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Questions arise over ML&P’s Beluga gas price Utility wants to factor depreciation costs into returns from field, eventually move to rate base approach for revenue calculation ALAN BAILEY Petroleum News
Anchorage electricity utility Municipal Light & Power has asked the Regulatory Commission of Alaska to approve a change to the way in which it prices its gas from the Beluga gas field. The gas price calculation, while somewhat esoteric in nature, is important since it directly impacts the cost of electricity for the utility’s customers.
Providence Health and Services, operator of Providence hospital and one of ML&P’s largest customers, has filed objections to the proposed gas price calculation changes, while the public advocacy section of the state attorney general’s office has raised questions over some of ML&P’s proposals.
Gas field purchases In 1996 ML&P purchased a one-third share of the Beluga field and was subsequently able to use its own gas from the field as its primary source of fuel for its gas-fired power stations. This enabled the utility to obtain its own gas at cost, rather than at the prevailing Cook Inlet market price, an arrangement that, in turn, reduced the price of electricity for ML&P’s customers.
In February the utility bought an additional 23 percent of the field from ConocoPhillips, to establish a continuing adequate supply of gas from the field at an attractive cost. Chugach Electric Association also bought a portion of the field.
The gas transfer price The price that ML&P uses internally for its Beluga field gas, the price that factors into the utility’s cost of electricity generation, is called the gas transfer price, or GTP. Essentially, the GTP consists of the revenue that ML&P requires from its gas field ownership divided by the volume of gas that the utility obtains from the field.
In June ML&P asked the commission for approval of the utility’s proposed method of accounting for its interests in the Beluga field. In that filing the utility said that it would continue calculating the GTP in a similar manner to the calculations used in conjunction with the field ownership established in 1996. But the utility also said that it was going to make a further filing, requesting approval for a change in the GTP calculation. That filing was made on July 1.
The requested change revolves around the financial return that ML&P wants to make on its investment in the Beluga field. ML&P currently calculates its Beluga field revenue requirement, the basis of the GTP calculation, by summing the utility’s share of the field’s operating expenses; the field’s production and property taxes; and funds needed to cover the cost of the debt incurred to purchase that original one-third of the field. The debt-related revenue consists of the principle and interest payments on the debt multiplied by a factor of 1.6.
But the recent purchase of an additional 23 percent of the field did not involve any debt. Instead, ML&P used the accumulated revenues from its sale of some of its Beluga gas to fund the purchase.
With no debt incurred from the recent purchase, the debt funding component and its associated multiplier factor disappear from the revenue requirement calculation, a situation ML&P says is unfair since it precludes the utility from making a return on its investment in 23 percent of the field.
Depreciation and depletion expenses Consequently, ML&P has asked for approval to include in the revenue requirement calculation the depreciation and depletion expenses for Beluga field plant purchased as part of the recent field acquisition. The proposed change to the calculation would raise the annual field revenue requirement from $23.2 million to $24.1 million, an increase that would raise the price of electricity by 1.22 percent, ML&P told the commission.
Providence has challenged this approach. The health care group says that ML&P has failed to demonstrate the reasonableness of either its proposed new GTP calculation or of its decision over the means of funding of its recent Beluga River field acquisition. The utility’s request violates conditions set when the commission approved the field acquisition and ML&P has failed to prove the reasonableness of its request, Providence commented.
Debt retirement in 2018 A further complication arises from the fact that the debt used to fund the original purchase of part of the field in 1996 retires in 2018, thus entirely eliminating the cost of debt factor from the GTP computation. Consequently, ML&P wants after July 1, 2019, to incorporate into the revenue requirement a rate of return calculation using the rate base determined by the capital structure of the field. The return on base rate is a very common method of calculating the revenue requirement for a regulated utility. A regulated utility is normally allowed to make some reasonable rate of return on its investments.
The attorney general’s office has questioned the rate of return that ML&P proposes using for the return on rate base calculation and has urged the commission to carefully scrutinize the field acquisition costs that ML&P proposes using in its GTP calculations. The office also raised questions over how some other funds associated with the Beluga field ownership factor into the GTP.
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