Legislature(2007 - 2008)Anch LIO Rm 220
11/25/2008 09:00 AM Senate JUDICIARY
| Audio | Topic |
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| Start | |
| Enstar Gas Supply Hearing | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
SENATE JUDICIARY STANDING COMMITTEE
November 25, 2008
9:03 a.m.
MEMBERS PRESENT
Senator Hollis French, Chair
Senator Charlie Huggins, Vice Chair
Senator Bill Wielechowski
Senator Gene Therriault
MEMBERS ABSENT
Senator Lesil McGuire
OTHER LEGISLATORS PRESENT
Representative Nancy Dahlstrom
Representative-elect Pete Peterson
Representative Les Gara
COMMITTEE CALENDAR
Hearing on Enstar/Aurora Power Customer Gas Supplies
PREVIOUS COMMITTEE ACTION
No previous action to record.
WITNESS REGISTER
MARTIN MARTENSEN
Continental Auto Group
Anchorage, AK
POSITION STATEMENT: Expressed extreme concern about having to
find a new source for gas by January 1, 2009.
MIKE GORDON, President
JADON Inc., dba Chilkoot Charlies
Anchorage, AK
POSITION STATEMENT: Expressed extreme concern about having to
find a new source for gas by January 1, 2009.
TOM TEIBER, representative
Northwest Airlines Cargo
Anchorage, AK
POSITION STATEMENT: Expressed extreme concern about having to
find a new source for gas by January 1, 2009.
MARK SLAUGHTER, Manager
Gas Supply
Enstar Inc.
Anchorage, AK
POSITION STATEMENT: Responded to questions related to the letter
that Enstar sent businesses about the possible need to arrange
alternative gas supply service for 2009.
DAN DIECKGRAEFF, Manager
Rates and Regulatory Affairs
Enstar Inc.
Anchorage, AK
POSITION STATEMENT: Responded to questions related to the letter
that Enstar sent businesses about the possible need to arrange
alternative gas supply service for 2009.
BOB STOLLER, Assistant Attorney General
Civil Division
Commercial/Fair Business Section
Department of Law
Anchorage, AK
POSITION STATEMENT: Provided information about the RCA Order No.
8.
ERIC ISAACSON, Vice President
Commercial Assets
ConocoPhillips
POSITION STATEMENT: Read a statement and responded to questions
related to Enstar's natural gas contracts.
Dan Clark, Manager
Cook Inlet Assets
ConocoPhillips
POSITION STATEMENT: Responded to questions related to Enstar's
natural gas contracts.
CARRI LOCKHART, Manager
Production Operations
Marathon Oil in Alaska
POSITION STATEMENT: Read a statement related to Enstar's
natural gas contracts.
STEVE DE VRIES, Assistant Attorney General
Civil Division
Regulatory Affairs and Public Advocacy (RAPA)
Department of Law
Anchorage, AK
POSITION STATEMENT: Responded to questions related to gas
contracts and explained RAPA's role before the RCA.
CRAIG TILLERY, Deputy Attorney General
Civil Division, Department of Law
Anchorage, AK
POSITION STATEMENT: Was available for questions.
ACTION NARRATIVE
CHAIR HOLLIS FRENCH called the Senate Judiciary Standing
Committee meeting to order at 9:03:07 AM. Present at the call to
order were Senators Huggins, Wielechowski and French. Also
present was Representative Dahlstrom and Representative-elect
Peterson.
^Enstar Gas Supply Hearing
CHAIR FRENCH stated that the Enstar gas supply hearing was
called because of a letter that was sent to some Anchorage
businesses advising that they would have to obtain gas from a
source other than Enstar by January 1, 2009. Mr. Galindo, who
owns Taco Loco, contacted him to ask how he is supposed to
secure a new gas supply in a month. About a half dozen other
businesses subsequently contacted him with the same problem.
Come January 1, 2009 they won't have a supply of gas.
9:04:03 AM
CHAIR FRENCH said he views this as a sort of microcosm of what
the larger Cook Inlet basin faces over the next four or five
years as gas supplies get tighter. Thus, it seemed like a good
time to: a) get to the bottom of the problem facing the affected
Anchorage businesses and b) look at the longer term gas supply
issues in the Cook Inlet basin. The agenda today is to hear from
affected businesses, Enstar, a Department of Law representative
for the RCA, ConocoPhillips and Marathon, and the Department of
Law representative for regulatory affairs and public advocacy
(RAPA).
9:04:48 AM
REPRESENTATIVE DAHLSTROM relayed that she too heard from
constituents and last week she sent a letter to the RCA asking
about a contingency plan. To date she hasn't received a response
or phone call from anyone. "I'm anxious to hear what they have
to say."
CHAIR FRENCH noted that Representative-elect Peterson made gas
supply issues a large part of his campaign and asked if he had
anything to add.
REPRESENTATIVE-elect PETERSON replied he had come to follow the
proceedings; he had no questions.
9:05:41 AM
CHAIR FRENCH called on Mr. Martensen to provide testimony.
MARTIN MARTENSEN, Continental Auto Group, thanked the committee
for letting him testify. He said that he received the letter
Senator French mentioned and he's concerned about where he will
get gas for his four dealerships. "For the next five days we are
customers of Aurora Power and then thereafter we'll be customers
of Enstar for 31 days." Running his business is stressful
enough, and figuring out where to get gas supplies to heat the
business on a daily basis is the last thing he wants to worry
about. Many people have great concern about what to do next. "We
contacted Chevron, we contacted Conoco, we contacted Marathon as
the letter suggested…and all of them said 'Well, we're not in
the business of providing gas to a company as yourself.' We
asked what to do and the suppliers said they didn't know." He
said he'd like to know what the next step is and he appreciates
legislators looking into the situation.
9:07:54 AM
MR. MARTENSEN said that Enstar has told him they do not have the
gas to take him on as a customer, but it's not because of a gas
shortage. It's related to a negotiated price that the RCA finds
acceptable. "It's all a bit over my head; all I care is that I'd
like to be able to heat my buildings and go on with business."
9:08:32 AM
CHAIR FRENCH asked how long his company bought gas from Aurora
Power.
MR. MARTENSEN recalled that it's been since 1995 or 1996.
CHAIR FRENCH asked if he has ever had to negotiate a different
supply contract with another company.
MR. MARTENSEN said no.
CHAIR FRENCH asked how many employees he has.
MR. MARTENSEN replied he has 200 employees and confirmed that he
cannot operate without natural gas.
CHAIR FRENCH asked if the information in the letter Enstar sent
was helpful.
MR. MARTENSEN replied it really wasn't, but he doesn't want to
throw Enstar under the bus because he ultimately wants to be a
customer. Calling Chevron, Conoco, and Marathon led nowhere, he
said.
9:09:47 AM
SENATOR WIELECHOWSKI asked if he originally received gas through
Enstar.
MR. MARTENSEN explained he was initially an Enstar customer and
he switched when Aurora Gas and Aurora Power came along and sold
gas at a cheaper rate. It was a 30-day contract so Continental
Auto Group was a customer thru November 2008.
SENATOR WIELECHOWSKI asked what volume of gas his business uses
in a month.
MR. MARTENSEN replied he didn't know how much the four
dealerships use.
9:10:41 AM
REPRESENTATIVE DAHLSTROM asked if he was ever offered a one-year
contract.
MR. MARTENSEN replied a 30-day contract was presented initially
and that's what he signed. Either party could cancel with 30-
days notice.
9:11:01 AM
SENATOR HUGGINS noted that he had received a discounted price
from Aurora and asked if he can imagine a scenario where he
might pay a premium to ensure he had gas.
MR. MARTENSEN replied absolutely. It was a prudent business
decision to pay less, but he would be willing to pay a premium.
9:11:34 AM
MIKE GORDON, President, JADON Inc., dba Chilkoot Charlies,
thanked legislators for the opportunity to testify. He said
there's a saying in Africa that when the elephants fight, only
the grass gets trampled, and that's how he feels today. In 39
years of operation he thought he'd dealt with every adversity
imaginable in the business world, but this one takes the cake.
It doesn't seem right that a public utility could single
businesses out and decide that they either do or do not get
service. "Frankly, I'd like to know how they decided who got
these letters and who didn't." On the surface it seems that they
went to people who had been getting service from Aurora. He was
told to contact Enstar, which he did. He filled out paperwork
and signed an agreement and thought everything was fine until he
got the letter from Enstar.
