area case “deserve significant, but prompt consideration,” adding: “For the sake of Interior Alaskans’ skyrocketing energy bills, the process cannot be drawn out. If it is, the overall success of the project could be at stake.”

Fairbanks Natural Gas and the Interior Alaska Natural Gas Utility filed their applications in April and the RCA initially found both applications to be complete. The RCA is typically given six months to make a ruling in a case such as this one. But, the RCA noted, both parties later changed their applications. “This posed a challenge for the parties as they attempted to respond to each other’s applications and the constantly changing applications were a challenge for this commission as we reviewed the record.”

AIDEA had said the delay would not harm its timeline.

The applications were not truly final until Oct. 3, after a long hearing on the case, according to the RCA. “Consequently, our evaluation of the applications took place in a much shorter timeframe than the six months contemplated by statute,” the decision said.

The decision aimed to cool heads, too.

The case became quite pointed, particularly during the hearings.

The RCA called out “insinuations,” “assertions” and “accusations” the Interior Alaska Natural Gas Utility made against Fairbanks Natural Gas during the proceedings — such as questioning Cook Inlet supply shortages, or claiming Fairbanks Natural Gas’ decisions caused bodily harm in Fairbanks — as being “without merit.” The RCA said it made its decision entire based “solely on the facts and law discussed in the body of this order.”

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