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Vol. 18, No. 39 Week of September 29, 2013
Providing coverage of Alaska and northern Canada's oil and gas industry

Sparks are flying

Fairbanks gas utilities exchange counter claims at contentious hearing

Alan Bailey

Petroleum News

Fairbanks, a city in Alaska’s Interior perhaps better known for its calm but severe cold winter weather than for tempestuous storms, has become the center of a hurricane-force debate over future natural gas supplies, as two competing gas utilities do battle over who should be allowed to expand natural gas distribution services for the city’s residents. And, in the latest twist in this contentious issue, the utilities, Fairbanks Natural Gas and the Interior Alaska Natural Gas Utility, have been arguing their positions in a public hearing being held by the Regulatory Commission of Alaska, or RCA.

The contention arises over which utility is best prepared to provide new gas distribution services in areas of Fairbanks with high or medium population densities, including the areas around North Pole and Eielson Air Force Base. The availability of natural gas could reduce residents’ heating bills and improve air quality in a region where the high cost of heating fuel has driven people to increasingly use wood stoves to heat their homes during those frigid winter months.

Different utilities

Fairbanks Natural Gas, or FNG, has been supplying gas to a limited number of customers in central Fairbanks since 1997 using liquefied natural gas, LNG, manufactured at a small plant at Point MacKenzie on the northern coast of Cook Inlet and transported to Fairbanks by truck. The utility wants to expand its operations into the new service area. Interior Alaska Natural Gas Utility, or IGU, was established by Fairbanks North Star Borough in 2012 as a municipal-owned utility, with a stated objective of bringing gas to as many Fairbanks residents as possible in as short as possible a time.

With both utilities applying for certificates to provide gas distribution services in Fairbanks, RCA must either select one of the utilities to provide service in the entire area, or allow each utility to operate within its own separate service area within the city.

Few gas consumers

During opening statements at the RCA hearing Robin Brena, attorney for IGU, blasted what his client views as FNG’s failure to adequately expand its gas supply services since going into operation 16 years ago. With gas not available to 98.2 percent of homes in Fairbanks and with only 5 percent of homes in FNG’s service area being connected to gas supplies, Fairbanks residents have to rely on firewood and diesel fuel for heating, Brena said. And one consequence of this is significant health problems resulting from particulates in the air, he said.

“We should be ashamed, all of us collectively, without attaching blame, that our second largest city is living the way the Bush lived 50 years ago,” he said.

Gas supply needed

For his part, Mark Figura, attorney for FNG, accused IGU of presenting an application based on improbable financial assumptions and without a credible gas supply to feed into its proposed distribution network. A system of gas distribution pipelines can only be built out to the extent that there is an adequate supply of gas to fill those lines, he said.

IGU does not have gas, does not have an LNG plant and does not have trucks to transport the LNG to Fairbanks, Figura said. And rather than selling gas to customers at a price of $15 per thousand cubic feet, as IGU proposes, a more realistic price based on IGU’s financial assumptions would be $24, he said.

Integrated system

While IGU, with its focus on just the Fairbanks distribution network, has a limited perspective of what is involved in being a gas utility, FNG views the supply of gas to its customers as an integrated system involving the acquisition of gas from suppliers, the production of LNG, the transportation of that LNG to Fairbanks and the distribution of gas to consumers, Figura said. And at various times in its history FNG has seen “pinch points” develop in different components of that system, he said. Those pinch points have constrained FNG’s ability to expand its gas deliveries in Fairbanks, he said.

Between around 2000 and 2006 the utility had access to a supply of gas from the Cook Inlet basin that exceeded its capacity to manufacture LNG at Point MacKenzie, Figura said. During that time FNG responded by incrementally improving its Point MacKenzie facility, he said.

