Fairbanks Natural Gas wants to sell its natural gas plant in Point MacKenzie to Hilcorp and sign a 10-year deal under which it would buy natural gas from Hilcorp for $15 per thousand cubic feet.
The proposed deal is likely to come under review by the Regulatory Commission of Alaska as part of a request by FNG for a rate hike of 6.92 percent.
Currently, FNG sells gas to itself from a company called Titan, a corporate entity it set up last year to run and own the Point MacKenzie plant. Fairbanksan Dan Britton is president of both companies, which are owned by Pentex.
FNG has sought to divorce the liquefaction business, which it wants to be unregulated, from the proceeding taking place before the RCA to set reasonable rates for consumers of natural gas in Fairbanks.
The Fairbanks North Star Borough has challenged the move to separate the liquefaction plant and protested the proposed rate increase. FNG says it buys gas from its corporate affiliate for about the same price it would pay Hilcorp to provide gas, treat it and deliver it to storage tanks in Fairbanks.
Britton said the sale price of the liquefaction plant has not been disclosed and that it does not have a bearing on the cost of LNG to be purchased by FNG from Hilcorp. FNG buys its gas now from Hilcorp for processing in its facility.
The borough said the lack of detail submitted by FNG earlier this year about its corporate reshuffling suggests "its highly irregular and unsupported transactions have been concocted to circumvent and avoid the commission's cost-based regulation of those assets."
"By all appearances, FNG is being gutted of its financial viability by this shell game, permitting FNG's owners to realize monopoly returns through affiliated but nonregulated companies to the detriment of the public interest and its ratepayers," the borough charged.
FNG rejected the borough claims. It said the liquefaction plant was not part of the utility and that the RCA has known about this split since mid-2013, when the borough brought it up at a rate hearing. It would be "inappropriate and a waste of time" for the commission to start a separate investigation of the liquefaction plant separation, the company said.
FNG said the borough "is merely making senseless objections to harass FNG" and that the RCA has no jurisdiction over that part of the company anyway. The borough argues that the RCA does have jurisdiction and should look into the underlying finances.
Britton submitted testimony saying that Titan has been giving FNG a "great deal, considerably less than a market price," and that Titan charges FNG less than it charges its other customer, the Talkeetna Lodge, which buys a small amount of LNG.
Titan supplies most of the gas to FNG from the Enstar pipeline. It chills the gas and places it in storage trailers for shipment to Fairbanks. On the northern end, the LNG is transferred to storage tanks, where it is heated to return to a gaseous state and pumped through buried pipelines.
In testimony submitted earlier this year, before the sale to Hilcorp came up, Britton defended the plan to split Titan from FNG, saying potential investors in Titan "will positively view the separation of the utility business, because they will be able to invest in a competitive business with a realistic return potential, without having to also invest in a public utility."
The company said it is buying gas from Hilcorp for $7.13 per thousand cubic feet for its base load, with a price of $8.91 for additional supplies.
Customers of FNG pay nearly three times as much for natural gas as do customers of Enstar in Southcentral Alaska. The treatment and shipment of the gas by truck is a major additional expense of the Fairbanks system.
FNG owner Pentex is controlled by Harrington Partners L.P., which is controlled by Lydiard partners L.P., which is controlled by Series L1 of Merced Capital Partners.