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Borough protests FNG proposed rate hike Attorney Robin Brena says Fairbanks North Star Borough wants RCA to investigate rate filing, including split of FNG into segments Kristen Nelson Petroleum News
Fairbanks Natural Gas LLC filed a revenue requirement and cost of service study with the Regulatory Commission of Alaska on June 30, proposing a rate increase of 6.92 percent. This was the first rate case FNG has filed since it began business in 1997, offering natural gas in the Fairbanks area by bringing in liquefied natural gas from Cook Inlet. The company accepted rate regulation in late 2012 as part of a long-running settlement with state officials.
In a July 25 filing attorney Robin Brena, representing the Fairbanks North Star Borough, vigorously protested the rate increase.
In the protest Brena cited RCA’s duty to strike a balance between the interest of ratepayers in the lowest possible rates and adequate revenue and return to shareholders for the utility.
Previously, FNG has not been economically regulated, Brena said, and its rates were not based on the costs of providing service. In recent hearings on FNG’s application to expand its service area, Brena said RCA Chairman Robert Pickett noted that return on equity would be substantially lower in a regulated than in an unregulated environment.
Brena said cost-based rates are expected to be less than non-cost based rates, but the rates proposed by FNG are not less than previous rates but nearly 7 percent higher, and called on the RCA to “immediately act to investigate FNG’s proposed rates.”
He argued that FNG’s rate increase “should not be permitted to go into effect on a permanent basis.” He said the company’s existing rates have not been determined to the just and reasonable.
Assets transferred One issue which Brena addressed was transfer of some of FNG’s assets to subsidiaries.
FNG President Dan Britton, in an affidavit supporting the rate increase, said the company initially separated its rate-regulated distribution and the unregulated LNG operations, but when the company became exempt from rate regulation in 2003, it combined the operations for convenience.
With the return to a regulated structure, Britton said FNG transferred the LNG production and transportation assets to Titan. He said the purpose was not to avoid RCA regulation of the LNG plant, but to go back to the original structure of the company where the regulated gas distribution company was held separately from the unregulated LNG company.
Brena told the RCA that FNG transferred “significant operating assets to affiliates for no consideration. These transfers were designed to create profit centers outside of the scope of the RCA’s review, thereby maximizing profitability for FNG’s owners, while disadvantaging FNG’s ratepayers.” He said FNG is seeking to “have its ratepayers pay a second time for these assets with return and taxes.”
Brena asked RCA for an “investigation to determine the propriety of FNG’s dealings with its affiliates.”
North Slope LNG costs Brena said inclusion in FNG’s rate of nearly $5 million invested in the plan - now abandoned - for FNG to liquefy natural gas on the North Slope was a “questionable ratemaking” practice. He said that $5 million should not be recovered through FNG’s rates, but should be borne by FNG and Pentex and/or Polar, the subsidiaries responsible for the expenditure.
Britton said the $5 million which FNG invested in the North Slope LNG plant is about a quarter of its current rate base, and said “risk of this sort of investment loss is increased due to FNG’s reliance on LNG,” a risk which a typical gas distribution company would not have.
Brena said FNG had provided no evidence that it had an ownership or controlling stake in the North Slope LNG project “or that FNG ratepayers would have benefitted from this project,” and said the lack of documentation gives the appearance that the $5 million was “nothing more than giveaways by FNG to its affiliates.”
Gas price protested Brena protested the gas supply price which FNG expects from Titan and said RCA should investigate the reasonableness of FNG’s proposed cost of gas. He also objected to inclusion of a management fee to the parent company, rate case expenses and lobbying costs.
Britton said most of the cost increase under the Titan contract is due to factors such as an increase in the contracted price for natural gas. FNG had a contract with Aurora Gas for $6 a thousand cubic feet, mcf, which terminated May 31 of this year, Britton said. FNG’s new contract, with Hilcorp Alaska, is $6.86 per mcf this year, increasing to $7.13 per mcf next year; costs for electricity and third-party trucking have also increased. Britton said Titan is “giving FNG a great deal” for LNG. He said the contract is adjusted monthly, based on Titan’s costs too process the gas into LNG, third-party trucking costs and all other costs, with an estimated average price for the rest of the year of $15.06 per mcf.
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