FAIRBANKS -- After a three-week hearing in which the complex challenges of providing expanded natural gas service to Fairbanks received a thorough review, the next move is up to the Regulatory Commission of Alaska.
Here is a three-step plan to move ahead.
1. Require the existing private utility, Fairbanks Natural Gas, to expand its service within the urban center of Fairbanks and focus its energies on thousands of potential customers it has not hooked into the system.
2. Grant the new municipal utility the power to serve the thousands of homes and businesses in the medium and low-density areas of Fairbanks that the private utility never showed an interest in until the prospect of state money appeared.
3. Acknowledge that the RCA failure to regulate the rates of the private utility in the years since oil prices spiked have made the Fairbanks energy problem worse.
Unlike its oversight of ENSTAR in Southcentral Alaska, the RCA does not regulate the rates for natural gas in Fairbanks. In recent years, utility charges have been 10 or 20 percent below the cost of fuel oil.
26 percent rate of return
As a result, Fairbanks Natural Gas makes more profit on a cubic foot of natural gas than it costs a consumer in Anchorage to buy the same amount from ENSTAR. One witness for the municipal utility said FNG had a 26 percent rate of return last year, which he said was “outside of the realm of anything I’ve ever seen in regulation.”
The business plan of Fairbanks Natural Gas has been to optimize profit and minimize investment, the municipal utility argued. The company has reached an agreement under which its rates will be regulated in the future, but the promise of lower rates some day is too little, too late.
“Once you’re regulating FNG, the commission will be a very important part of FNG’s life and that FNG will feel, if not compelled, at least a certain motivation to ensure that the commission is happy with its performance,” Fairbanks Natural Gas attorney Mark Figura told the commission. “We’ll be motivated if, for no other reasons, than you’re going to determine what rates we can charge.”
He said one of the weaknesses in the municipal utility plan is that it could opt out of rate regulation by the RCA in the future because it is a government entity. Figura’s logic is backwards.
The municipal utility grew out of the desire for regulated natural gas rates. There have been warnings about rates before. In 2009, former RCA Commissioner Kate Giard wrote, “There is only so much profit that should be made on 1,100 customers, and personally I believe FNG exceeded that amount in 2008.”
Had Fairbanks Natural Gas and its Minnesota owners been motivated to ensure that Fairbanks was happy with its performance, there would be no question about the merits of extending the company’s territory. But its pricing and the decision to not build larger storage facilities to supply more customers sparked the creation of the municipal utility.
The new entity, the Interior Gas Utility, was not designed to compete with Fairbanks Natural Gas, but to build a system that would get natural gas service to the medium and low-density parts of the community beyond the center of Fairbanks. After the municipal utility took shape and plans for state financial assistance gained momentum, Fairbanks Natural Gas became interested in serving the medium and low-density areas, too.
Both Fairbanks Natural Gas and the Interior Gas Utility appeared before the RCA in Anchorage for three weeks and each entity identified financial shortcomings in the other’s proposal. It was a contentious proceeding, with Fairbanks Natural Gas portraying the municipal venture as “clueless” and numerous Interior Gas Utility witnesses questioning the credibility of its competitor.
A way forward
The RCA will be under some pressure to grant the expanded service area to the private utility, under the theory that the company already exists and that is the easiest thing to do. But the track record of Fairbanks Natural Gas over the past 16 years should be enough to disqualify it from getting a new service area in which the economics are worse than they are in the city center. The company claims that it could not hook up new customers because it did not have long-term gas supply contracts. However, had the company built more storage in Fairbanks, it would've had the gas to supply more buildings.
Robin Brena, the attorney for Interior Gas Utility, had it right.
“Our second-largest city in the state of Alaska has a failed gas utility. It serves less than 5 percent of the homes in its service area after 16 years. It serves less than 1.8 percent of the residences in the borough after 16 years. I cannot believe we’re even in a conversation about the reasons for such a catastrophic failure to provide service.”
Interior Gas Utility consists of a volunteer board with considerable experience in Alaska utilities and business, united in the belief that a solution is within reach. It does not have to pay taxes, has access to lower-cost loans and grants and does not need to earn a profit to please investors Outside. The municipal utility also has the political support of local governments.
Interior Gas Utility doesn't have a perfect plan, but helping Fairbanks make the transition to a more economic fuel supply is a critical and complex task. The RCA should allow this effort to continue by granting a certificate to the Interior Gas Utility and forcing Fairbanks Natural Gas to focus on its existing service area.
The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch, which welcomes a broad range of viewpoints. To submit a piece for consideration, e-mail commentary(at)alaskadispatch.com.