Fairbanks Natural Gas seeks rate hike

Dermot Cole

FAIRBANKS -- The private utility that serves 1,110 Fairbanks customers with natural gas disputes the notion that state regulation of its rates will mean lower costs for consumers.

Fairbanks Natural Gas said Monday it wants a 6.92 percent rate increase, filing a cost study and other documents with the Regulatory Commission of Alaska in which it makes the case that it should be allowed to collect $1.4 million more from its customers under standard utility practice.

A consultant who prepared an analysis for the company argued that FNG deserves an overall return of 11.92 percent "relative to a hypothetical capital structure" of 40 percent long-term debt and 60 percent equity.

In the run-up to an agreement in late 2012 under which FNG was to become rate-regulated, one of the key arguments by supporters of rate regulation was that it would mean a better deal for consumers. It's not clear what the RCA will accept or reject from the FNG arguments, but the company is not ready to start charging less for energy.

During proceedings last year about whether a municipal utility or the private firm should serve the area outside of the city center , an attorney for the Fairbanks North Star Borough said that FNG made more in profit per thousand cubic feet of natural gas than Enstar was charging its customers in Southcentral for the same amount of gas. FNG charges its customers $23.35 per thousand cubic feet of gas, a rate established in 2008.

In the end, the RCA decided that the new municipal utility, which hopes to start putting pipe in the ground in North Pole next year, would provide service to the areas outside the city center and that FNG should concentrate on its existing service area. The municipal utility was formed because of local discontent with FNG's policy of not expanding its local storage facilities, lowering its rates or hooking up more customers to gas.

FNG has argued that it could not connect more customers because of a shortage of natural gas from Cook Inlet, which has been trucked to the Interior since the small system began to take shape more than 15 years ago.

In advance of the rate case before the RCA, FNG separated the part of its business that treats and processes natural gas at Point MacKenzie, creating a separate LLC, last summer. It now buys liquefied natural gas from Titan, an enterprise that shares its owners with FNG.

FNG President Dan Britton, who is also the president of Titan and other companies under the same ownership chain, said the new entity was not created to avoid regulation. Under the new arrangement, the gas supply would come from an unregulated company, which would not have the same profit limits as a regulated utility.

He said that the RCA will be able to review the Titan contract to make sure it is reasonable. Titan is expected to charge $15.06 per thousand cubic feet of gas to FNG, a cost that FNG wants to be accounted for separately in customer bills, according to testimony filed with the RCA.

The gas charge would be adjusted monthly and include all of Titan's costs, such as administration and trucking, and profits. The total charge to the customer each month would include additional fees for administration and other services.

Britton said the price FNG pays Titan is "absolutely not" a market rate.

"Titan is giving FNG a great deal, considerably less than a market price. The price paid by FNG to Titan is less than other customers of Titan pay for LNG," Britton said in testimony submitted to the RCA.

Elsewhere in his testimony, he said that all of the capacity of the Titan plant is "dedicated to FNG, with the exception of a minor amount for the Talkeetna Lodge."

As part of its application, FNG is asking that the $5 million it spent on early development of an LNG project on the North Slope -- which has since been abandoned because of the state-backed effort to do the same -- be recovered from gas consumers.

"Where a utility has made a substantial prudent investment in a project for the benefit of its customers and the project is later abandoned, the utility should be compensated for its investment," Britton said.

The company also wants to have $40,000 in lobbying expenses added to the rate base because that money was to benefit ratepayers, FNG argued.

Part of the company's costs is an annual payment to Harrington Partners LP, the majority owner of FNG, for management fees that run to $240,000 a year.

Under each of its agreements with companies owned by affiliated companies, "FNG received quality goods and services at less than the cost available from unaffiliated suppliers," Patrick Kirby, the manager of regulatory affairs for FNG, said in his testimony.

In 2013 it had total operating revenues of $20 million, operating expenses of $16 million and net income of $4 million, down from $5.3 million in 2012. The big difference between the two years is that FNG paid $6.4 million for natural gas and LNG in 2012 and $9.7 million in 2013.

The company has 465 residential customers, 639 small commercial customers, 28 large commercial customers and 14 customers on an interruptible basis.

By Dermot Cole