Anchorage Daily News

Despite a profitable year and a salary bump for its president, Fairbanks Natural Gas is not collecting too much revenue and its rates should not be regulated, according to two witnesses testifying for the state Attorney General's office.

But it might be appropriate for state regulators to cap the natural gas utility's rates to keep them connected to fuel oil prices in Fairbanks, according to one of the witnesses.

The testimony comes as part of an investigation into whether Fairbanks Natural Gas should have its rates regulated again. The company will file testimony by Dec. 5. The Regulatory Commission of Alaska is scheduled to rule by June 5.

The investigation is based on a May request from Rep. Jay Ramras, R-Fairbanks, and 13 state lawmakers from Southcentral. They chose not to be involved in the case, asking instead that the Attorney General's office represent the public interest.

Their request came after Fairbanks Natural Gas posted $621,362 in net income in 2007, during a year of rate increases and a large raise for its president, Dan Britton.

But even with those factors, Fairbanks Natural Gas did not collect from its customers more than it should, according to Parker Nation, an analyst with the Regulatory Affairs and Public Advocacy section of the Department of Law.

Nation wrote in his testimony that the company had $2.41 million to $2.65 million in expenses last year not offset by revenue collected through its rates.

"Essentially FNG is voluntarily forgoing its return on equity," Nation wrote.

This disparity between the expenses and the reported profit comes primarily from the fact that Fairbanks Natural Gas passes on its income tax burden to its owners.

UPSTART COMPANY

Fairbanks Natural Gas started providing service in 1997 as a regulated utility. Heating oil dominates the Fairbanks-area market. Fairbanks Natural Gas markets gas from Cook Inlet that the company superchills into a liquid then trucks north.

State regulators exempted the company in 2003 to help it compete against unregulated heating oil companies.

Fairbanks Natural Gas expanded in the years after the ruling, adding distribution lines to new subdivisions and businesses. The company now supplies some 1,100 Fairbanks commercial and residential customers.

The company has a contract with Exxon Mobil to start taking natural gas from the North Slope starting in April. Its Exxon contract requires Fairbanks Natural Gas to build a liquefied natural gas plant on the North Slope, and to travel farther to get gas to Fairbanks, but the company still expects supplies to be cheaper and more secure than the current Cook Inlet supply.

IS HEATING OIL CHEAPER?

The price Fairbanks Natural Gas pays for its Cook Inlet gas has risen considerably since 2006, when the company had problems securing a reliable supply. The company boosted its rates several times last year. Its rates nearly tripled between 2003 and 2008.

At the current residential rate of $23.35 per thousand cubic feet, natural gas in Fairbanks is the cheaper fuel when heating oil is around $3.10 per gallon or higher.

For much of this year, natural gas was cheaper in Fairbanks than heating oil, but at present it is more expensive, with average fuel oil prices hovering around $2.60 a gallon.

Fairbanks Natural Gas argues it still provides a competitive product, even with slightly higher prices, because natural gas burns cleaner than heating oil, and because the gas boilers can be somewhat cheaper and easier to maintain than those for heating oil.

TIE PRICE TO OIL?

Despite these assurances, state regulators have often worried many natural gas customers in Fairbanks can't easily switch between gas and oil to take advantage of differences in prices between the fuels. The process is technically possible, but it can be so expensive or complicated that gas customers wouldn't bother.

Because of this, state regulators could cap Fairbanks Natural Gas' rates, allowing the company to keep some of the pricing agility that would be lost through full regulation.

The RCA didn't impose a cap when it exempted Fairbanks Natural Gas from regulation in 2003 because of "the ease with which its customers can change fuels."

But Cristina Klein, a consultant for the Attorney General and a former state economist, testified that while many of Fairbanks Natural Gas' commercial customers have the resources to switch easily between fuels, "residential customers are essentially captive."

Klein recommended capping Fairbanks Natural Gas' residential rates at the average price of heating oil in Fairbanks, based on equivalent heat value, or British thermal units.

"This cap would offer residential customers the same protection that the ability to purchase potentially lower price fuel from the fuel oil suppliers offers to those customers with dual fuel capacities," Klein wrote.

Klein also recommended that state regulators re-examine the question of whether to economically regulate Fairbanks Natural Gas should the utility eventually reach a 25 percent share of either the residential or commercial markets in Fairbanks.

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