Gas shortage

But 2006 saw a crash in the Cook Inlet gas market, with FNG struggling to obtain sufficient gas and having to establish some short-term gas supply contracts to maintain service to its Fairbanks customers. At this point the utility found itself in a situation where it had overbuilt its distribution system in Fairbanks and where it had an insufficient gas supply to expand its customer base.

“No customer was ever denied service,” Figura said. “No-one was cut off, but there was no opportunity to expand.”

Currently FNG has 1,100 customers and could serve an additional 900 customers through the distribution pipeline system if sufficient gas were available, he said. Apparently FNG has recently signed a new gas supply contract with Hilcorp Alaska for continuing Cook Inlet gas supplies.

But, with insufficient gas to justify the cost of installing additional distribution pipelines, FNG has had to curtail expansion of the distribution system since 2006, Figura said.

“We would have just a whole bunch of pipe in the ground that wasn’t doing anybody any good,” he said.

North Slope gas?

Meantime FNG has been trying to move forward on a proposal to obtain gas from the North Slope, trucking LNG from a proposed LNG plant on the Slope. Polar Liquefied Natural Gas, an FNG affiliate, has entered into a gas supply contract with ExxonMobil, has leased a pad on the North Slope to site a plant and has obtained a state right of way for a gas pipeline to that plant, Figura said.

But following the enactment earlier this year by the state Legislature of a statute to provide state funding assistance for the North Slope LNG plant, the Alaska Industrial Development and Export Authority has taken a lead in the development of the North Slope plant, Figura explained.

However, with FNG confident that construction of the plant will move ahead, the utility now sees its distribution network in Fairbanks as the future pinch point in its system. Consequently, in April FNG applied to the RCA to expand its Fairbanks service area, Figura said.

Dissatisfaction

Brena said that IGU was formed because of dissatisfaction with what he characterized as FNG’s slow incremental approach to expanding its distribution network, an approach that he said does not work for the Fairbanks community. And Brena accused FNG of not trying hard enough to obtain additional gas after 2006, saying that, given the high fuel prices in Fairbanks, FNG could have outbid other gas users in the Cook Inlet gas market.

At its current rate of progress it will take FNG 260 years to build out its distribution system, Brena said.

Brena claimed that FNG’s business model of making money from buying and selling gas, rather than from the transportation of the gas, provides a disincentive for the company to buy high priced gas from gas suppliers and, hence, a disincentive to expand its services when gas supplies are tight.

12,000 customers

IGU’s objective is to build out its service area to somewhere in excess of 12,000 customers, he said. And during testimony at the hearing an IGU witness said that the utility anticipates obtaining its gas from the same source as FNG, that is, from the proposed LNG plant on the North Slope. IGU’s assumed gas price of $15 was based on Gov. Parnell’s target price for Fairbanks gas — the utility assumes that state financing would be structured to support that price level, Brena said.

Figura said that FNG proposes maintaining reasonable gas prices for its Fairbanks customers by first securing a contract to supply gas to a large industrial customer in the city. But Brena challenged this model, saying that the customer that FNG has in mind is electric utility Golden Valley Electric Association and that Golden Valley does not in fact want FNG’s gas.

Ownership changes

FNG is in the process of moving ownership of its Point MacKenzie gas liquefaction plant to an affiliate company called Titan LLC. Thus, with Polar LNG obtaining North Slope gas and Titan obtaining Cook Inlet gas, FNG will end up buying all of its gas from affiliate companies, rather than directly from gas suppliers. Brena accused FNG of engineering this arrangement to move as much of FNG’s business out of the utility’s future regulatory fence. However, a witness for FNG denied this motivation, pointing out that gas prices set by either Polar or Titan would be regulated by RCA as part of RCA oversight of FNG’s supply contracts.

Other bones of contention debated in the hearing include disparities in estimates of how much gas distribution pipeline needs to be installed in Fairbanks; the relative merits of operating a utility as a private company versus a subcontracted business managed and owned by a municipality; and disparities between the utilities in cost estimates and financing assumptions.



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