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Propane-air project running out of time Propane-air firm continues to have problems starting up in Alaska, Regulatory Commission of Alaska grants third extension in less than three years and is working closely with Montana-Dakota ‘concerning an equity position’ Larry Persily Petroleum News Government Affairs Editor
The Regulatory Commission of Alaska has granted its third extension in less than three years to a company working to bring natural gas to coastal communities, but also has ordered the company to show cause why its operating certificate should not be revoked.
“It is not in the public interest to continue to extend Alaska Intrastate Gas Co.’s conditional certificate without evidence there is a reasonable expectation that the AIGC project will be completed,” the commission said in its Feb. 24 order.
The regulatory agency granted the original certificate more than five years ago.
The company also is having to deal with a consultant’s report that says the project could be a money-loser unless it can find a low-cost propane supply.
Alaska Intrastate’s plan is to ship liquid propane by barge into coastal communities, store it as a liquid, then gasify and mix it with air for distribution through a network of underground pipes it would build in each community. At the right price, the gas could be competitive with diesel fuel for heating and electrical generation.
So-called propane-air systems are used in small Lower 48 communities not connected to natural gas pipelines.
It comes down to the price of the propane supply, the consultant report said. “The propane supply is the most critical variable in the success of this project,” said the report by Montana-Dakota Utilities Co. “Propane prices over 30 cents per gallon have the potential to negate any potential earnings.” Propane supply price a problem That could be a tough number to overcome, said the report, which was released last month. “At the time of this report, Montana-Dakota has not been able to identify a reliable source of propane at costs less than 47 cents per gallon at Edmonton.”
Propane for April delivery was selling for 58 cents a gallon March 16 on the New York Mercantile Exchange futures market. The price averaged 50 cents a gallon at the Edmonton, Alberta, pricing point the second week of March, with delivery to Puget Sound an additional 17 cents to 19 cents.
The consultants suggested perhaps Alaska Intrastate could make its 30-cent price threshold if it could buy half its propane from the state of Alaska royalty share at Valdez at just 20 cents a gallon and match that supply with an equal volume out of Canada at 40 cents a gallon.
Even if it could get propane delivered to Juneau for 61 cents a gallon, the company’s internal rate of return over 40 years — using low prices to win customers — would be just 3.5 percent, the consultants said. With higher rates to customers, the “aggressive model” shows an 8.45 percent return.
Meanwhile, with six months before its deadline to prove to the regulatory commission that it should keep its operating certificate, Alaska Intrastate is trying to convince the Legislature to authorize the Alaska Industrial Development and Export Authority to issue up to $76 million in state bonding for the project. House committee approves bonding measure The measure, House Bill 449, had its first hearing and moved out of committee March 16, but it could be hard to push the bill through two more House committees, the full House and also Senate committees in the final seven weeks of the legislative session.
“I’m not exactly happy at how things have moved,” Frank Avezac, board chairman of Alaska Intrastate, said last month. It’s up to the Legislature and governor “to have the balls” to pass the bill and show investors the state is serious about helping the project, he said in a February interview.
Avezac, an accountant by trade, in 1986 transformed his Anchorage real estate company into the envisioned gas distribution business, and has been working ever since to put together the deal.
Alaska Intrastate applied to the state utility regulatory agency in 1997 to barge liquefied natural gas to as many as 17 Alaska coastal communities, then later amended its application to serve the cities with a propane-air mixture, also called utility gas. The company later scaled back its plan, proposing to start with service to Juneau, Ketchikan and Sitka in Southeast Alaska, pledging to add more communities in later years.
With a propane supply at the right price, the company believes it could bring gas to the communities and pipe it around town at a lower cost than diesel fuel or electricity for residential and commercial uses.
“Gas utility service … will be initiated in 2004,” Avezac said in a Feb. 16 letter to legislators, pushing for passage of HB 449 that would allow AIDEA to bond for the system. Avezac made no mention in his letter to lawmakers of the company’s pending request to the regulatory commission for a delay in the start-up date until December 2005. New regulatory commission deadlines Regardless of what happens to the legislation, the company has to meet two deadlines from the Regulatory Commission of Alaska:
• Sept. 15, 2004, to show cause why the commission should not revoke Alaska Intrastate’s certificate to operate as a natural gas public utility. The commission wants to see a current business plan, management structure and proof that the company has the ability to start service. The commission delayed action on the company’s request for a December 2005 start-up deadline.
