|
Interior creates public gas utility Fairbanks North Star Borough forms utility to expand natural gas distribution, but Fairbanks Natural Gas challenges move Eric Lidji For Petroleum News
As Interior Alaska works to increase its natural gas supply, policymakers are debating how best to manage the public and private obligations needed to expand infrastructure.
With an eye toward bringing natural gas to as many people as soon as possible, the Fairbanks North Star Borough recently formed the Interior Alaska Natural Gas Utility, an entity capable of either collaborating or competing with Fairbanks Natural Gas LLC, a private distribution company already operating on a small scale in the Fairbanks area.
Fairbanks North Star Borough Mayor Luke Hopkins and two borough assemblywomen proposed the public utility concept this past summer, following the recommendations of a borough-commissioned report showing significant cost-savings for the region if a non-private entity built a natural gas and propane distribution system. “We must get affordable energy to our town. This local public natural gas utility will create the strongest tool we have to fight for our interests, assuring that we have a seat at the table as discussions progress on how we bring gas to Fairbanks,” Hopkins said in August.
The move shows the frustration many in the Interior feel about ongoing efforts to convert the region to gas from heating oil. With crude oil prices staying high and air quality concerns plaguing the region, Fairbanks officials believe the switch must happen soon.
Locally, those efforts include separate proposals by Fairbanks Natural Gas and the regional electric cooperative Golden Valley Electric Association to build liquefaction facilities on the North Slope and truck liquefied natural gas to local consumers. On a state level, the Interior could be served by one of many large natural gas pipeline projects.
The Interior Alaska Natural Gas Utility would have a seven-member board of directors, with four chosen by the borough, two by Fairbanks and one by North Pole. The utility will begin drafting bylaws and a business plan once it is official formed in November.
Seeking state funds While many stakeholders believe public funding is needed — or at the very least welcome — to bring gas to the Interior, they disagree on the level of public involvement.
Specifically, Interior officials want to capitalize on signs Gov. Sean Parnell is willing to contribute state funds to help solve the problem — if the Interior can come together around a single project. “You don’t want to squander that kind of an offer from the governor,” Steve Haagenson, the former head of Golden Valley Electric and a name being considered for the borough utility board, recently told the Fairbanks City Council.
To that end, the Interior Alaska Natural Gas Utility came together quickly.
Within the span of two weeks, the cities of Fairbanks and North Pole both voted to transfer their utility authority to the borough, and the borough voted to form the utility.
But all three votes included lengthy public hearings, where policymakers and the public debated how the utility would and should interact with existing players, specifically Fairbanks Natural Gas. Although all three measures passed, none passed unanimously.
While North Pole made the transfer unconditionally, Fairbanks tacked on several provisions, including one prohibiting the utility from competing with private utilities without its permission. The Fairbanks North Star Borough added similar language requiring the utility to act first as a facilitator, second as a contracting agent and only competing as a provider if private entities aren’t offering service to specific areas.
The provisions rankled Hopkins and other supporters of the plan, who saw them as unnecessary obstacles placed before an entity meant to project unity. According to the Fairbanks Daily News-Miner, the borough provision inspired “many shocked faces” when it passed, but officials insisted the language wouldn’t jeopardize the venture.
While acknowledging the potential for the public utility to compete with private entities, Hopkins believes local governments should not worry about the issue because the Regulatory Commission of Alaska is already responsible for managing such competition.
Unfair competition? Fairbanks Natural Gas disagrees.
“I’m 100 percent for the goal: more natural gas to Fairbanks,” Fairbanks Natural Gas President Dan Britton told the Fairbanks City Council before their recent vote.
While Britton supports the borough facilitating existing efforts, he believes the best way to move the project forward is to bring Fairbanks Natural Gas and Golden Valley Electric together as a single unit to ask for funds from the state to offset the cost of building the liquefaction terminal. The two entities are currently in “active discussions,” Britton said.
A public utility would have two advantages over Fairbanks Natural Gas, though, according to Andy Warwick, a member of the Doyon Utilities management committee and another name currently being considered for a spot on the public utility board.
First, it would be easier for the borough to ask the state for money than for a private company. Second, any money the borough received would be tax-exempt, while Fairbanks Natural Gas would end up paying some 40 percent in taxes, a cost ultimately transferred to ratepayers. Warwick, who previously chaired the Alaska Natural Gas Development Authority, called this way of funding infrastructure “terribly inefficient.”
Of course, the public utility would also have to keep a percentage of any funding it received to cover its overhead costs, Britton noted. And if the public utility issued bonds to pay for its proposals, it would need a guarantor, most likely the state or the borough.
As far as taxes are concerned, local governments could always relieve the burden by exempting any project, Britton suggested. “We’ll be happy to pass that savings on,” he said. Of course, even so, Fairbanks Natural Gas and its customers would still be on the hook for federal taxes. But as Britton noted: “If we want to eliminate private business because they pay taxes, we won’t have any government to provide services to people.”
Ready for construction While many in the Interior want to expand distribution, especially to remote corners of the region, Britton said the major factor limiting expansion is supply. “With an increased level of supply, there’s going to be increased distribution in Fairbanks,” he said.
With the stranded gas fields of the North Slope just 500 miles away by road, the supply problem is actually an infrastructure problem. There is broad consensus in the Interior for trucking liquefied natural gas down the Dalton Highway, a way to get gas to Fairbanks quickly without shutting the door on a future spur line from a large-diameter pipeline.
Although the pace of development has been too slow for some in Fairbanks, Fairbanks Natural Gas is ahead of the pack, Britton argued. “We’re at a stage that’s ready for construction,” he said, pointing to its 15-year supply agreement with Exxon and its list of approved permits, including some with long leads times, such as an air quality permit.
Additionally, Fairbanks Natural Gas is preparing for expansion, on numerous fronts.
With an eye toward bringing new customers online quickly, the company is adding 5 million gallons of capacity to its 240,000-gallon storage facility on Fairbanks.
And with the expectation of increased scrutiny should the company ask for state grants or tax credits — or in the entirely possible situation it one day monopolizes the Interior heating market now dominated by unregulated heating oil suppliers — the company is negotiating a possible return to full rate regulation. (Currently, Fairbanks Natural Gas can change its rates at will, as long as it notifies the state and maintains certain price caps.)
Asked at the Fairbanks hearing about that unusual move, Britton said the cost to keep revisiting rate regulation has negated some of the financial benefits of being exempt.
“We’re just trying to shorten the process,” he said.
As required by a 2009 settlement between the utility and the state Attorney General, the Regulatory Commission of Alaska is currently investigating whether Fairbanks Natural Gas should once again be rate regulated. Despite some reluctance, the RCA recently allowed the Fairbanks North Star Borough to become a party to those proceedings.
Asked why Fairbanks needs to set its sights north, Britton said, “If we could get a long term gas supply in the Cook Inlet, we would do so and do so happily.” While Britton said he is enthused by the recent increase in Cook Inlet exploration, he made a point to note, “it has not proven up any supplies that changed the market dynamic in Cook Inlet yet.”
| 