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Natural gas debate hinges on costs to consumer, size of project

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Posted: Saturday, May 18, 2013 12:00 am | Updated: 8:48 pm, Sun May 19, 2013.

The eventual cost to the consumer and the number of new consumers who would be able to hook up to natural gas are key questions for the Regulatory Commission of Alaska as it decides which entity will be allowed to serve portions of the Fairbanks area beyond the current Fairbanks Natural Gas service area.

There are two competitors, one a public corporation and one a private corporation. The private company is proposing a much smaller and much less expensive expansion plan, one that is founded on the idea that a single large industrial customer — either GVEA or Flint Hills — would provide nearly all of the new revenue.

The Interior Gas Utility, a public corporation owned by the Fairbanks North Star Borough, took shape last year with the goal of providing natural gas service to high and medium-density parts of the borough outside of the FNG service area.

It filed an application April 22, two weeks after FNG, a private company controlled by a Minnesota business, applied to serve essentially the same territory.

The state RCA is beginning to sort out the competing applications now.

There are major differences in cost and scope.

The most recent action is a document filed by Ray Latchem, who founded Fairbanks Natural Gas but has had no connection with the business for many years. He is seeking permission to intervene in the case.

Latchem objects to the bid by FNG to expand its service area, arguing that it would harm his company, Spectrum Alaska, which, like FNG, is among the entities looking at building an LNG facility on the North Slope.

 He said he wants to develop a project capable of delivering natural gas to Fairbanks and using LNG to fuel industrial operations and trucks on the North Slope.

The RCA may or may not allow Latchem to intervene, but in a comment he filed, with his attorney, Jeff Lowenfels of Anchorage, Latchem raises one of the underlying points of contention — the rates charged by FNG.

“The commission is also requested to take judicial notice of the fact that FNG sells natural gas for the highest price in the nation, more than double the national average, according to the U.S. Energy Information Agency,” they said. “While FNG states it will accept rate regulation, it receives its gas supply from a non-regulated sister entity. This situation is not in the best interests of the public.”

For its part, FNG says its natural gas prices are 20 percent below the cost of fuel oil and “as FNG shifts its source of supply from Cook Inlet to the North Slope, much lower rates are anticipated.”

The municipal gas utility, in its review of the FNG application, focuses its critique on the company’s expectation that $46.3 million of the $50.9 million FNG expects to collect from the new area will come from one unidentified customer — meaning GVEA or Flint Hills in North Pole.

FNG’s application said it would expand natural gas service to 1,926 new residential customers in the expanded service area, generating about $3.8 million in new revenues from residential customers.

It wants to build a 15-mile transmission line from its operation in South Fairbanks along the Tanana River levee to near the GVEA and Flint Hills sites.

Neither GVEA nor Flint Hills are guaranteed to be FNG customers and both could make alternate arrangements, but the FNG plan is based on deriving near all of its new revenue from one of them.

“FNG’s entire expansion is economically driven by its efforts to ‘cherry pick’ this single industrial customer and FNG has not provided any credible assurances that this customer will be available,” the Interior Gas Utility told the RCA.

FNG has 1,100 customers, a number that it has not increased in eight years. There are conflicting arguments about why.

FNG says it wanted to expand but could not  “because of the tightening of the Cook Inlet gas market in 2006.”

The company said “it was unclear whether and when additional gas would be available, plans for further distribution system expansion were deferred.”

In 2008, FNG signed a deal to buy gas from Exxon on the North Slope and truck it to Fairbanks, but it did not build the project.

With FNG now planning a large state-subsidized storage tank in Fairbanks, it will be able to buy more gas in the summer from Cook Inlet, store it and sell it in the winter, meaning more customers can be hooked up, FNG said.

The Interior Gas Utility says the FNG has not expanded its customer base  because of FNG’s decision to not invest in additional storage facilities. FNG has long maintained that the lack of supply was the bottleneck.

Today, the company serves less than 5 percent of the residential customers in the city and less than 1 percent of the residential customers in the borough, the municipal group says.

While FNG is proposing to serve 1,926 customers in the new service area, the municipal authority says it would serve 12,839 residential customers in the same area.

At a price of close to $485 million, the scale and reach of the project envisioned by the municipal authority is more than 10 times as costly as the FNG plan.

The municipal authority says its goal is to get gas to consumers at about half the current cost of oil, which is believed to be enough of a gap to prompt homeowners to make the switch.

IGU asserts  that existing state programs will  provide the nearly half-billion in financing, with a 50-year term at 1 percent interest. A supply of natural gas can be arranged after the details of the North Slope LNG plant take a more definite form. The Legislature approved a plan this year that could advance that effort quickly.

FNG has asked the RCA to reject the municipal authority plan because it “fails to include documentation of a gas supply contract or financing.”

The idea of borrowing $482 million for 50 years at 1 percent is implausible and highly unlikely to occur, FNG said. The Interior Gas Utility counters that the state loan programs already exist.

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