MR. GORDON described the November 10 letter as ambiguous. None
of the four options worked. The phone number for Marathon was
non-working, Conoco and Union both said they weren't in retail
business and couldn't help. The last option was Aurora and they
had already told him that he couldn't get gas from them. That's
when he called Senator French. "I don't have any solutions to
offer, I just feel like this is an outrageous set of
circumstances." If he doesn't have gas he couldn't operate and
all the pipes in the building would freeze and his property
would essentially be destroyed. "I appreciate any help you can
give me," he said.
9:14:55 AM
CHAIR FRENCH asked how long he bought gas from Aurora.
MR. GORDON estimated it was about 10 years. In response to
further questions he said he has 120 employees.
CHAIR FRENCH noted that a quick-witted person had suggested that
Chilkoot Charlies might run on body heat.
MR. GORDON replied that may work on Friday and Saturday, but not
on Sunday.
9:15:30 AM
TOM TEIBER, representing Northwest Airlines Cargo in Anchorage,
thanked the committee for inviting him to give his story. He
explained that the business has a 50,000 square foot facility at
the Anchorage airport and several hundred employees. As others
have testified, he too received a letter from his natural gas
provider, Aurora Power, advising that they would not provide gas
after December 1, 2008. Subsequently, he signed with Enstar to
supply gas to his large commercial accounts. Northwest Airlines
Cargo already has small commercial accounts with Enstar, he
added. Then on November 10 he received a letter from Enstar
advising that it could only confirm commitment for gas until
December 31, 2008. He too contracted three of the four gas
suppliers listed in the letter and they all said they could not
supply gas. Aurora Power was listed as the fourth alternative,
but it didn't make any sense to make that call. He said it's
frustrating and his sense is that the elephants are playing
these businesses, getting them to come testify and push their
agenda.
CHAIR FRENCH asked where Northwest Airlines Cargo is located.
MR. TEIBER explained that it is north of FEDEX and adjacent to
the Pen Air hanger.
CHAIR FRENCH asked if he is representing the cargo business and
not the space heating needs for the different airlines at the
airport.
MR. TEIBER clarified he is not representing the terminal
building. Northwest Airlines Cargo is a warehouse facility.
Responding to further questions he explained that the facility
houses over 100 Northwest employees: 200 pilots that are in the
facility at various times, and 70 to 80 contract vender
employees. The building is slightly smaller than the UPS
facility.
CHAIR FRENCH thanked him for coming to testify on short notice.
9:18:50 AM
ADAM GALINDO, Vice President and CEO, Taku Local Products in
Anchorage, said he has about 20 year-round employees and is
probably one of the largest food manufacturers in Alaska. He
explained that he had been a customer of Aurora for about 7
years and he too received a letter from Enstar advising that he
would not receive gas after the end of the year. On average he
uses about 3,000 cubic feet of gas each month. He contacted Don
Page at Chevron and others and he learned that they don't sell
to individual customers.
MR. GALINDO said that a year ago he spent about $1.2 million
upgrading and automating his facility and without a supply of
gas he would go out of business. A 1.6 million BTU/hr oven is
essentially scrap metal if there isn't any gas. Without gas he
couldn't keep the building from freezing and he couldn't produce
any product. Competition is fierce in both retail and wholesale
and any lag in producing his product would provide outside
companies an advantage that he might not gain back. "I
understand the shortage of gas as well as the economic factors
of it, but to use our companies as pawns is just absurd." He
said he's willing to pay a higher premium.
MR. GALINDO said that 7 years ago Enstar advised him that he
would get a cheaper rate from Aurora, but he never would have
switched had he known that it would ultimately put him out of
business.
CHAIR FRENCH asked if there are other small gas suppliers doing
business in the Anchorage area.
MR. GALINDO replied he isn't aware of any.
9:22:14 AM
CHAIR FRENCH said that the committee would next hear from
Enstar.
9:22:36 AM
MARK SLAUGHTER, Manager of Gas Supply for Enstar, and DAN
DIECKGRAEFF, Manager of Rates and Regulatory Affairs for Enstar,
introduced themselves.
MR. SLAUGHTER thanked the committee and said they didn't have
prepared testimony; they would respond to questions based on the
letter Senator French sent to Enstar.
CHAIR FRENCH noted that Andrew White signed the letter that was
sent to customers and he assumed that Mr. White did so after
having consulted with other Enstar company members.
MR. SLAUGHTER agreed. The reasoning was that it would be
imprudent to take on customers returning from Aurora Power when
Enstar didn't have gas available. He reminded members that about
two years ago Fairbanks Natural Gas didn't have gas under
contract and continued to accept customers. "We did not believe
that that was a prudent policy to follow and we did not want to
allow our customers have that same situation happen to them."
CHAIR FRENCH conceded that it sounds like a good idea but the
solutions offered weren't particularly viable. As one witness
pointed out, the number for Marathon Oil Company was not and is
not operating.
MR. SLAUGHTER said that was a clerical error and Enstar has
since made phone calls providing corrected numbers. He then
pointed out that Marathon, under the Marathon Natural Gas
Company, has been and is selling gas to third-party customers.
"It's not that these companies do not sell… they have in the
past and some of them are right now," he said.
9:25:40 AM
CHAIR FRENCH conceded that his letter had an error; Marathon has
some small customers. He asked if ConocoPhillips sells to retail
customers.
MR. DIECKGRAEFF replied they did when they were part of Arco and
he believes that continued for a time after the merger.
ConocoPhillips currently does not sell to retail customers.
9:26:32 AM
CHAIR FRENCH asked if he believes that ConocoPhillips has sold
to retail gas users within the last decade and if so, on what
scale.
MR. DIECKGRAEFF replied his recollection is that they were
bundling to large, primarily to governmental, units.
CHAIR FRENCH asked if, prior to sending the letter, anyone from
Enstar called ConocoPhillips to ask if they were willing to sell
gas to small commercial users in the Anchorage bowl.
MR. SLAUGHTER replied Enstar advised ConocoPhillips and the
other suppliers about the letter and the contact information.
"We have offered to provide back-office support to these
companies in the event that they chose to sell…to these
customers." Enstar is trying to ensure that no one goes cold,
but it doesn't believe it's proper to tell customers that there
is a supply of gas come January when there is not a contract in
place. "We wanted to get that information out as soon as
possible," he said.
MR. DIECKGRAEFF added that Enstar is aware that Marathon Oil and
ConocoPhillips do have the gas that Enstar was contracted to
purchase and the RCA has not approved.
CHAIR FRENCH responded saying the contract issues would be
addressed later; he's still stuck on the letter. Again he
questioned whether Enstar specifically asked ConocoPhillips if
it would sell gas to the individuals who were going to receive
the letter.
MR. SLAUGHTER said that ConocoPhillips didn't indicate one way
or another. In response to a question, he said the same applies
to Union/Chevron.
CHAIR FRENCH questioned why Enstar placed Aurora Power on the
list.
MR. SLAUGHTER replied Enstar did not want to discriminate. "In
the event they changed their mind, they're all on 30-day
contracts."
CHAIR FRENCH asked if he believes that it's conceivable that
Aurora could change its mind and pick up the customers again.
MR. SLAUGHTER said yes.
9:28:40 AM
REPRESENTATIVE DAHLSTROM asked for an explanation of Enstar's
policy on cutting off service to customers in the winter.
MR. DIECKGRAEFF asked if she's referring to transport customers,
supply customers or gas supply customers in general.
REPRESENTATIVE DAHLSTROM replied in general.
MR. DIECKGRAEFF explained that Enstar's tariff provides that
during extreme weather conditions it stays the normal tariff for
residential customers for disconnection for non-payment.
Specifically it's for residential life and safety issues. "We
were instructed to put that language in our tariff by the
commission several years ago," he said. There is no such
protection in the tariff for commercial customers. Unpaid
commercial accounts are subject to disconnection.
REPRESENTATIVE DAHLSTROM said she understands that the RCA
instructed Enstar to include that language.
MR. DIECKGRAEFF said that's correct. That was Enstar's informal
policy and the RCA asked for it to be formalized in the tariff.
It's been that way for a long time, he added.
REPRESENTATIVE DAHLSTROM asked what the policy is for customers
who paid their bills from Aurora for 7 to 10 years before
returning to Enstar as a customer. Will they be cut off January
1?
MR. DIECKGRAEFF reiterated that Enstar's tariff does not permit
it to bring on customers if there isn't a gas supply for them.
"So we cannot bring the Aurora customers onto our system if we
don't have a gas supply for them." It would disrupt other Enstar
customers and their tariff prohibits that.
9:31:09 AM
REPRESENTATIVE DAHLSTROM asked if any existing customers would
be cut off in the event of an extreme cold spell that resulted
in excessive consumption of gas. Where would you get the gas for
that?