• Dec. 31, 2004, to show proof of financial fitness and permanent financing for the venture.
The company had faced a Dec. 31, 2003, deadline for proof of financial fitness. In its mid-December filing to extend that date until December 2004, Alaska Interstate partially blamed the Legislature and the administration for the delay.
It said legislation introduced last year, House Bill 235, would have allowed for state bonding to assist the project. “(It) received strong support from both Democrats and Republicans,” the company said in its filing with the regulatory commission. Work on the bill ceased when Alaska Intrastate turned its attention to different bond financing “promised by the Department of Revenue,” the company said.
Despite the company’s claim of strong bipartisan support, not a single legislator signed on to co-sponsor HB 235, introduced by freshman Rep. Bruce Weyhrauch, R-Juneau, and the bill never had a single hearing. The measure would have authorized the Alaska Railroad Corp. to use its bonding authority to issue $76 million in debt for the propane-air venture, with Alaska Intrastate to assume sole financial responsibility for repaying the debt. Official denies ‘promise’ of financing And a Department of Revenue official denies there ever was a promise of bond financing. “We gave Paul Fuhs a copy of the application,” said Tom Boutin, deputy commissioner at Revenue. Fuhs, a paid lobbyist in the past on natural gas issues, is not listed with the state as a lobbyist for Alaska Intrastate.
The application was for the issuance of private-activity bonds through the state, Boutin said. “We told them there was plenty of private-activity allocation to go around,” but Alaska Intrastate would need to get a bond counsel opinion as to whether its project could qualify for the tax-exempt financing, he said.
Boutin said he had no further financing discussions with the company, which never submitted an application to the state bond committee.
In its filing with the regulatory commission, Alaska Intrastate said it later determined it would not qualify for the tax-exempt, private-activity bonds. “The avenue that the administration had promised did not appear feasible,” it said.
The company told the regulatory commission in December its new plan was to develop other sources of financing, at 80 percent debt with 20 percent equity. Consultants warn of too much debt But Alaska Intrastate’s consultant, Montana-Dakota Utilities, pointed to a potential problem with that plan. “Montana-Dakota’s experience has been to limit utility operations to a 50 percent equity,” it said in its report. “Further, as a start-up utility, it is prudent to construct the first community using 100 percent equity financing.” After starting operations and generating revenue, “debt financing will become more readily available and more prudent.”
As for raising equity to build the system, Alaska Intrastate told the regulatory commission it was working closely with Montana-Dakota “concerning an equity position,” and that the utility company’s management was prepared “(to) ask its board for a commitment of up to $5 million, a 10 percent equity position.”
That statement differs from what Montana-Dakota’s spokesman reported as the company’s role in the venture. “We were never involved in it from investing,” said Dan Sharp, spokesman for the Bismarck, N.D., oil, gas, electricity and construction material company. He said the company’s only role was to prepare the market and economic feasibility report under contract to Alaska Intrastate.
Montana-Dakota is not new to Alaska. It owns Alaska Basic Industries, which owns Anchorage Sand and Gravel Co., one of the largest aggregate suppliers in the state.
In another financing issue, Alaska Industrial Development and Export Authority Executive Director Ron Miller in a Dec. 24 letter to the regulatory commission questioned Alaska Intrastate’s representation of its dealings with the state agency. State agency says its role ‘mischaracterized’ “AIGC’s memorandum in support of its extension request implies that the Alaska Industrial Development and Export Authority may consider financing of the project under its development finance program. … We have indicated to AIGC on previous occasions that the proposed project does not appear to fit within the development finance program,” Miller said.
Letters from AIDEA officials in 2001 and 1999 also stated the project would not meet the agency’s criteria for development finance program lending.
“There were some claims … that mischaracterized our programs and our potential role and our history in the project,” Miller said last month.
The Regulatory Commission of Alaska also received several letters in support of Alaska Intrastate’s request for another year to prove its financial fitness, including letters from Jim Sampson, president of the Alaska AFL-CIO; Alaska House Speaker Pete Kott and Senate President Gene Therriault; and Michael Gallagher, business manager of Laborers’ International Union Local 341 in Alaska.
U.S. Sen. Ted Stevens, R-Alaska, also sent in a letter of support, adding, “We have been unable, so far, to obtain Federal funds to assist AIGC.”
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