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Beefy state loans energize efforts to expand natural gas distribution in Fairbanks

Dermot Cole
Officials hope that many Fairbanks residents will switch from wood heating to natural gas in the coming years, cutting air pollution as well as customers' fuel bills. Loren Holmes photo

FAIRBANKS -- A state authority approved $23 million in two subsidized loans Thursday to help bankroll the largest expansion of natural gas service to Fairbanks homes and businesses ever.

It is also the next step in a major state-backed project approved by the Legislature and Gov. Sean Parnell to truck natural gas from the North Slope to Fairbanks.

The Alaska Industrial Development and Export Authority approved a loan of up to $15 million for Fairbanks Natural Gas and a loan of up to $8.1 million for the Interior Gas Utility, owned by the municipal government in Fairbanks. While a contractor prepares plans for a North Slope gas treatment plant under a related program, these loans are aimed at beefing up distribution networks.

The loan to Fairbanks Natural Gas could allow the private utility to double its customer base in the main parts of town. After 32 new miles of gas pipes are in the ground, the company expects to add 1,250 residential customers to its base of 1,100. Fairbanks Natural Gas President Dan Britton said the firm won't be actually hooking up homes until a gas supply off the North Slope is available in about two years.

In the meantime, it will be installing distribution lines, made of high density polyethylene pipe from 2 to 8 inches wide, throughout several residential areas. Fairbanks Natural Gas uses close to 1 billion cubic feet of gas a year from Cook Inlet, but has pledged to buy a half-billion cubic feet a year from the North Slope as one requirement for the loan. That gas contract will help solidify the finances of the state project and lower the per-unit cost.

Most of the service lines into people’s houses, which are typically three-quarters of an inch wide, will not be installed until gas is available. That’s when most people will choose to sign up.

In exchange for the loan, Fairbanks Natural Gas also agreed that it would invest at least $1.5 million of any state tax credit it receives -- a separate state-backed effort is subsidizing a storage tank with a tax credit of up to $15 million -- into the expansion of its distribution system. 

Fairbanks Natural Gas said it plans to run pipe to Hamilton Acres, College Road,  Loftus Road, Chena Pump, Westgate Subdivision, Brandt Subdivision, Bjerremark Subdivison, and the East Ramp of Fairbanks International Airport. All told, the pipes would pass more than 2,500 homes, with Fairbanks Natural Gas expecting that about half of the owners -- some 1,250 customers -- would sign up when gas becomes available, making the switch from oil to cheaper natural gas. The company expects about 100 new commercial customers, too.

The cost per home to switch to gas could range from a few thousand dollars to $10,000 or more, depending on whether a furnace can be modified or a new system is needed. The local government is investigating possible incentives and financing options.

The big draw is the potential savings, as natural gas is expected to cost about half the price of fuel oil -- though it would still be twice the price of natural gas in the Anchorage area.

Britton said the company chose its first expansion plan based in part on summer construction schedules. “We worked with the city, we worked with DOT, to make sure that if there’s road projects we can get in and put pipe in at the same time,” he told the AIDEA board.

AIDEA board member Gary Wilken, a former Fairbanks state senator, said the Fairbanks Natural Gas expansion plan in the most heavily developed areas of Fairbanks is welcome. “It is good news,” Britton agreed. “We’re happy about it, too.”

The private company has a certificate to serve the major urban area of Fairbanks, but it has not expanded since 2006. Fairbanks Natural Gas said it didn’t expand because it couldn’t acquire natural gas in Cook Inlet, while its critics said the company didn’t expand because it didn’t want to build new storage facilities and was making a lot of money by staying small.

Frustration over the failure of Fairbanks Natural Gas to expand contributed to the formation of a municipal utility. The Regulatory Commission of Alaska approved plans late last year to have the municipal utility serve the suburban areas of Fairbanks and encouraged Fairbanks Natural Gas to expand its facilities in its existing service area in the city.

Fairbanks Natural Gas is to become rate-regulated, under an agreement with the state, which has been cited as the means by which regulators will be able to ensure that the value of state assistance is passed onto consumers.

The $15 million line of credit will be interest-free for the first 20 months. The company and AIDEA will negotiate on terms in the months ahead. If the two sides can’t agree, the loan will automatically convert into a 40-year loan at 3 percent interest. The loan to Interior Gas Utility has similar provisions.

Bob Shefchik, a retired administrator and finance officer who has worked for the University of Alaska, the Fairbanks North Star Borough and the Fairbanks school district, serves as volunteer chairman of Interior Gas Utility. He said the agency was pleased with the AIDEA vote and it “will look to get to work with the financing ASAP.” Last week, the Fairbanks North Star Borough Assembly approved a $7.5 million line of credit for the utility.

Shefchik said Interior Gas Utility funds will pay for engineering, design, permitting and other details necessary to get construction started in 2015 in the North Pole area.

The Legislature approved $125 million in funding for the Interior Energy Project in 2013. AIDEA has reserved $85 million for a liquefied natural gas plant on the North Slope, leaving $33 million for future loans.

Britton said Fairbanks Natural Gas needs additional storage as its tanks only contain a five-day supply and is moving ahead with those plans under a stand-alone project.

“This provides additional market availability that otherwise wouldn’t necessarily be in place,” he said of the new distribution lines to be built. “This is complementary.”