9:31:37 AM
MR. SLAUGHTER said current Enstar customers won't be cut off;
there is gas under contract for them. He continued:
We have enough gas January 1 for Enstar's customers.
For these returning customers, these customers are in
the forecast that we used to negotiate these
contracts. We estimated that they would be coming back
to us beginning this year. We thought we would have
them back sooner so they're in our plan for 2009. We
can't control what Aurora Power does and I think that
should be the question. … Why is Aurora shedding
customers at this time?
REPRESENTATIVE DAHLSTROM agreed that is a valid question, and
again asked if there is gas for existing customers if usage were
to suddenly double.
MR. SLAUGHTER replied yes; Enstar has gas for existing
customers.
MR. DIECKGRAEFF added that Enstar's gas supply contracts follow
the load. The gas supply is structured such that for 2009
certain companies pick up a certain percentage of the forecasted
load. Whether it's a warm or cold day they pick up their pro-
rata share as the load moves up and down. The gas supply
contracts that Enstar negotiated were approved by the RCA with
the conditional amendments that have not yet been negotiated.
Those contracts were to supply five percent of the load
including the anticipated return of [Aurora] customers. Without
the contracts that five percent of the load is not covered. The
remaining 95 percent of the forecasted load is covered. He
continued:
The way the contracts work is they take care of their
pro-rata share of our load regardless of what the
weather is. So on a warm summer day one company is
providing 60 percent and on a cold day they're
providing 60 percent. So our contracts provide the
deliverability. So if it gets all of a sudden cold and
everybody uses 50 percent more, which in reality
between a warm day and a cold day they're using 10
times more. Our existing contracts have that
flexibility, and our new contracts would cover that as
well. So to answer your question again, for existing
customers we have existing contracts that will provide
that flexibility between the high and the low. So if
it does double, they're - we're - covered.
9:34:40 AM
CHAIR FRENCH observed that those contracts seem to have room to
move a lot more gas if it's needed. He characterized it as more
of an accounting issue than a gas supply issue.
MR. DIECKGRAEFF asked what customer should be interrupted if
Enstar takes these customers on and it gets cold. "We don't have
the gas for the cold days. That's why our tariff specifically
states that we cannot bring back returning customers unless we
have sufficient gas to cover them on the average day as well as
the peak day without disrupting our other customers." The only
way to take on the returning customers would be to plan to
interrupt existing customers that all along have been paying the
gas sales contracts at a higher price than the returning
customers paid to third-party marketers. Enstar also feels like
it is the grass under the elephants, he said. "If the gas supply
contracts that we presented to the commission had been approved,
we would not have this situation." Enstar and these customers
are stuck between the producers' and the commission's separate
desires on pricing.
9:36:56 AM
CHAIR FRENCH noted that Senator Therriault and Senator Dyson had
joined the hearing.
SENATOR WIELECHOWSKI asked how much gas those 400 customers
typically use.
MR. DIECKGRAEFF estimated it's between .8 Bcf/year and 1.2
Bcf/year.
SENATOR WIELECHOWSKI asked how much gas the existing customers
use.
MR. SLAUGHTER replied the 2009 forecasted purchase is 32.1 Bcf.
SENATOR WIELECHOWSKI asked how much gas is available for Enstar
to use each year.
MR. SLAUGHTER restated that the forecast is 32.1 Bcf in 2009. He
continued to explain that Enstar buys gas under several
contracts: a Marathon APL-4 contract, which is a fixed volume of
5 Bcf; a Unocal contract of 19.5 Bcf for next year; the Beluga
contract consisting of three producers - ML&P, Conoco, and
Chevron - which is estimated at 4 Bcf. The other two contracts
would have supplied about 1.6 Bcf.
9:39:14 AM
SENATOR WIELECHOWSKI asked if the maximum amount of gas
available to Enstar next year is 32.1 Bcf.
MR. SLAUGHTER replied there is some flexibility within the
contracts. The way these contracts are structured to work is
that gas is purchased on a pro-rata basis based on the daily
forecast. This includes the legacy contracts. He continued:
If it's warmer then normal, we might buy 31.5, but
everyone's percentage at the end of the year would be
equal. If it's colder than normal, with these
contracts in place we had agreements - and were
working toward agreements with others and one of our
other legacy contracts - to go above the 32.1. These
contracts were all very specifically tailored to work
together with our legacy contracts and it's been a
very arduous process that we've been working through
with our current suppliers to make sure that these
contracts meshed very nicely.
9:40:23 AM
SENATOR WIELECHOWSKI asked if there would be enough gas for
current Enstar customers if the winter is very cold and demand
goes up to 35 Bcf.
MR. SLAUGHTER said a 10 percent increase would be a challenge
for the suppliers.
SENATOR WIELECHOWSKI asked how confident he is that there is
sufficient gas to supply current Enstar customers for the coming
winter.
MR. SLAUGHTER replied they've thoroughly reviewed the forecasts
with their suppliers and the numbers have been vetted. It's a
sound forecast, he said.
SENATOR WIELECHOWSKI asked who gets cut off in the event that
Enstar runs out of gas.
MR. SLAUGHTER replied they'd follow the tariff so industrial and
interruptible customers would be first. Realistically, the first
step would be to ask customers to reduce consumption on cold
days.
SENATOR WIELECHOWSKI observed that running out of gas isn't the
problem, it's the peak days.
MR. SLAUGHTER responded that it depends on the contract. For
example, the APL-4 contract is a set amount; next year it's 7
Bcf. In theory that contract could run out on November 4 if it's
a cold year. Enstar has been working to bring flexibility into
its contracts to allow purchase of additional gas. Now in 2008
they are targeting to bring in the Marathon APL-4 contract as
close to 9 Bcf as possible.
SENATOR WIELECHOWSKI noted that .8 Bcf to 1.2 Bcf is roughly one
thirtieth of the total gas supply, and asked if he's saying that
Enstar doesn't have that amount of gas available for the 400
customers.
MR. SLAUGHTER replied Enstar does not have enough gas under
contract to supply those customers without the two contracts
that are open before the commission. "Those are customers that
chose to leave the system and have benefited from the lower
price of gas that Aurora Power was providing them." With the two
contracts there will be available gas.
9:43:33 AM
SENATOR WIELECHOWSKI asked if the gas that Aurora Power provided
ran thru Enstar gas lines.
MR. DIECKGRAEFF said yes, but not all of Aurora's gas runs
through Enstar lines. Aurora Power Resources is a third-party
marketer that procures gas from Aurora Gas. The businesses are
owned separately but have the same president. Aurora Gas sells
to other companies and the gas does not run through the Enstar
system.
SENATOR WIELECHOWSKI asked if the gas that Taco Loco and
Continental Auto Group receive runs through Enstar gas lines.
MR. DIECKGRAEFF said yes.
SENATOR WIELECHOWSKI asked if Enstar collects a tariff on that.
MR. DIECKGRAEFF said yes; Enstar makes the same amount if they
sell their gas or haul someone else's. "We are financially
indifferent."
9:44:43 AM
SENATOR WIELECHOWSKI asked if Enstar knew about this potential
problem in July when they were before the RCA.
MR. DIECKGRAEFF said yes.
MR. SLAUGHTER added that there was specific and substantial
discussion about Aurora Power returning customers and they were
included in the forecast. At that time the Aurora attorney
questioned including those customers in the forecast contending
that there was no indication that those customers would return.
"We believe it was prudent, it was proper to include those
volumes because in the past they have returned customers." In
November or December 2006 Aurora gave back about 500 customers,
and there was reason to believe these [400] customers would be
dropped and returned to Enstar.
SENATOR WIELECHOWSKI asked if they were directed to give the
attorney general or the RCA a list of those commercial
customers.
MR. SLAUGHTER replied he doesn't believe so.
MR. DIECKGRAEFF added that request was not made during the
course of the hearing.
SENATOR WIELECHOWSKI asked if there was a reason Enstar didn't
send notification in July.
MR. SLAUGHTER replied it's up to Aurora to decide which
customers to notify. Enstar has a list of all the Aurora
customers but they didn't know which, it any, would be retained.
9:46:36 AM
SENATOR WIELECHOWSKI opined it is short notice to drop service
now if people potentially knew about this in July.
MR. DIECKGRAEFF said that in the hearing Enstar stated the
belief that this would happen. During the hearing Aurora's
representatives challenged the belief that Aurora would return
customers. You're asking the wrong people, he said. He
continued:
We were notified by Aurora in October that they were
going to return customers effective December 1 and
provided us the list just the week of Halloween so we
got about as much notice as anyone else other than the
fact that we had a strong suspicion, and had for some
time, that we would be getting some, if not all, of
those customers back.
