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Vol. 21, No. 47 Week of November 20, 2016
Providing coverage of Alaska and northern Canada's oil and gas industry

Unconstitutional take?

CINGSA, others file court briefs in appeal over RCA ruling on native gas

ALAN BAILEY

Petroleum News

Cook Inlet Natural Gas Storage Alaska and various other parties have filed briefs in state Superior Court in an appeal by CINGSA over a December 2015 Regulatory Commission of Alaska ruling concerning the disposition of natural gas that CINGSA found by accident in its gas storage facility south of the city of Kenai. CINGSA claims that the RCA order amounts to an unconstitutional confiscation of private property and that the commission’s ruling over the distribution of the gas is arbitrary and contrary to established facts.

The dispute originated during the drilling of one of the storage facility’s wells. The well encountered an unanticipated pocket of undiscovered gas in a sand body that had been earmarked for gas storage and had been assumed to be empty. Ultimately, CINGSA determined that the discovery amounted to a total volume of 14.5 billion cubic feet of unanticipated gas, a windfall that appears unique in the history of U.S. gas storage facilities.

It turned out that a substantial amount of the discovered gas could be used to overcome a technical problem that CINGSA had encountered in its storage reservoir. However, 2 bcf of the 14.5 bcf was surplus to requirements and could be sold.

While nobody disputes that the excess gas can be sold, contention revolves around the question of which entities would be entitled to the profits from the sales.

Tariff filing

CINGSA made a tariff filing with RCA, requesting permission to sell the surplus native gas, with the profits from the sales going to CINGSA. CINGSA had argued that, with the investors in the storage facility bearing the risks and uncertainties associated with the facility construction, the investors were entitled to any unpredicted upside benefit.

In its December 2015 ruling the commission said that CINGSA could sell the surplus gas, albeit subject to conditions mandated by the commission. Those conditions only allow CINGSA to obtain sales proceeds in proportion to the amount of base gas relative to customer gas in the facility, with the storage company’s share adjusted downwards to reflect the lengths of storage contracts. CINGSA’s firm customers would split between them the remainder of the proceeds. Base gas is the gas, belonging to CINGSA, pumped into the storage reservoir to maintain reservoir pressure.

CINGSA’s position

CINGSA has responded that the excess native gas does not form part of its gas storage operations and that the discovery of the gas happened at no extra cost to the development of the storage facility. Consequently, the company says since the gas is not part of the regulated facility, the RCA does not have jurisdiction over the gas, thus rendering illegal any attempt to mandate any ownership of the gas to gas storage customers. This would amount to an unconstitutional take under both the federal and state constitutions, CINGSA told the Superior Court. Moreover, the formula that RCA constructed for the distribution of the proceeds from the sale of the gas “represents an abuse of discretion, lacks a reasonable basis and is unsupported by the record,” CINGSA wrote in its court filing.

RCA responds

RCA, in its court briefing, said that CINGSA, as the only certificated natural gas storage utility in Alaska, is a monopoly, subject to RCA regulation. The commission said that CINGSA’s only business is gas storage and that the company acquired the native gas through eminent domain when operating as a public utility, as part of a storage development in which all assets were acquired as a consequence of an initial investment. Consequently, the found native gas is public utility property, subject to commission regulation, RCA said.

And the allocation method that the commission mandated for the proceeds from the native gas sales appropriately takes into account the relative risk of the loss of stored gas that the various firm CINGSA customers took when signing up for gas storage services - the return from a beneficial outcome should reflect the risk that something may go wrong. The customers, by signing firm storage agreements with CINGSA, accepted risk by agreeing to pay for contracted levels of storage, regardless of whether the storage service would be received, the commission said.

And, although there are no precedents for dealing with the native gas that CINGSA found, there is a precedent from a regulatory case in the state of Washington for a commission to order the distribution of gains from the sale of a regulated asset, RCA told the court.

Percentage split

RCA’s mandated allocation formula would result in CINGSA obtaining 13 percent of the sales proceeds, with the storage facility’s customers sharing the remaining 87 percent. In its court filing, Enstar Natural Gas Co., an affiliated of CINGSA as well as a storage customer, argued for splitting the sales proceeds 50/50 between CINGSA and its customers. In the course of the RCA hearing into the native gas issue, CINGSA had agreed on this 50/50 split with some customers. The allocation involving just 13 percent going to CINGSA would result in nobody receiving anything, since the small CINGSA allocation would be insufficient to motivate the company to sell the gas, Enstar argued. Then, the excess gas remaining in the storage reservoir would unnecessarily reduce the facility’s storage capacity, Enstar said.

State AG and others respond

The Regulatory Affairs and Public Advocacy section of the state attorney general’s office has supported the commission’s position, telling the court that the commission has broad authority to review the functions of a regulated utility and to regulate the profit from the sale of a gas find of this type. Because the leases in which CINGSA found the native gas form part of CINGSA’s storage facility, the RCA is entitled to set the rules for dividing up the profits from the sale of the gas. And the RCA mechanism for the distribution of those profits is reasonable, RAPA said.

Chugach Electric Association, a CINGSA customer and potential beneficiary of the RCA ruling, told the court that by initially asking the commission to adjudicate over CINGSA’s ability to sell the native gas, CINGSA had clearly understood that the commission had jurisdiction over the gas. And the certificate of public convenience and necessity that RCA had issued to CINGSA expressly gave the commission jurisdiction over all surface and subsurface issues for the storage facility, Chugach Electric told the court.

Municipal Light & Power, another CINGSA customer, commented that because the found native gas is in pressure communication with gas that has been injected into the storage facility, CINGSA cannot prove that the native gas was never used to provide service and, hence, is not part of the storage facility. Regardless of that, the native gas should be considered a part of the regulated utility property because the gas was found as part of a regulated activity, ML&P told the court. While CINGSA incurred no risk in finding the native gas, the costs associated with the find are incorporated in the rates charged to storage customers. Those customers have also assumed the risks and costs associated with the development of the storage facility, ML&P told the court.

Homer Electric Association, another CINGSA customer, agrees with the essence of RCA’s proposed mechanism for the distribution of the native gas sales profits but wants RCA to mandate that CINGSA’s firm customers must divide their 87 percent of the sales proceeds in proportion to each customer’s storage capacity share. Tesoro Alaska, a major industrial customer of HEA, told the court that it supports the RCA ruling and that, because the CINGSA customers bore the cost of the drilling that resulted in the discovery of the native gas, the customers are entitled to the resulting benefits.



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