In a Sept. 26 order the Regulatory Commission of Alaska issued its ruling on Enstar Natural Gas Co.’s proposed new schedule of fees for the shipment of natural gas through the utility’s gas transmission and distribution network. Enstar had proposed an overall increase it its rates. The commission has accepted some of Enstar’s proposed changes to its rate structure but has also rejected some of the utility’s proposals.
Enstar had originally proposed the rate increase in June 2016. The idea was to apply the new rates in two stages, with the end result a total increase of 3.9 percent of revenues from the utility’s gas transportation services. Enstar said that the impact to a typical residential gas bill would be an increase of 4.6 percent per year or $5.47 per month.
Having rejected some of Enstar’s proposals, the RCA has ordered the utility to file a revised revenue requirement by Oct. 20, with supporting documentation including revised tariff sheets. Parties involved in the tariff case must then comment on the new filing within two weeks of the filing being made.
Enstar’s gas shipment fees are critically important in Southcentral Alaska, not just because of the impact of the fees on consumers’ gas bills but also because of the impact on gas transportation costs for commercial businesses including electric utilities that use gas-fired power plants. Contention over Enstar’s proposals has resulted in a lengthy RCA investigation, with the Sept. 26 order being the outcome of the commission’s hearing of the case.
The RCA, in its order, commented that Enstar operates a safe and reliable utility, with the utility’s fees to deliver gas to customers well below the national average.
Postage stamp rate
The RCA has upheld Enstar’s use of a postage stamp rate for the shipment of gas through its pipeline system. In other words, the fee per unit of gas shipped will be the same, regardless of which sections of the system the gas molecules pass through. The use of postage stamp rates has become common practice by electric, gas and water utilities and generally reflects the fact that all customers tend to benefit from the use of an integrated transportation system, RCA said.
The commission has also upheld a request by Enstar to include its costs associated with the storage of gas in the Cook Inlet Natural Gas Storage Alaska facility on the Kenai Peninsula in the cost of the gas that it sells to customers, rather than through its gas transportation fees. But the commission is allowing the inclusion of some past gas storage reservation and capacity fees in Enstar’s rate base, until the impact of these fees is eliminated as a consequence of continuing use of the storage facility.
The commission also confirmed that Enstar can include in its rate base the amortized cost of developing a short pipeline used to expedite the delivery of gas from the CINGSA facility.
The rate base represents a utility’s total investment, to compensate for which the utility can obtain revenues through its rates.
Pipeline to Homer
The commission is not allowing Enstar to add to its rate base the cost of a pipeline between Anchor Point and Homer on the Kenai Peninsula. This pipeline was built to give Homer residents access to supplies of utility gas - Enstar has been recovering the cost of the line using a surcharge on the gas rates for Homer consumers. However, Enstar says that the take up of gas usage in Homer has been much slower than anticipated, as a consequence of which the utility may not be able to fully recover the cost of the line. The RCA says that it is sticking with its original view that recovering the pipeline cost through the rate base would place an undue burden on Enstar’s existing customers but that Enstar can, if it wishes, propose a higher Homer surcharge.
On the other hand, the commission is allowing Enstar to continue to include in its rate base the cost of the gas transmission line between Ninilchik and Anchor Point. Some Enstar commercial customers had claimed that they do not use gas shipped on that line.
Rate base determination
A particular bone of contention in Enstar’s proposals has been the utility’s request to use year-end data to determine its rate base, rather than the 13-month average costs that the RCA normally requires. Essentially, a utility will use these historic costs coupled with anticipated cost changes to derive its rate base. Enstar had argued that the 13-month average method would fail to adequately accommodate the cost impact of some major new capital investments that the utility had made in its system. In its order, RCA has rejected Enstar’s request to use a year-end rate base rather than the commission’s preferred 13-month average method.
However, the RCA is allowing Enstar to include in its rate base the cost of some new additions to its system made after the end of the test year used for the rate base determination. But the commission declined to make any adjustment to the test year data to allow for climate warming trends.
Capital structure and rate of return
The commission has also ordered an adjustment to Enstar’s cost of debt, along with a slight change to the proportions of debt and equity assumed in the utility’s capital structure. These factors impact the cost of capital that the utility must account for in its economics.
Also contentious is the rate of return that Enstar should be allowed to make on its investment in its business. The appropriate rate depends on the business risks that the utility faces. In justifying its rate of return, proposed at 12.55 percent, Enstar had cited a list of risks, including risks to its gas supplies, lag in the regulatory process, weather uncertainty and challenging economic conditions in Alaska. Having evaluated the risks and the method used to determine the return, the RCA concluded that the appropriate rate of return would be 11.875 percent.
Customer classes
Another tricky issue in determining equitable utility rates is the manner in which the utility’s costs are recovered from different classes of customer. For example, a type of customer that forces the need for maximum transmission capacity may be required to pay more than a customer whose peak transmission need are more modest. In the case of Enstar, the guaranteed transportation of large volumes of gas for electrical power stations, in particular, can present rate making challenges: The manner in which the utilities can sell power to each other through economy energy sales can result in fluctuations in the shipment of fuel gas for the generating stations. In its order, the RCA requires Enstar to allow for economy energy sales in assessing customer gas transportation volumes. And the commission is approving Enstar’s use of a standard method called “Seaboard” for the apportioning of costs between different customer classes.
The RCA also ruled on a number of other aspects of Enstar’s rate case, including the allocation of the cost of employee salaries, the cost of the company employee health care benefits, customer credit card fees, the cost of transmission system maintenance and the manner in which the utility’s general office and administrative costs are allocated across the business.
And the commission declined to allow Enstar to increase its rates in stages, saying that the staged approach would result in cross-subsidization between different classes of customer.
The commission declined to rule on a proposed Enstar rate schedule for shipping gas for an electrical power pool that is being established between Chugach Electric Association, Municipal Light & Power and Matanuska Electric Association.
