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Attorney general wants regulators to suspend sale of Point MacKenzie LNG terminal

  • Author: Eric Lidji
  • Updated: May 31, 2016
  • Published December 27, 2014

Attorney General Craig W. Richards is raising antitrust concerns over a proposed sale of the Point MacKenzie liquefied natural gas terminal to a Hilcorp Alaska LLC subsidiary.

In comments filed with the Regulatory Commission of Alaska on Dec. 12, Richards said he would be "unlikely to consent to the sale" until after regulators conclude a rate case filed by Fairbanks Natural Gas LLC, which is the primary customer of the terminal.

State law gives the attorney general the authority to stand in the way of any deal that threatens competition. In this case, the authority might be superfluous because the two parties made the deal explicitly contingent on "the consent of the attorney general."

Since acquiring assets from Chevron and Marathon, Hilcorp has been the dominant gas producer in the Cook Inlet basin and is now the sole supplier to the terminal. If the sale went through, Hilcorp could have great influence over the small Fairbanks gas market.

Similar concerns over market dominance led the state to impose a consent decree on Hilcorp, regulating the conditions under which it could operate in the region.

Titan Alaska LNG LLC owns the 50,000-gallon-per-day terminal, which liquefies Cook Inlet gas to be trucked to regasification facilities in Fairbanks. Fairbanks Natural Gas and Titan are both subsidiaries of Pentex Alaska Natural Gas Co. LLC.

In November, Titan announced plans to sell the terminal to the Hilcorp subsidiary Harvest Alaska LLC. The companies have yet to seek regulatory approval for the deal.

Fairbanks Natural Gas subsequently sought regulatory approval for a 10-year supply contract with Harvest Alaska, which would replace its current contract with Titan.

Richards wants the commission to delay any decision about the supply contract until after it reaches a conclusion in a FNG rate case launched in August.

After being able to adjust its rates at will for the more than a decade, FNG is currently going through the process of becoming a rate-regulated utility. Through the process, regulators will set natural gas rates based on costs and a fixed rate of return.

Chief among those costs is the cost to acquire its product. Because the terminal is unregulated, it is currently impossible to know how closely its prices are tied to its costs.

Richards also expressed concerns about the proposed contract.

The terms of FNG's proposed contract with Harvest is based on its current supply with Titan, which is one of the matters being considered in the rate case.

The proposed Harvest contract would start at a delivered price of $15 per thousand cubic feet. The price would increase annually by 2 percent starting in the third year and would be adjusted to the lowest price available in the Fairbanks market starting in the sixth year.

The current Titan contract starts at a base rate of $15.06 per thousand cubic feet, which increases by 4 percent each year under the terms of Hilcorp's consent decree to operate in the region.

By comparing those two contracts directly, FNG concluded that the proposed Harvest contract would cost less, year by year, than the current Titan contract.

"This justification is circular," Richards wrote.

Specifically, he explained, FNG cannot use the Titan contract as a benchmark while the Titan contract is being evaluated as part of the larger rate case.

Additionally, any contract between affiliated companies such as FNG and Titan requires the commission to apply extra scrutiny to its evaluations.

FNG also justified the proposed contract by comparing it to other contracts, including its current interruptible contract with ConocoPhillips and proposed terms offered by WesPac Midstream LLC, which aims to start an LNG operation.

Given that regulators were never required to consider the ConocoPhillips contract and that WesPac offered only an estimate, Richards called those comparisons "inapt."

One issue Richard wants the commission to specifically consider before it approves the contract is factors contributing to the proposed price. The $15 base price is a combination of commodity and service costs -- the cost to buy the gas, the cost to liquefy it and the cost to truck it to Fairbanks. Richards wants specific costs for each of those components.

The Fairbanks North Star Borough is also worried about commodity costs.

In separate comments, the borough asked the commission to consider how the changing ownership of the terminal and other assets has impacted natural gas prices in Fairbanks.

Initially, FNG owned the LNG terminal. It subsequently transferred ownership to its affiliate Titan Alaska. Titan now wants to sell the terminal to Harvest.

The borough also wants the commission to investigate whether ratepayers should have been compensated when FNG transferred the terminal to Titan and transferred other assets to other affiliates. For example, the Pentex subsidiary Arctic Energy Transportation LLC owns the equipment used to truck LNG from Point MacKenzie to Fairbanks. The subsidiary Cassini LNG Storage owns storage facilities.

According to the borough, such an investigation is legally required and "long overdue."

The Fairbanks North Star Borough is one of the three Interior governments that formed the Interior Gas Utility, which has a certificate to provide gas distribution service throughout less densely populated parts of the borough, including the city of North Pole.

In recent years, FNG sought to expand its certificate to include those areas. The Regulatory Commissions of Alaska chose the Interior Gas Utility instead.

The Fairbanks North Star Borough is also a customer of FNG.

Interior Gas Utility hopes to get its supply from a proposed North Slope LNG facility.

This story originally appeared in Petroleum News and has been republished with permission.