9:47:38 AM
SENATOR HUGGINS expressed optimism that this meeting would
provide a catalyst to solve the problem. He asked for a
description of the timeline starting when Enstar began
negotiations leading through the RCA process, with particular
emphasis on what the RCA said in late October.
9:48:22 AM
MR. SLAUGHTER explained that Enstar began negotiating for the
2009 volumes in 2004, bringing the APL-5 Marathon contract
forward. Unfortunately, the RCA did not accept the contract.
SENATOR HUGGINS asked if that means that the 2008 contracts are
actually the second round.
MR. SLAUGHTER said that's correct.
SENATOR HUGGINS asked the timeframe for the first set of
contracts.
MR. DIECKGRAEFF explained that the first contract was with
Marathon and it called for starting deliveries in 2009 and
filling through 2016. Negotiations began in 2004, were submitted
to the RCA for approval in 2005, and were rejected in 2006.
"Those contracts would have provided 100 percent of our needs-
including gas for returning transport customers if we received
any-for 2009 all the way through 2016."
SENATOR HUGGINS asked how the price of gas in that initial
contract would compare to contracts in effect at the time and to
the new contract.
MR. SLAUGHTER replied that the price for 2009 would be
approximately $8.96, which is the current estimated average cost
of gas so it would fall in the middle. Comparatively, the Beluga
contract for next year will be priced at $11.20.
SENATOR HUGGINS asked for an update on the current negotiations.
MR. SLAUGHTER explained that in early 2007 Enstar sent out an
RFP for gas. Union said it didn't have gas available. Chevron
and Marathon were the other respondents and negotiations began
with those companies for 2009 volumes. Contracts were signed and
submitted to the RCA in April and the hearing was scheduled for
the last week of July. The hearing lasted about two and a half
weeks and Enstar requested a final ruling by October 31. The RCA
approved the two contracts conditioned on the amendments to
change the pricing provisions of both contracts. December 1 is
the deadline for updating the RCA as to whether negotiations on
the amendments were successful.
SENATOR HUGGINS calculated that there were about 30 days to
renegotiate.
MR. SLAUGHTER said that's correct and they have met with both
companies.
SENATOR HUGGINS asked about the status of those negotiations.
MR. SLAUGHTER replied they are ongoing and confidential, but
they will file with the commission next Monday [December 1].
9:52:20 AM
SENATOR HUGGINS questioned what would happen on December 1 if
the negotiations did not go well. When no response was
forthcoming, he turned the question around and asked what would
happen on December 1 if the negotiations go well. He added that
that's what he believes will happen.
MR. SLAUGHTER replied if negotiations go well there will be
something to submit to the commission that it can approve. "Then
st
beginning January 1 we will be on our merry way, and we won't
be having this discussion any further."
SENATOR HUGGINS asked for a description of the mechanism for
producing extra gas on cold days so everyone's pilot light stays
lit. He recalled that diverting gas from the LNG plant is one
option.
MR. SLAUGHTER said yes; these contracts had specific language
that the producers would agree to divert gas from the LNG plant.
There's also specific language that the producers would work
with Enstar for regasification so gas can be taken off to help
cover those peak days in the future. He reiterated that as
Enstar buys gas as it gets colder, it continues to buy
proportionately from each supplier so everyone provides their
equal share.
SENATOR HUGGINS asked if storage is a potential solution going
forward.
MR. SLAUGHTER said yes; the Marathon contract provided the
benefit of buying gas for storage at a reduced rate.
9:54:29 AM
SENATOR HUGGINS referred to the discussion about the amount of
gas the 400 customers typically use and asked if .8 is use on an
average day and 1.2 use on a cold day.
MR. DIECKGRAEFF clarified that that's the annual usage of those
customers. He estimated that the peak daily requirement would be
between 7,000 and 8,000 cubic feet. Enstar uses approximately
270,000 Mcf on the absolute peak day, he added.
SENATOR HUGGINS questioned how long it would it take to restart
the system if all the pilot lights were to go out.
MR. DIECKGRAEFF said that after a total system crash it would
take months to purge the air from and relight or restart every
appliance.
9:56:22 AM
SENATOR HUGGINS said that although he firmly believes this will
be solved, it's only an interim solution because it's about
supply. We have to look at in-state gas and get on with solving
the problem for the long term, he said.
9:57:04 AM
SENATOR THERRIAULT asked if Enstar disagrees with some of the
commission's findings.
MR. DIECKGRAEFF replied they aren't in a position to discuss
that since it's still an open docket proceeding. They did agree
with the RCA finding that Enstar was prudent in entering into
the gas supply contracts.
SENATOR THERRIAULT asked if they have responded to any of the
points with public documents.
MR. DIECKGRAEFF replied they filed a petition for
reconsideration on extending the time of the order. That's the
only thing they've addressed thus far.
SENATOR THERRIAULT noted that on page 32 it says that as part of
the settlement agreement, ConocoPhillips and Marathon committed
to act in good faith, in their sole discretion, to complete gas
supply agreements with Enstar that the commission would find
acceptable. He said that leads him to believe that there are
ongoing discussions to resolve this issue. If not he believes
the state has an action against ConocoPhillips and Marathon for
the export license. It's not in the state's best interest to
shut that industrial use down, but, he said, it seems that the
significant leverage that the state has will play in Enstar's
favor. He asked if they have an opinion on that.
9:59:14 AM
MR. DIECKGRAEFF reiterated that they can't discuss ongoing
negotiations. We have had discussions with the Department of
Natural Resources, he added.
SENATOR THERRIAULT asked if they believe that the terminology
that was in the contract would have led to third-party suppliers
coming in.
MR. SLAUGHTER said that Enstar has had discussions with the new
independent Armstrong oil company as recently as last week about
their new North Fork field. They are very interested in selling
gas to Enstar. At this point Armstrong is looking what comes of
these contracts to determine their decision process.
SENATOR THERRIAULT asked if Armstrong was agreeable with
supplying gas at the rates under the terms of the original
contract.
MR. SLAUGHTER replied they were interested in seeing market
price for their gas. "That's one of the reasons why they are up
here looking in Cook Inlet," he said.
10:00:46 AM
CHAIR FRENCH asked if they know the rough ratio between gas
being exported to Japan as LNG and the amount that's used in the
greater Anchorage bowl.
MR. DIECKGRAEFF recalled that at full capacity the plant uses
85-95 Bcf/year and the local utility market for home heating and
power is about 70 Bcf/year.
CHAIR FRENCH noted that it's roughly 50:50 with just a little
more being exported. He asked for Enstar's total annual sales.
MR. SLAUGHTER replied it will be about 32 Bcf in 2009.
CHAIR FRENCH asked who, other than Enstar, supplies gas to
commercial users in the Anchorage bowl.
MR. SLAUGHTER listed: Aurora Power, MainCo, and ConocoPhillips -
supplying gas to their building.
CHAIR FRENCH asked if they have an idea of Aurora's volume.
MR. DIECKGRAEFF replied it was about 1.4 Bcf/year before they
shed the 400 customers
CHAIR FRENCH observed that that is a large portion of that .8-
1.2 Bcf/year.
MR. SLAUGHTER said they aren't going out of business, they
simply decided to sell gas to different customers.
CHAIR FRENCH asked if Aurora is picking up other Enstar
customers.
MR. SLAUGHTER said no; beginning January 1 they have a contract
to sell to Fairbanks Natural Gas and they're selling to one
other industrial customer.
CHAIR FRENCH noted that Senator Wielechowski said that Aurora
accounts for between three to five percent of the gas sales in
the Anchorage bowl.
10:03:30 AM
MR. SLAUGHTER replied that sounds about right.
SENATOR WIELECHOWSKI asked if Aurora is regulated by the RCA.
MR. SLAUGHTER said no; Aurora Power is a third-party marketer
and Aurora Gas is an exploration and production company.
SENATOR WIELECHOWSKI noted that page 33 of the RCA order says
that when the LNG export was granted, the producers were allowed
to export up to 98.1 Bcf [of LNG between April 2009 and March
2011]. He said he finds it ironic that there's a squabble over
.8-1.2 Bcf/year for in-state use when 98.1 Bcf is being exported
to Japan.
MR. SLAUGHTER clarified that there is plenty of gas available in
Cook Inlet, but the RCA must approve the purchase price of the
gas. Enstar is a regulated utility and it has to be able to
recover costs to stay in business so those contracts must be
approved to go forward. The LNG plant provides backup and is
integral to Enstar's future plans, which is one reason they
supported that license extension with the state. During the RCA
hearing they discussed how the LNG plant figures into the plans
to build a line from the Foothills. Without an industrial tenant
there isn't enough demand in Cook Inlet to consider any North
Slope or Foothills gas. Now Agrium is out the market and the LNG
plant isn't running at capacity either. The contracts very
clearly stated that there was agreement to divert the gas, but
without that plant the deliverability drops and there would be
more problems on cold days.
