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Fairbanks gas utility dismisses antitrust concerns

  • Author: Eric Lidji
  • Updated: September 28, 2016
  • Published January 4, 2015

Fairbanks Natural Gas LLC is asking state regulators to approve a long-term liquefied natural gas supply agreement by next summer and said it would accommodate "all reasonable requests and requirements" to alleviate concerns about the proposed deal.

The utility also dismissed suggestions that a proposed sale of its LNG terminal in Point MacKenzie would result in decreased competition in the Interior natural gas market.

Attorney General Craig Richards recently asked the Regulatory Commission of Alaska to delay making any decisions about the agreement or the sale until after Fairbanks Natural Gas completes a rate case currently in its early stages. Richards said the ratemaking process would reveal crucial information about the agreement, such as commodity prices.

Monopoly concerns argued

The two approaches are mutually exclusive in their current form.

The ratemaking process runs through December 2015. The proposed supply agreement expires June 15, 2015. Approval of the agreement is a requirement for closing the sale.

In comments filed with the Regulatory Commission of Alaska on Dec. 23, Fairbanks Natural Gas asked why regulators needed to wait until 2016. "The issue is a simple one: will FNG ratepayers benefit from the new LNG supply contract? The relevant information is available. The AG should be able to decide whether to support or oppose the supply contract in the next several months," attorneys for the company wrote.

The Fairbanks Natural Gas affiliate Titan Alaska LLC wants to sell its 50,000-gallon per day LNG terminal in Point MacKenzie to the Hilcorp Alaska LLC subsidiary Harvest Alaska LLC. As a condition of the sale, Fairbanks Natural Gas would purchase between 850 million and 950 million cubic feet of gas per year from the facility for 10 years.

The contract would start at a delivered price of $15 per thousand cubic feet. The price would increase 2 percent annually starting in the third year and would be adjusted to the lowest price available in the Fairbanks market starting in the sixth year. Those terms would make the Harvest contract slightly cheaper than the existing Titan contract.

But Hilcorp is currently the sole supplier to the terminal, which led Richards to worry about the company being able to exercise monopoly power in the Interior market.

Fairbanks Natural Gas believes the concern is unfounded, saying that the supply agreement contains terms to protect consumers. Specifically, the price is being agreed upon before Harvest acquires the facility, and the contract allows Fairbanks Natural Gas to seek supplies from other producers, should those opportunities become available.

Utility: Information AG needs is already available

Among Richards' reasons for asking regulators to delay their decision on the proposed supply agreement until after the conclusion of the rate case was a lack of transparency.

According to Richards, the proposed agreement only provided the delivered price for gas, which made it impossible for regulators to review components of the price. Those components include the base commodity price and the cost of services and transportation.

Those details would come to light during the ratemaking process, Richards said.

But, according to Fairbanks Natural Gas, the Attorney General's office "already has access to all the information it needs" to evaluate the proposed supply agreement because Fairbanks Natural Gas has already made that information available through its rate case.

"Included is documentation of Titan's gas supply costs, Titan's transportation costs, its electrical costs, its plant efficiency, its third-party transportation costs, its plant-related costs, its employee costs, and other costs," Fairbanks Natural Gas attorneys wrote.

In its initial filing, Fairbanks Natural Gas used the terms of a current interruptible contract with ConocoPhillips to justify the terms of its proposed contract with Harvest.

Richards rejected that comparison, writing "it does not appear that this LNG supply contract was ever submitted to the commission for approval, and it is not before the commission now for comparison." But Fairbanks Natural Gas claims that it provided the attorney general's office with a copy of the ConocoPhillips contract in September 2014.

Richards took office in December 2014, when Gov. Bill Walker came into office.

Fairbanks Natural Gas also questioned why the attorney general and regulators need to segregate the various components of the delivered cost in order to properly evaluate the supply agreement: "The commodity, process, and delivery risks are all taken by Harvest. The issue is whether the (agreement) as a whole is a great deal for Fairbanks ratepayers, not whether some allocation of the contract price internal to Harvest is correct."

Even so, Fairbanks Natural Gas said that it "stands ready to respond quickly to any reasonable requests" to provide information that would speed up the proceedings.

Questions about competition

The antitrust issue raises thornier questions.

According to Fairbanks Natural Gas, the proposed supply agreement makes no significant change in the Interior market because the utility can still buy gas from other producers.

"This is not always the case in gas supply agreements," the company added, in a provocative footnote. Fairbanks Natural Gas is currently in negotiations with the Alaska Industrial Development and Export Authority to use a proposed North Slope LNG terminal. The terminal is a public-private initiative to bring gas supplies to the Interior.

AIDEA and its private sector partner MWH Americas Inc. are requiring Fairbanks Natural Gas "to purchase all of its future needs from the North Slope plant, thus shutting out any future competition," according to Fairbanks Natural Gas, whereas the Harvest contract includes no such provision. Additionally, "The developers of the North Slope LNG plant are projecting a slightly lower price for LNG delivered to Fairbanks, but this projection is based on an entirely unrealistic best case demand scenario, the use of over $100 million in State of Alaska grants and subsidized loans for the LNG plant, and a State grant of $10 million for trucking equipment," according to the company.

Fairbanks Natural Gas' parent company Pentex Alaska Natural Gas Co. LLC had unsuccessfully applied to be the private sector partner on the North Slope project.

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