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RCA hearing on Enstar natural gas cost adjustment draws a crowd

Sean Doogan
An overflow crowd waits at the doorway of the RCA hearing room in downtown Anchorage. Enstar president Colleen Starring listens in the foreground. The Regulatory Commission of Alaska took public comment on the recent increase Enstar Natural Gas Company rates on Wednesday, July 23, 2014.
Marc Lester
Marc Lester / Anchorage Daily News An overflow audience listens to the RCA hearing Wednedsay in downtown Anchorage. The Regulatory Commission of Alaska took public comment on the recent increase Enstar Natural Gas Company rates on Wednesday, July 23, 2014.
Marc Lester
Commissioner Robert Pickett listens to Enstar president Colleen Starring. The Regulatory Commission of Alaska took public comment on the recent increase Enstar Natural Gas Company rates on Wednesday, July 23, 2014.
Marc Lester

More than 100 people packed a public hearing room and overflowed into the hallways of the offices of the Regulatory Commission of Alaska on Wednesday morning as about a dozen Enstar customers testified about the recent 48.5 percent increase in the cost of natural gas the utility is passing along. 

Many wanted to hear the Southcentral Alaska utility explain the reason for the hike in cost. Some were there to petition the RCA to make Enstar lower the rates.  

"I don't think it will make any difference," said Caroline Gardner, an Enstar customer from Anchorage who testified Wednesday. "But you never give up." 

By the meeting's end, no changes were made to Enstar's tariff -- the rate it charges customers for the gas it buys from Cook Inlet producers.

The RCA said it would take another look at the issue in two weeks, when it has its next regularly scheduled public meeting, to decide if it needs to investigate the way Enstar adjusts its charges to customers for the gas they use.

How Enstar predicts prices 

Enstar is not allowed to make money off the sale of natural gas, only its transportation and delivery. The utility must, by law, file for any change to its rates (called a gas cost adjustment) at least 45 days in advance to give the public time to comment on the proposed changes and the RCA time to go over them.

To do this, Enstar must predict what it believes the total cost of natural gas will be in the following three months. Before 2011, Enstar made these adjustments on a yearly basis, but now it's done quarterly.

The estimates are based on a variety of highly speculative factors, including weather, historical gas usage, and the growth of its customer base. Enstar must also predict whether it will have to pull gas from its storage facility, Cook Inlet Natural Gas Storage, Alaska, a reservoir under Cook Inlet into which gas is pumped during times of low usage. CINGSA gas is among the most expensive gas in Enstar's portfolio. When it has to pull gas from the reservoir, costs go up.

The utility spends an average of $220 million a year on natural gas. It buys the gas from a number of different producers. Each contract has different pricing structures. Some are tied to the price of oil. Others change with fluctuations in the state's gross domestic product, an inflation indicator. Still others are indexed by the Henry Hub, the commodity futures price for natural gas.

Add it all up and things quickly get muddled, even for those charged with regulating the state's utilities.

"If I had spent a good month woodshedding this issue, I wouldn’t have understood half of it myself," said RCA Commissioner Paul Lisanke.

The adjustment to the price Enstar is charging its customers for gas in the third quarter of this year (July-September) is due to several factors, according to Dan Dieckgraeff, Enstar's director of regulatory affairs. The main factors were warmer-than-expected weather in January and February, colder-than-expected weather in Late February and March, and a miscalculation in the gas cost adjustment for the second quarter of the year.

"You forecast, true-up, and adjust," said Colleen Starring, Enstar's president.

Starring said Enstar went to quarterly adjustments (true-ups) because of new gas purchase contracts with producers, but also to reduce wildly fluctuating charges to its customers.

But the practice may be having the opposite effect.

"The thought was that by going to quarterly pricing you would have smaller variations, but it hasn’t worked out that way," Starring said.

Surprising weather leads to 48.5 percent price hike

Natural gas is used throughout Southcentral Alaska to heat homes. It also fuels power plants. In general, people use more gas when the weather gets colder. Enstar tries to predict how much gas it will need to fill demand based on historical weather models and long-term forecasts. Sometimes when it get very cold (generally the months of December through early March), Enstar must draw gas from CINGSA to meet demand. This significantly raises the total cost of gas to Enstar and its customers.

But in parts of the first and second quarters of this year,  Mother Nature did not cooperate with Enstar's predictions. From January through mid-February of 2014, Southcentral Alaska experienced weather that was much warmer than normal. That meant Enstar had overestimated how much gas its customers would use, causing consumers to overpay.

Just as it does every quarter, Enstar figured out how much of an overpayment the weather had caused. It then combined that figure with its predictions of a warmer spring to lower its per cubic foot price in the second quarter.

However, the weather again did not cooperate, becoming colder than predicted for late February through March. As a result, Enstar customers used more gas than the utility thought they would, forcing Enstar to take more of the very expensive gas from the CINGSA facility. This meant customers underpaid significantly during the second quarter of 2014.

That compounded the first quarter error, meaning that Enstar had to again adjust prices up for the third quarter (the current billing cycle.)

The nearly 49 percent increase that went into effect on July 1 followed an almost identical decrease in the second quarter of 2014, making this a year of massively varying prices -- even if the price per thousand cubic feet of natural gas people are paying today is about the same as it was in January.

People at the Wednesday meeting were obviously frustrated with the constantly changing prices.

"The (gas cost adjustment) goes to gas producers in Cook Inlet that have already benefited from $25 million in tax credit for production; they have fiscal certainty," said Francine Lilly, who testified on behalf of the Alaska Workers Association. "We demand that the commission provide working people with the same stability that (the producers) have."

Enstar said it would look at methods for possibly changing the way it determines the amount and the frequency of adjustments to customers' bills. Starring said Enstar would examine the possibility of asking the RCA to let it spread any future increases or decreases over more than just the one quarter so as to avoid huge changes to its customers' bills.

Enstar spokesperson John Sims said the utility currently has no plans to adjust the latest gas cost increase. 

But RCA commissioners warned Enstar that whatever it does, more widely fluctuating prices will be both noticed, and hated, by its customers.

"If you have another black swan coming in, I have a feeling the next meeting we will have will be over at the Dena'ina Center," said RCA chair Robert Pickett.