10:06:47 AM
SENATOR WIELECHOWSKI asked for Agrium's total volume and peak
capacity on an annual basis.
MR. DIECKGRAEFF stated that at peak capacity, before any
shortages, Agrium was using 55-60 Bcf/year.
SENATOR WIELECHOWSKI asked what they estimate it costs to
produce 1 Mcf of gas. He added that he's heard it's between 50
cents and $1.00.
MR. DIECKGRAEFF responded that isn't realistic. He's seen
information in a lawsuit indicating that for a low-cost producer
and taking embedded costs into account, it's three to four times
higher than that range.
SENATOR WIELECHOWSKI asked if that means that it'd be about
$4.00.
MR. DIECKGRAEFF reiterated that he's seen numbers in a lawsuit
that are three to four times higher than the numbers he quoted.
10:08:18 AM
SENATOR WIELECHOWSKI calculated that would be between $1.50 and
$4.00, and added that Cook Inlet residential users currently are
paying $8.96/Mcf.
MR. DIECKGRAEFF said Enstar's price effective January 1 is $8.99
and the price for the Beluga field is $11.96.
10:08:55 AM
REPRESENTATIVE DAHLSTROM asked what Enstar will do and what will
happen to the 400 customers come January 1 if these contracts
aren't negotiated.
MR. SLAUGHTER replied he has every reason to believe there will
be a successful outcome. Gas is available in Cook Inlet; it's
just a matter of who supplies the gas and who buys it.
REPRESENTATIVE DAHLSTROM asked if Enstar has made a decision
about what it will do in the event of the worst case scenario.
MR. DIECKGRAEFF said that Enstar has discussed the possibility
of providing about back-room and billing support if the gas
producers were to sell directly to those customers.
REPRESENTATIVE DAHLSTROM asked if she's hearing that there is a
plan in place so that these customers won't be shut off.
MR. SLAUGHTER replied that continues to be evaluated. There is
no desire for customers to have no gas. December 1 is the
deadline and more decisions have to be made thereafter.
REPRESENTATIVE DAHLSTROM said she too hopes the negotiations are
successful, and asked if a representative from Aurora would be
testifying.
CHAIR FRENCH said Aurora isn't regulated and wasn't invited
today.
10:11:21 AM
SENATOR THERRIAULT asked if they believe that Enstar's success
is tied to the long-term operation of the LNG plant.
MR. SLAUGHTER said that's correct. His understanding is that
it's easier on the wells if production is even and steady, which
is why an industrial load is necessary for a bullet line to be
feasible. "You're not going to have .5 B/day pipeline and only
run it with a 100 million in there." For that reason Enstar
views the LNG plant as an anchor tenant. In the short term it's
necessary to have the ability to divert gas going to the plant
and they're working with the producers to put regasification
equipment on the tanks so gas can be pulled off on cold days in
order to meet peak deliverability needs. The producers have
agreed to work on that because deliverability continues to be a
problem as the Cook Inlet fields decline.
SENATOR THERRIAULT remarked that it's also in the state's best
interest to have even steady production. AOGCC would likely step
in if production fluctuated wildly.
MR. DIECKGRAEFF added that the flat load helps smooth the
utility's wild swings between summer and winter and makes the
overall takes easer to handle. It's in the community's best
interest and it helps to ensure that everything keeps running.
10:14:41 AM
SENATOR THERRIAULT commented that although you're engaged in
tough negotiations with the producers, you aren't here to cast
them as the villains because you need them long term to stay in
business.
MR. SLAUGHTER responded that's one way to represent it.
CHAIR FRENCH asked for a summary of one or two points that have
to be worked out between now and January 1 to ensure that these
400 customers have a supply of gas.
10:15:29 AM
MR. SLAUGHTER said the key point is price.
CHAIR FRENCH reminded them that although their customers hope
Enstar will negotiate a tough price, ultimately they have to
heat their businesses.
MR. SLAUGHTER stated that Enstar believes it brought forward
contracts with fairly negotiated prices. The RCA ruled that
there needs to be a change in the pricing structure and
negotiations with ConocoPhillips and Marathon are ongoing so
that there is something ready next week.
SENATOR WIELECHOWSKI asked if it's fair to say that there's
enough gas for all Cook Inlet consumers next winter and it comes
down to whether or not ConocoPhillips believes it's making
enough profit.
MR. SLAUGHTER said he isn't sure that profit is the right word,
but there is sufficient gas available. He continued:
Aurora has the gas but they're choosing not to keep
those customers. Marathon and Conoco have the gas and
we've negotiated what we believe to be a fair price
and now we're having to go back and renegotiate again
with those two entities.
MR. DIECKGRAEFF summarized that the RCA believes that one price
is correct and the producers believe that another price is
correct. Enstar doesn't make money either way; it makes money by
moving the gas. We brought contracts to the RCA that we thought
had reasonable prices and were approvable. The RCA thought
otherwise and sent us back to the producers to renegotiate
prices that the RCA determined.
10:17:50 AM
CHAIR FRENCH remarked that when he read the order he noted that
the RCA admonished Enstar for testifying in favor of an export
license before it had taken care of its own customers. It's
common sense to make sure you're locked down before you agree
with shipping gas to Japan. "95 to 98 percent of the people that
operate businesses in the Anchorage bowl rely on Enstar so I
guess I would echo that remark I saw in the order," he said.
Second, he said he doesn't know who dreamed up the letter that
was sent out but from his perspective it wasn't a good idea. It
was a ham-handed effort to notify customers of a supply shortage
when there really is gas out there. The likelihood that you'll
shut the valve on those 400 businesses is vanishingly small and
you should work it out, he said.
The four major Anchorage businesses that came here today are
represented by people who would be better off at their offices
working on what they do best, which is selling cars or cooking
tortillas. Senator Huggins is correct that we'll hit this point
again and again over the next few years and you need to find a
different way to work out your differences with the major
producers, he said. Although you may feel that you're part of
the grass, he said he doesn't think Enstar is that small. "Maybe
you're a baby elephant compared to the bigger elephants, but
you're not grass and so I hope you'll take a different approach
next time." He thanked Mr. Slaughter and Mr. Dieckgraeff for
coming.
10:20:27 AM
CHAIR FRENCH said Mr. Stoller with DOL will talk about RCA Order
No. 8.
10:20:40 AM
BOB STOLLER, Assistant Attorney General, Department of Law said
his client is the RCA commissioners. He assists with
adjudications if the RCA orders are challenged on appeal and
defends those orders before the appellate courts. Senator French
asked him to provide a layman's summary of Order No. 8. In
anticipation of questions, yesterday he emailed a detailed
functional outline of the order and a summary of the hearing.
MR. STOLLER relayed that the hearing lasted two and a half weeks
and four active parties were in front of the commission with
Enstar sponsoring their gas supply contracts. Chugach Electric
participated in the proceeding as did Aurora Power Resources
through counsel. He noted that the DOL also functions in a
consumer protection capacity called regulatory affairs and
public advocacy (RAPA) and so to avoid any appearance of a
conflict of interest he doesn't talk to RAPA people and they
don't talk to him. The sole exception is when they're both on
the same side of an issue under appeal.
10:23:03 AM
MR. STOLLER said that the commission takes this very seriously.
Since U-08-58 is an open docket in front of the commission, DOL
has advised the commissioners not to speak publicly about this
matter. And because it could result in litigation, he must be
circumspect in what he says. "Nothing that I say here today can
in anyway shape or form qualify what is in Order No. 8." The
order has to speak for itself and the statutes governing the
commission on appeal require that. The statutes substantially
say that the commission's conclusions of law must be supported
by findings of fact and those must be supported by substantial
evidence on the record. The commission states its findings
repeatedly throughout the order and the order explicitly sets
out the evidence upon which those findings are made.
10:24:27 AM
MR. STOLLER said he first would respond to Representative
Dahlstrom's question about what the commission will do about the
situation that has developed. The commission has discussed this
matter and although he is not at liberty to provide substance to
those confidential discussions, the crystallizing event will be
what is in Enstar's December 1 filing. Whatever is in that
filing, the commission will take swift action thereafter. Either
Enstar will have negotiated the price caps that were ordered or
it won't. The rational for ordering the price caps is that from
the commission's perspective, the producers have market power
that they use to extract a price that is too high.
