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RCA orders rework of some elements in CINGSA’s proposed tariff rates
Alan Bailey Petroleum News
Following a lengthy hearing, the Regulatory Commission of Alaska has ordered Cook Inlet Natural Gas Storage Alaska to rework its proposed revenue requirement. The revenue requirement, the revenue that a utility needs to obtain to cover its costs and earn a return on its investments, is a key factor in determining the rates the utility charges its customers.
CINGSA provides natural gas storage services for gas and electricity utilities in Southcentral Alaska, enabling the utilities to warehouse gas during periods of low gas demand. The stored gas is critical to ensuring adequate gas supplies and deliverability when gas demand is high, particularly during the winter. CINGSA’s rates impact the rates that the utilities need to charge their customers for the supply of gas and electricity.
When CINGSA went into operation in 2012, the storage facility determined its initial rates using a revenue requirement based on estimates of its likely cost structure. In 2014 the utility conducted a true up of its tariff, based on actual costs. Now, with several years of service under its belt, the facility can determine its revenue requirement using what is referred to as a “test year,” a year in which actual costs are used as a basis for estimating future costs. In the case of the tariff filing that RCA has now ruled on CINGSA used 2017 as its test year.
Contention over some items However, contention has arisen between CINGSA and its customers, and with the state of Alaska, over some cost items that CINGSA claimed should be factored into its revenue requirement. For example, CINGSA wanted to include the planned cost of an additional employee, and to recover costs associated with an RCA docket in which CINGSA had requested commission preapproval of some potential upgrades to its facility. In its new order, RCA has rejected some of these proposals. The commission now requires CINGSA to file a revised revenue requirement proposal, taking into account the commission’s findings.
One tricky issue involves factoring in the potential maintenance costs of the facility’s wells. Determining the depreciation cost for the facility’s equipment is also difficult. If the facility ceases to be needed at some time in the future, as Cook Inlet gas supplies run down, the equipment could become obsolete while still in working condition. But what might be the operational life of the facility?
What rate of return? Another complex issue revolves around the rate of return that CINGSA might expect on the equity invested in its facility. As with any return on investment, the higher the risk, the higher the return needed. But what are the risks associated with the CINGSA facility? Moreover, there are different methods of determining a reasonable return based on the risk assessment.
RCA has ruled that a return of 10.25% is appropriate - this is the midpoint between rates of return calculated by two different methods and is slightly lower that CINGSA’s requested rate of return of 11.875%.
Commissioner Janis Wilson disagreed with the other commissioners on this point. She views CINGSA’s proposed rate of return as reasonable when compared with the same rate of return that the commission approved for Enstar Natural Gas Co.
- ALAN BAILEY
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