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Future of Fairbanks natural gas pivots on RCA ruling this week

Dermot Cole
Regulatory Commission of Alaska is scheduled to issue a final order this week about whether a private company or municipal utility will be granted the right to create a natural gas distribution system in much of the community beyond the city center of Fairbanks, Alaska's second largest city. Erik Hill photo

FAIRBANKS -- This is a critical week for the energy future of Fairbanks.

The Regulatory Commission of Alaska is scheduled to issue a final order by Friday about whether a private company or municipal utility will be granted the right to create a natural gas distribution system in much of the community beyond the city center.

The key thing to look for is whether the RCA attaches conditions that will provide a means of tracking and enforcing commitments made by whichever party it selects. The RCA has not taken that approach in the past.

Fairbanks Natural Gas (FNG), a private firm controlled by Minnesota investors, has had a certificate of convenience and public necessity to serve the city center for 15 years. About 1,100 customers are signed up today.

Dissatisfaction with the lack of expansion by the private company and its high rates led the three local governments a year ago to create a municipal utility to provide gas in the area beyond the existing Fairbanks Natural Gas system boundaries.

In the meantime, Fairbanks Natural Gas also applied to serve the new area, which put the state regulatory agency in the position of deciding which plan is best.

“Stripped of excuses, FNG is attempting to arbitrage its exclusive franchise and public financial support to optimize its private opportunities and profit,” the Interior Gas Utility -- the new, municipal entity -- said in a blistering critique leveled in October.

Fairbanks Natural Gas is no kinder in its assessment of the Interior Gas Utility, describing it as a political entity guilty of “magical thinking,” making projections based on guesses instead of economics.

Each company says it has the best alternative.

The Interior Gas Utility contends that Fairbanks Natural Gas has not expanded its Fairbanks operations for eight years because the company refused to invest in storage facilities. It had access to more gas, but never spent money to build storage tanks, which would have lowered its profits.

The municipal entity says Fairbanks Natural Gas makes more profit on a cubic foot of gas than it costs a consumer in Southcentral Alaska to buy a cubic foot of gas.

Fairbanks Natural Gas says that it did not expand service -- even to many people along its distribution lines -- because it could not obtain more gas from Cook Inlet and it did not build more storage. It says the company suffered losses during its first decade.

Until recently the RCA set no limits on Fairbanks Natural Gas’s profits, but that is about to change as the company becomes regulated in the next year or so.

In recent months, Fairbanks Natural Gas placed different parts of its business into separate limited liability companies, a move that Interior Gas Utility says was designed to avoid rate regulation of some segments of the enterprise and make it harder to follow the money.

A decision by the RCA on which company will get the certificate for suburban Fairbanks had been due by Oct. 2, but the parties agreed to a delay until Dec. 20.

A second major action by a state board had been expected Wednesday, but the Alaska Industrial Development and Export Authority recently decided to delay a decision on the proposed North Slope LNG plant until January. The gas must be converted to a liquid before it is trucked to Fairbanks, a system that remains in the planning stage.

A measure approved by the 2013 Legislature provided a $50 million grant for the LNG plant, along with low-interest loans of $125 million. That bill also included $150 million in low-interest loans to expand the distribution system. Fairbanks Sen. Pete Kelly added a $7.5 million grant in the last capital budget to help fund distribution expansion in the Fairbanks and North Pole areas.

“The distribution network will be needed in order for Fairbanks to benefit from a natural gas pipeline, which we expect to follow,” Kelly said in a September letter to the RCA.

Both the private company and the public utility are competing for the right to gain access to the state financial assistance for construction of the distribution system. Fairbanks Natural Gas says it expects to have 9,000 customers signed up in the new area by 2021, providing energy at a much lower rate than it now charges. The company said its initial plan is to build a new transmission line from Fairbanks to North Pole and try to secure contracts with the Golden Valley Electric Association and the Flint Hills Refinery as major customers.

Interior Gas Utility says Golden Valley intends to buy gas directly from the North Slope liquefaction plant and not from a utility. Consequently, the municipal utility said it’s unrealistic to claim that Golden Valley can become the Fairbanks Natural Gas anchor tenant.

Fairbanks Natural Gas projects a customer rate of $16 per thousand cubic feet of gas in 2015, more than twice what consumers pay in Southcentral, but below the current Fairbanks Natural Gas rate of more than $23.

Fairbanks Natural Gas says the plans from the municipal entity “ignore economic realities,” while Fairbanks Natural Gas intends to focus on areas with high population density, followed by low-density areas.

“IGU blindly commits to a result, rather than proposing a realistic path to a realistic outcome,” Fairbanks Natural Gas said in October. “It makes the politically popular decision to advocate for service expansion that is too comprehensive and too fast to actually accomplish the desired result. IGU ignores the actual costs of its proposal and manipulates its financial schedules to display unrealistic projections. This makes for good headlines, but not for good gas service at a reasonable rate.”

For its part, Interior Gas Utility says it plans to serve 13,150 customers and build out 663 miles of pipe in six years, more than twice the mileage planned by Fairbanks Natural Gas.

The municipal utility says that this is the fourth time Fairbanks Natural Gas has gone before the RCA in 16 years to talk about expanding natural gas service.

The Interior Gas Utility says that Fairbanks Natural Gas has provided 90 percent of its gas to commercial customers and now serves about 5 percent of the homes in its existing service area. The municipal utility says that the RCA should insist that Fairbanks Natural Gas serve its existing area.

“FNG was unable to successfully apply its business model to provide service to the high-density core of the city of Fairbanks for over a decade,” Interior Gas Utility told the RCA. “There is no reason to assume that it will now be able to successfully apply that same model to less economic portions” of the Fairbanks area.

Dermot Cole can be reached at dermot@alaskadispatch.com. Follow him on Twitter at @DermotMCole.