AS 42.05.431(a) specifies that if the commission finds that
anything affecting a rate is not reasonable, the commissioner
shall establish a reasonable rate by order. That statute is set
out on page 15 of the decision and is the legal basis upon which
the decision was made.
MR. STOLLER added that although the factual basis for the
decision is set out in great detail, there isn't a statute that
specifically requires Enstar to bring the contracts to the
commission. The Legislature does not require a utility to make
its supply arrangements available to the commission for review
and approval in advance. "It's not a matter of statute by which
Enstar came to the commission; it's a matter of their tariff."
He recalled that in the 1980s Enstar modified its tariff and
asked the commission to approve their supply contracts in
advance and looking forward rather than coming to the commission
in the context of a rate case years after their contracts had
been executed and have the commission say that in that context
they acted imprudently. Mr. Dieckgraeff spoke to that in his
presentation this morning and the reference to that is on page
5, line 10 of the order. The tariff section is cited in footnote
20. In summary he said it's the tariff that brings Enstar to the
commission in this context, and it's the statute that gives the
commission the power and authority to approve the contracts and
require the price cap.
10:27:17 AM
CHAIR FRENCH asked if the price cap is a dollar limit above
which the contract can't go or just a different way of arriving
at what the price should be by using different points of
measurement.
MR. STOLLER replied you're exactly correct; it's a different
mechanism for determining price. The commission characterizes it
as a dynamic market-driven cap. It has to do with which markets
will be used as the measuring instruments. The commission
concluded that the array of markets that the producers selected
do not share similar characteristics as those found in the Cook
Inlet basin. It is unique in that it is the only natural gas
producing area that exports gas to foreign countries and as such
the commission concluded that a different set of market tests
should be used for the pricing mechanism. He said he is not at
liberty to characterize it because he might do so incorrectly
and to defend it he must do so as it's written.
10:28:34 AM
SENATOR THERRIAULT said he generally thinks of the tariff as the
cost of shipping product through the pipe and the different
pricing methodology is the price of the gas going into the pipe.
He asked, "Do we have two components here?"
MR. STOLLER clarified that a tariff is the written terms and
conditions of service that a utility makes available to members
of the public. It includes the whole array of terms and
conditions, including price provisions. It is a public document
that is available for review on the commission's website. This
applies to all utilities that the commission regulates; they all
have tariffs. Sometimes tariff is used to mean the price that
the utility asks for its service. As Mr. Dieckgraeff pointed
out, Enstar makes money transporting the gas not on the cost of
the gas. The cost is a pass through.
From the commission's perspective, when it is asked to approve a
contract that raises Enstar's weighted average cost of gas
(WACOG), Enstar wants the commission to approve in advance.
Surprisingly enough, although it is within the Legislature's
purview to articulate the standards that the commission should
employ in determining how to evaluate gas supply contracts in
the future, it has chosen no to do so. Currently the commission
makes determinations based on evidence submitted during a public
hearing process.
10:31:13 AM
MR. STOLLER relayed that he brought the commission's record for
the committee to review. The transcript has about 2,400 pages of
testimony and the entire record consists of between 5,000 and
6,000 pages of materials. The commission distilled that
information into the 35 page order and three concurring opinions
from commissioners Giard, Johnson, and Wilson.
SENATOR THERRIAULT asked for some idea of the difference in
price under the commission's methodology versus the negotiated
methodology.
MR. STOLLER replied it's enough to be significant but he
couldn't supply an authoritative answer right now. "I'll be
happy to look that up and get back to you later today if you'd
like me to do that," he said.
SENATOR THERRIAULT said he's interested in knowing how much
difference there is.
10:32:35 AM
SENATOR WIELECHOWSKI asked what standards the RCA uses to
determine a reasonable rate of return for the gas producers. He
noted that the FERC sets pipeline rates in the neighborhood of
14 percent.
MR. STOLLER pointed out that the Legislature has not empowered
the commission to regulate producers. The production of gas is
not a public utility service as defined in AS 42.05.990. The
Legislature has defined a public utility service as the
transmission and distribution of gas, not the production of gas.
The commission was not trying to determine a fair rate of return
for ConocoPhillips and Marathon; it was trying to find a fair
market surrogate for the gas given that there isn't a wide-open
and functioning willing buyer/willing seller market in the Cook
Inlet basin. He described that as the crux of the dilemma.
MR. STOLLER said that the commissioners are acutely aware of the
situation; once Enstar makes the December 1 report on where it
is with the producers, there will be a record upon which to take
thoughtful action.
10:34:49 AM
CHAIR FRENCH recognized that Representative Gara had joined the
meeting.
SENATOR WIELECHOWSKI said we've heard again and again that we
own the gas and oil and we lease it to the producers who are
entitled to a reasonable rate of return, and you're saying the
commission doesn't currently employ that standard.
MR. STOLLER replied as follows:
The Legislature hasn't given the commission the
authority to employ that standard vis-à-vis the
producers. The commission is a creature of the
Legislature. Ratemaking is a legislative function and
the commission is a creature of the statute. And so
what the commission may do is a function of what the
Legislature has put forth in 42.05 for utilities,
42.06 for pipelines and the powers that are reasonably
inferable from the legislative provisions as the
Supreme Court has ruled. But the commission cannot act
lawfully beyond those confines. If the commission were
to attempt to set a rate of return for ConocoPhillips
or Marathon through the device of these contracts,
that would be a questionable action. I don't want to
second-guess an argument I might have to make on
appeal, but as I sit here, I think that it would be a
stretch to find that the commission has the authority
to do that.
10:36:50 AM
SENATOR WIELECHOWSKI asked if the state has an action it could
take if ConocoPhillips or Marathon were to say they didn't want
to sell gas at a particular rate and the state thought the rate
was reasonable.
MR. STOLLER replied it's a more appropriate question for the
Department of Natural Resources (DNR) and the assistant
attorneys general who work with DNR, but he thinks that the
state would have some leverage. In the mid 1970s the state did
take its royalty share of North Cook Inlet gas in-kind and made
it available to Enstar's predecessor. The constitutional
constraint is that that resource, upon which the state's in-kind
share or in-value share is based, belongs to all people of the
state and the constitution provides that the state must manage
its natural resources for the maximum benefit of all its people.
That means that the state cannot take any less on a sale of
royalty in kind than if it took the royalty in value. That issue
was litigated for years in the Alaska North Slope royalty
litigation.
10:38:36 AM
CHAIR FRENCH said it puts a damper on the idea that the state
can sell gas cheaper to Alaskans than on the market.
MR. STOLLER said that's right. The business problem that the
commission was confronted with is how to determine a fair value
for the gas when there isn't a functioning market in the local
area that has lots of willing buyers and sellers to establish a
clear arm's length market price for the gas that Enstar should
pay and pass along to the ratepayers. Based on the evidence,
including the evidence that ConocoPhillips and Marathon
exercised market power and constrained Enstar's ability to
negotiate, the commission said it thinks that the pricing
mechanism - which is characterized as a cap, but actually is a
floating and dynamic mechanism - should be applied in this case.
SENATOR THERRIAULT observed that the right to regulate the
utility stems from the fact that the state sovereign established
the utility as a monopoly. So it's strange here to reach through
the utility to the producer, but he supposes that it's because
it's a component of that tariff.
MR. STOLLER interrupted to agree. It's Enstar's tariff and they
don't want to be in a position where they might come in for a
rate case several years after they've entered into a gas supply
contract and have the commission say that the negotiated price
was too high and they aren't allowed to collect that much from
the ratepayers. "From Enstar's perspective that would be a
terrible conundrum and that's why they modified their tariff and
that's the instrument which brings us to this proceeding."
SENATOR THERRIAULT referred to Enstar's letter and pointed out
that if the customers had to negotiate their own supplier but
they could put the gas on Enstar's transportation system, the
RCA would have no control over the price those customers pay for
the gas, but the delivery mechanism would still be regulated.
MR. STOLLER agreed; that's the market dynamic by which Aurora
has made gas available to its customers. The Legislature hasn't
defined the production and sale of the commodity as a public
utility service, which is why the commission has not had
regulatory authority over Aurora. It is free to enter or exit
the market without the same constraints on it that Enstar has.
Enstar's perspective is that it is the provider of last resort
and they want to be assured that they will be able to recover
what they pay for gas. He told Representative Dahlstrom that he
will see that she receives a response to her letter.
10:42:37 AM
SENATOR HUGGINS noted that Mr. Dieckgraeff and Mr. Slaughter
testified that the price of gas under the original contract
would be in the "shot group" of what their gas is today.
MR. STOLLER said he has no reason to doubt their testimony, but
he hasn't done research on it so he can't speculate. He offered
to do the research.
