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State, borough witnesses seek regulated natural gas rates

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Posted: Sunday, November 25, 2012 11:25 pm | Updated: 12:07 pm, Mon Jan 21, 2013.

The state should begin regulating rates charged by Fairbanks Natural Gas, which would lower the costs to consumers, according to testimony filed by the attorney general’s office and the borough with the Regulatory Commission of Alaska.

A borough witness from a Washington, D.C., energy consulting firm alleges the Minnesota company that owns FNG is making “excessive returns” because its rates have remained the same while the cost of its natural gas has been dropping in recent years.

The company paid about $2 million less for natural gas in Cook Inlet in 2011 than it did in 2008, but did not change its rates, which have been unchanged for four-and-a-half years, the borough witness said.

The state witnesses, taking a much less aggressive approach than the borough, do not use the word excessive to describe FNG rates, but they say the company’s charges should be regulated and based on costs.

One state witness says FNG earned anywhere from 4.5 percent to 9.2 percent more in 2011 than it would have had the company been regulated.

FNG has yet to officially respond to the documents before the RCA.

This is all part of a proceeding to determine if the rates of the company will be regulated. It is likely that the RCA will begin to regulate FNG rates because of pressure from Fairbanks. The company has said it would agree to rate regulation with some conditions, but chances are it will be required to do so.

The main reason is that natural gas prices in Fairbanks to consumers do not reflect the steep decline that has occurred elsewhere in recent years, while heating oil prices remain high. The 1,100 or so customers of Fairbanks Natural Gas are paying the equivalent of about $3.08 per gallon of heating oil.

In recent months the equivalent amount of heating oil has been about 75 cents to $1 per gallon more expensive.

The documents and testimony in this rate case will advance the discussion in Fairbanks about the potential role of the new municipal gas utility and clarify the position of Fairbanks Natural Gas.

The inquiry will create a better understanding of what it would take to greatly expand the local natural gas system and whether a private company is willing to do it.

One of the most intriguing arguments put forward by borough witness Gary Grasso, a 35-year veteran of the energy business, is that Fairbanks Natural Gas has not expanded its number of customers because it is more profitable to maintain the status quo. FNG has 426 residential customers and 436 commercial customers, Grasso said, adding that these “appear to be inconsistent” with the statement on the company’s website that it has 1,100 customers.

FNG has said repeatedly it has not expanded its service because it has been unable to get a greater supply of natural gas from Cook Inlet. And the Anchorage utilities say they expect a crunch in future years so they are making plans to import natural gas.

But in recent years, according to Grasso, “every utility on the Railbelt except for FNG has been able to secure an additional supply of natural gas to provide service for its customers” and he suggests the company has not really wanted a greater supply because it makes more money under the current setup.

In most cases utilities have an incentive to provide service to the greatest number of customers because the cost of gas is passed directly onto consumers, while its profits are based on investment, he said. 

In this case, however, FNG is not rate regulated and it collects profits on its fuel supply.

He said, “FNG has an incentive to provide the most natural gas to the fewest customers in order to minimize investment and optimize returns.”

He said, “FNG’s excessive returns are, in part, explainable by FNG’s ability to lower the cost of its natural gas supply during the same period it has been unable to secure an adequate supply to provide service.”

Both the state and borough witnesses highlight what they say is a lack of competition in the energy market in Fairbanks, which is dominated by fuel oil. 

Grasso said FNG refused to provide the borough with  audited financial statements, but he said FNG is making much more profit today than in 2008 because its cost of gas dropped from $8.47 per million Btu to about $6.73 while its rates to customers have stayed the same.

He said, “no customer on the system has benefited from the drastic reduction in the cost of purchased gas, while the owners of FNG have realized the entire benefit of these falling price market conditions.”

Much of this is based on the disconnect that has developed between the cost of oil and the cost of natural gas. Oil remains at a high price, while gas has fallen sharply, in large part because of the fracking boom in the Lower 48.

In Fairbanks, most people are dependent on heating oil, with Petro Star providing about two-thirds of the market and Flint Hills Resources providing about one-third, according to the state.

Cristina Klein, testifying for the public advocacy section of the attorney general's office, said the fundamental argument for why FNG was exempt from rate regulation was that it needed to be able to rapidly change its prices to compete with fuel oil. She said that argument “no longer appears valid.”

•••

HOLIDAY BAZAAR: Ticasuk Brown Elementary School’s PTA invites one and all to a holiday bazaar from 10 a.m. to 4 p.m. Saturday.

With more than 50 vendors, shoppers will have an opportunity to peruse a variety of items made in Alaska, as well as in other parts of the world. The PTA adds that the bazaar will also be a drop off location for Wes Madden’s toy drive.

Dermot Cole can be reaced at cole@newsminer.com or 459-7530

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