CINGSA backs up storage claim

Storage operator of Kenai Peninsula facility believes its investor should reap the benefit of 2 billion cubic feet of native gas

Eric Lidji

For Petroleum News

The Regulatory Commission of Alaska has scheduled an August hearing to determine what a Cook Inlet storage facility should do with “native gas” found in its reservoir.

The Enstar Natural Gas Co. affiliate Cook Inlet Natural Gas Storage Alaska LLC believes it should be allowed to sell excess gas to benefit investors. The office of the state attorney general believes the profits from any sale should benefit ratepayers.

The matter began in 2012, when unexpectedly high pressure in the storage reservoir prompted CINGSA to investigate the geology of the Cannery Loop field more closely.

By late 2013, CINGSA realized it had accidentally found an isolated pocket of natural gas in what was believed to be a depleted reservoir. In early 2014, CINGSA estimated the size of the discovery at 14.5 billion cubic feet, which constitutes a significant discovery.

The majority of the gas needs to remain in place to preserve the reservoir pressure needed to keep the facility running as intended. But CINGSA believes it could produce as much as 2 billion cubic feet of the additional volumes without harming regular field activities.

The question is this: Who should get the profits of those gas sales? Should it be the investors who provided upfront financing for CINGSA to build the facility or ratepayers who are currently repaying those investors through their monthly natural gas bills?

Bearing the risk

In April, CINGSA submitted testimony from three witness of its behalf. The attorney general and other parties to the case are scheduled to submit responses in early June.

The $160.5 million CINGSA facility was financed equally through investor funds and a debt facility, according to CINGSA President Jared B. Green. Through the end of 2014, investors had yet to recover $150.1 million of their investment through customer rates.

Even though CINGSA designed its rates to recover that investment with a rate of return, that outcome depends upon the facility operating as intended and all four customers of the storage facility remaining in business for the 20-year life of the contracts, Green testified.

“There are no assurances that there will be a market for CINGSA’s service or, if there is a market, what the fair value for the storage service will be in 2032. That risk is placed entirely on CINGSA and its investors,” Green said in April 13 testimony. Additionally, according to Green, the average depreciable life of the facility is 30 years, meaning that some $39.1 million in investment will be outstanding at the end of the 20-year contracts.

Among the underlying questions is whether investing in a public utility is risky, given that thousands of customers are gradually paying back the investment month by month.

To analyze the risk, Green divided the project into five phases: pre-construction, construction, the current 20-year contracts, the period after those contacts and the time when the facility reaches the end of its useful life. In the first two phases, CINGSA and its investors bore the entirety of the risk because the system had yet to bill ratepayers.

During the current 20-year contracts, CINGSA could face a natural disaster, its utility customers could be unwilling to make payments or costs could exceed revenues. After the current contracts, CINGSA needs to sign additional contracts to remain viable. And when the time comes, CINGSA will be responsible for reclamation. Although it has been setting aside ratepayer funds for this purpose, the cost is purely an estimate, Green said.

The Regulatory Commission of Alaska is still waiting for a response from the attorney general and the four customers: Enstar, Chugach Electric Association, Municipal Light & Power and the Homer Electric Association affiliate Alaska Electric and Energy Cooperative. Regulators denied Tesoro the opportunity to be a party to the proceedings.