SENATOR HUGGINS said he would appreciate that because he'd like
to hear about lessons learned from that contract negotiation and
ultimate disapproval.
MR. STOLLER agreed to do some research.
10:44:08 AM
REPRESENTATIVE GARA commented that it's a conundrum that there's
enough gas to export yet there's a shortage in Anchorage. He
asked if the state's royalty-in-kind rights extend to the
natural gas that's being exported.
MR. STOLLER replied that's outside his area of expertise so he
can't speculate. He said he would quibble with the assumption
that there's a shortage of gas. There are enough molecules of
gas, he said, the issue is the price of the gas and who
determines the price.
REPRESENTATIVE GARA asked who would know the answer.
MR. STOLLER referred him to the Department of Natural Resources
and the oil, gas and mining section of the Department of Law.
REPRESENTATIVE GARA asked if the RCA will take a position on the
next export license.
MR. STOLLER replied that AS 42.05.141 authorizes the RCA to
advocate and support the state's interest in proceedings beyond
itself, but it would probably have to be coordinated with the
administration.
10:46:34 AM
SENATOR THERRIAULT asked if he knows of any other jurisdiction
where the producer of a resource like this has been declared to
be a regulated utility.
MR. STOLLER replied there may be, but he isn't aware of any
jurisdiction where that's happened.
SENATOR THERRIAULT asked if the statutory directive to the RCA
is to look only at the tariff on the resource that's being
delivered now or is there also a duty to look at the system to
make sure that more of the resource is produced.
MR. STOLLER replied the commission's responsibility is a balance
between the lowest reasonable price and continuous reliable
service. The commission must exercise its judgment to balance
that tension.
CHAIR FRENCH recapped that the next step is for Enstar to take
the new pricing mechanism and make a deal with the producers.
MR. STOLLER agreed that is what order No. 8 says. From the
commission's perspective the contracts are approved, but the
price term set forth was excessive so a new price term should be
inserted. The appendices set out in detail what the new price
mechanisms are, and the commission is waiting to hear from
Enstar on December 1 as to how it is doing.
CHAIR FRENCH asked if we'd be out of the woods if Enstar, Conoco
and Marathon went out in the hall and looked at the new price
mechanism and made a deal and shook hands.
MR. STOLLER said yes.
At ease from 10:49:17 AM to 10:59:11 AM.
CHAIR FRENCH said that representatives from Conoco and Marathon
are next to testify. He noted that some members of the public
have signed up to testify but there is only time to hear from
those who were specifically invited today. He apologized and
suggested that they email their comments. They would be given
consideration.
11:00:05 AM
ERIC ISAACSON, Vice President for Commercial Assets for
ConocoPhillips, and DAN CLARK, Manager of the Cook Inlet Assets
for ConocoPhillips, introduced themselves.
MR. ISAACSON stated the following into the record:
We at ConocoPhillips have worked diligently with
Enstar over the last 22 months and invested a lot of
time and effort to develop a gas sales contract. A
contract that we believed would be acceptable to the
Regulatory Commission of Alaska. And we made that
judgment based on indications inherent in the
commission's other recent decisions on gas pricing in
the inlet, and also upon the recommended pricing by
the regulatory affairs and public advocacy group
within the attorney general's office, known as RAPA.
These decisions and recommendations are as follows:
· In 2001 the RCA approved a 450 Bcf contract
between Enstar and Union that used Henry Hub as
the price basis. Henry Hub is the major trading
hub in the Lower 48.
· In 2006 the RCA rejected the same pricing
mechanism when the Enstar Marathon contract was
proposed. During that hearing RAPA put forward
what is known as the Cook Inlet Composite Index,
otherwise known as CICI. They put that forward as
the proposed appropriate price for Cook Inlet
gas, which is well below Henry Hub.
· Now in 2008 the RCA rejected what we brought
forward, which was CICI, as an appropriate price
for as long as LNG is being exported.
By this record, it's very difficult to determine what
pricing model the RCA will find acceptable for Enstar
to recover their costs. At one time even LNG was being
proposed as a possible index. Also consistent with
these same past RCA rulings, we removed the current
affects of transportation to production taxes and
incorporated the self imposed production price cap,
the CICI index, that had historically been below Henry
Hub.
11:02:59 AM
The contract that we negotiated with Enstar also set
forth the framework for Enstar to work with us on
studies for using [the] LNG plant for future gas
storage. Basically to secure gas supply here to the
Anchorage bowl.
We at ConocoPhillips certainly had no interest in
spending all the resource time we did over that 22
months developing a contract that we did not believe
would be approved. Please appreciate Mr. Chairman that
our job in developing a contract that we thought would
be approved is significantly hindered by the lack of
clarity and the inconsistent signals that the
commission sends to the industry.
Mr. Chairman, what the Cook Inlet needs now for its
long-term health is more activity not less. How many
independents do you see actively exploring or
developing gas in the Cook Inlet today? To attract
this activity and in order to keep the Cook Inlet
alive into the future, we need to have a transparent
pricing mechanism that allows a fair market price for
the investment in this basin in the Cook Inlet basin-
which has distinct cost issues and distinct risk as
compared to the Lower 48 basins, which were proposed
as pricing mechanisms.
With all that being said, ConocoPhillips is continuing
to work with Enstar to develop contractual terms that
we believe will resolve this issue. Additionally, we
would like to address the public's concerns on the gas
deliverability that arose after many corporations and
businesses received Enstar's written communications.
11:05:01 AM
The RCA stated that ample gas supplies existed in the
proposed contracts. These were scheduled to start
January 1, 2009 and supply Enstar's uncontracted gas
needs for the next five years. Right now some of the
concern is that after January 1 the gas goes away.
It's there. In fact, there's an existing RCA approved
contract that Enstar can call on for the needed gas in
2009. As many of you know the recent export extension
that we received has allowed ConocoPhillips to embark
upon the largest development program we have had in
the Cook Inlet for some time. In 2008 and 2009 we plan
to invest approximately $250 million gross to drill
wells in our North Cook Inlet unit and Beluga River
units to increase deliverability and gas resource in
the Cook Inlet.
So to conclude, ConocoPhillips is investing
significant amounts of new capital in the Cook Inlet.
We want to see this issue resolved and are working
with Enstar to do so. We see the opportunity for
continued business investment in the Cook Inlet, but
need to realize a market price commensurate with the
realities of the cost and risk environment associated
with working in the Cook Inlet basin.
11:06:38 AM
SENATOR THERRIAULT asked for information on the existing
contract that could be called on to fill the shortfall.
MR. ISAACSON explained that it's the Beluga River contract that
Enstar alluded to that goes through 2009.
MR. CLARK added that Enstar has the right to call on as much gas
as they need or desire. The issue is that above a certain point
it isn't guaranteed and what ConocoPhillips is saying is there
is a supply that it would make available if they called upon it.
SENATOR THERRIAULT asked what the price mechanism is on that
gas.
MR. CLARK said it's indexed to the price of oil; it's the one
that was quoted at $11.20
SENATOR HUGGINS observed that $11.20 is the highest gas price.
MR. ISAACSON agreed.
CHAIR FRENCH said he can understand the frustration with having
the Henry Hub and Cook Inlet pricing mechanisms approved and
then disapproved. Now there's a third, RCA approved "basket,"
pricing mechanism laid out on page 28 of the order that uses
price points from the El Paso Permian [Basin]; Panhandle [Tx.-
Okla]; El Paso San Juan [Basin]; Kern River [Opal Plant]; and
TCPL Alberta, AECO-C. Enstar is now going to ask if you'll buy
off on that new pricing mechanism, he said. What it boils down
to and why there's a hearing today is that 400 customers out
there feel like they're getting levered. Enstar thought it had a
deal and it doesn't, and they'll be asking you to agree to a
lower price. "If the method that the RCA has suggested to you
isn't a good one, what is?" It's a fair question, he said,
because if you're going to say no, I need an idea of where you
need to go with your gas prices to keep everybody warm and dry
this winter.
MR. ISAACSON restated that the contracts they submitted used the
pricing mechanism that was recommended by RAPA in 2006 and the
market dynamics today also suggest hints of pricing mechanisms.
He noted that Chevron/Union has chosen not to renew an option on
a contract that was 3 Bcf at Henry Hub price; at a recent
conference they basically quoted the high cost of drilling,
developing and exploring in the Cook Inlet. The cost to work in
the Cook Inlet has to be balanced by the market price to
stimulate activity. In comparison, the basket of basins that
were referenced in the RCA order are all in the Lower 48. In the
industry those are called a resource play because they have
almost no risk. "The risk is how cheap you can drill because you
step from location to location to location and find gas." In the
Cook Inlet the costs are considerably more. "We're drilling 9
wells, $250 million gross, and there's considerable risk."
