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Homer uses less gas than expected; rate of return cut to accommodate
Alan Bailey Petroleum News
Enstar Natural Gas Co. has made a tariff filing with the Regulatory Commission of Alaska requesting approval of a change in the manner in which it recovers the cost of providing natural gas supplies to the city of Homer in the southern Kenai Peninsula. The requested change is a response to the fact that Homer natural gas demand has proven lower than Enstar had projected when the company built a 22-mile gas distribution pipeline to the city in 2013. The idea behind the pipeline was to make natural gas available in the Homer area for the heating of buildings.
$1 surcharge The state provided a grant of $8.1 million towards the $10.7 million cost of the pipeline, on the understanding that Homer gas consumers would pay a $1 per thousand cubic feet surcharge on the gas that they use, to cover the balance of the cost until that cost is recouped. Under the surcharge arrangement, Enstar factored the construction costs not covered by the state grant into its cost calculations for the Homer gas supply, without changing the parameters that the utility uses for calculating its required rate of return on its gas supply costs and its associated income tax liability.
But those financial calculations were based on projections of how Homer gas demand would rise, once the city became connected to a gas supply. Enstar has now told the RCA that, although the number of customers signing up for gas supplies has followed a trajectory close to what Enstar had expected, those customers have not individually been consuming as much gas as predicted. As a consequence, the $1 surcharge is proving insufficient to enable Enstar to recover its costs in building the Homer extension to its system.
“Anecdotal evidence suggests that customers in the Homer area are behaving differently than those in outer areas Enstar has expanded into and are not fully converting buildings to gas when hooking up for service,” Enstar told the RCA. “Instead it appears that many are waiting until their existing heating units and other appliances need replacement before fully converting their systems.”
Resolving the problem In 2016 Enstar proposed resolving the problem by placing the cost of the Homer extension into the rate base that the utility uses to determine the fees that it charges all of its customers for its services. However, the RCA rejected this proposal and invited Enstar to propose a revised Homer surcharge.
Rather than increasing the surcharge, Enstar now proposes resolving the problem by reducing the rate of return that the utility obtains from its costs associated with the construction of the Homer pipeline. That, in turn, would reduce the utility’s income tax liability associated with the return from the Homer extension to its network. Essentially, the rate of return would drop from the weighted cost of Enstar’s capital to the cost of the company’s debt. The excess cost already incurred by Enstar to date because of the shortfall in gas demand would be accounted for by amortizing this over the remaining 30-year period that the Homer surcharge is expected to be in effect. The overall result would be a net reduction in Enstar’s monthly costs associated with the original cost of the pipeline, enabling that cost to be recouped over time using the $1 Homer surcharge.
Enstar has asked that its proposed new tariff arrangement go into effect on Jan. 1.
- ALAN BAILEY
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