CHAIR FRENCH asked how much each well costs.
MR. ISAACSON replied it depends on the location and the field.
Currently they're drilling in the North Cook Inlet and the
Beluga River field. It isn't a low-cost environment.
MR. CLARK added that it's between $25 million and $30 million
per well.
CHAIR FRENCH referenced a presentation Chugach [Electric
Association, Inc.,] made yesterday about the price difference
and asked if the negotiated $9 price would drop to about $7.40
under the RCA price cap.
MR. ISAACSON replied that's roughly correct; Enstar is quoting a
15 percent difference.
CHAIR FRENCH observed that the argument is basically over a 15
percent price gap.
MR. ISAACSON replied, "Given a certain set of assumptions about
what the various indices will do over time, but yes."
11:13:25 AM
CHAIR FRENCH asked if he agreed with the characterization that a
little over half of the total supply in the Cook Inlet basin is
exported and a little less than half is burned locally.
MR. ISAACSON replied it looks like the total export of gas for
the basin will be about 45 Bcf in 2008.
CHAIR FRENCH questioned how much will be sold to Enstar assuming
the contracts are approved.
MR. CLARK replied it varies over time but for 2009 it's 1.1 Bcf.
CHAIR FRENCH reiterated that he'd trying to get an idea of how
much is exported compared to how much is burned locally.
MR. CLARK said the existing contract from the Beluga River field
is scheduled to be roughly 4 Bcf for 2009. The contract for 1.1
Bcf is in addition to that.
CHAIR FRENCH calculated that ConocoPhillip's total sales to
Enstar for a year would be about 5 Bcf.
MR. ISAACSON said that is what the anticipated sales are for
next year.
CHAIR FRENCH commented that Enstar must buy the lion's share of
gas for local usage from Marathon.
MR. ISAACSON clarified that the gas actually comes from Union
under a previously approved contract.
MR. CLARK added it's the 450 Bcf contract that was referenced
before.
11:15:04 AM
SENATOR WIELECHOWSKI asked if there has to be an adequate supply
of gas for in-state use before getting approval for export.
MR. CLARK said that's correct.
SENATOR WIELECHOWSKI asked what ConocoPhillips predicted the
Cook Inlet reserves to be when they submitted their export
license.
MR. CLARK said he didn't recall.
SENATOR WIELECHOWSKI recalled it was about 1.5 trillion [Bcf].
MR. ISAACSON said he remembers it was about 1.7 [Bcf].
SENATOR WIELECHOWSKI asked if that's roughly a 20-year reserve
when weighed against the Cook Inlet demand.
MR. ISAACSON said he believes that's about right.
SENATOR WIELECHOWSKI asked if a typical gas reserve lasts about
8 years.
MR. ISAACSON said he understands that a typical Lower-48 reserve
lasts between eight and ten years.
SENATOR WIELECHOWSKI observed that there's plenty of gas in the
Cook Inlet.
MR. ISAACSON agreed that the available supply is adequate.
SENATOR WIELECHOWSKI asked if he has an idea what reserves are
expected from those nine wells.
MR. ISAACSON said they obviously have an idea after looking at
the economics, but from a competitive standpoint that
information is confidential. The issue for the Cook Inlet is
deliverability and that's the essence of the need for the LNG
plant. As previously mentioned, a flat profile is important to
keep wells from being damaged by production swings. "Drilling
the wells that were being drilled are for deliverability
reasons."
SENATOR WIELECHOWSKI asked what Chevron is doing with their gas
if they didn't submit a bid to deliver gas to Enstar.
MR. ISAACSON replied, "I wouldn't pretend to know what a
competitor is doing."
SENATOR WIELECHOWSKI asked where anyone drilling in the Cook
Inlet would sell their gas in a market that, other than the LNG
plant, is stranded.
MR. ISAACSON clarified that Chevron didn't exercise a future
option; it's not gas for today and he doesn't know what their
deliverability status will be in the future.
11:18:19 AM
REPRESENTATIVE GARA said he understands the problem of not
exporting the gas, but he's interested in knowing how long the
supply of gas that's being exported would last if it were used
only in state.
MR. ISAACSON replied it was quoted earlier that the in-state
usage is 70 Bcf/year and this year ConocoPhillips expects to
export 45 Bcf. The term of the license export is less than 100
Bcf so it would last less than a year.
REPRESENTATIVE GARA asked if what's remaining in those fields
would last less than a year.
MR. ISAACSON pointed out that he specifically asked how long the
gas that is already approved for export would last.
REPRESENTATIVE GARA clarified that he is interested in the
fields that ConocoPhillips is exporting from, and how long that
gas would last if it were kept for in-state use.
MR. ISAACSON said it's difficult to say because without exports
those fields would be shut down and there's no way of knowing
what you'd get back when they're restarted.
REPRESENTATIVE GARA said he was encouraged to hear that
negotiations are ongoing. Referring to previous testimony about
having difficulty figuring out what standard the RCA applied
with the price cap, he asked if they could sit down and work
that out directly with the RCA...
MR. ISAACSON clarified that ConocoPhillips isn't a party to the
RCA proceedings. Those are between Enstar and the RCA, which is
the commission that sets Enstar's rates.
REPRESENTATIVE GARA said what he's trying to get at is whether
there's someone at the RCA that ConocoPhillips could talk with
since they said earlier that it's difficult to know what the RCA
order requires.
MR. CLARK replied that the order itself is clear. The past
rulings are confusing and make it difficult to come forward with
a contract that could be approved. "With all the effort that we
did, obviously we got it wrong."
MR. ISAACSON added that they've understood the guidance all
along but the latest ruling has created confusion because it
appears to be another change in approach. "Each ruling of itself
is clear; the problem is that it's changed over time."
REPRESENTATIVE GARA asked if the current ruling is clear.
MR. CLARK replied the ruling is clear as it's written; what
isn't clear is the direction for basing price in a basin that
has less and less activity over time.
11:22:09 AM
CHAIR FRENCH said it's clear to him that the proposal roughly
amounts to a 15 percent reduction in his gas bill. That's what
he took away from the market basket pricing that the RCA is
proposing.
MR. ISAACSON said that Enstar put out information bullets on
that and it isn't 15 percent of your gas bill it's 15 percent of
this particular contract. For the average consumer the impact of
having accepted the contract as originally filed was about
$2.00. With the RCA mandated amendments the average consumer's
gas bill would be $17 lower over a year.
CHAIR FRENCH acknowledged that in his letter he erroneously
extrapolated that term onto all the Cook Inlet contracts that
would come up in the future.
SENATOR WIELECHOWSKI pointed out that that's for this year but
the savings for Cook Inlet consumers would increase rather
dramatically in future years.
MR. ISAACSON agreed that the volumes on these contracts increase
over time so as a relative proportion it probably would change.
SENATOR WIELECHOWSKI added that there's also precedential value
for future contracts for in-state gas use.
MR. ISAACSON agreed. But, he said, it also sets a precedent for
attracting exploration and development in the Cook Inlet.
CHAIR FRENCH thanked Mr. Isaacson and Mr. Clark for making time
to come and talk to the committee and welcomed the
representative from Marathon Oil.
11:24:25 AM
CARRI LOCKHART, Manager of Production Operations for Marathon
Oil in Alaska, read the following statement into the record:
Marathon has operated in Alaska for more than 54
years, and we value working with all stakeholders
toward achieving improved gas supply security for the
people of Southcentral Alaska. To illustrate this,
over the past 6 years alone, Marathon has invested
more than $450 million in the Cook Inlet and has
drilled 65 producing wells. We have a total of
approximately 200 employees and contract personnel
carrying out our daily operations, and these are high
paying, skilled positions that bring positive economic
impact to the Peninsula. We are proud of our long-
standing business relationship in the community and
our demonstrated track record of helping meet the
energy needs of local markets.
Consistent with this commitment, Marathon and Enstar
have been engaged in active gas supply negotiations
for many years and have produced two completed
contracts for RCA approval, APL V and the current APL
VI. Unfortunately, neither have been approved despite
the hard work and efforts of all parties to achieve
the necessary balance of reliable, long-term supply
and competitive pricing for the required services. We
believed both agreements provided a reasonable and
fair solution for Marathon, Enstar, and most of all,
for the customers of Enstar - the people of Alaska.
We are not here to bring you the industries' problems
to solve. We are here today to continue the effort to
find solutions, and as part of this effort, to provide
some added context around this matter in the hopes of
increasing understanding of the market realities we
are facing and the need for rational, fact-based
decision making that will be in the long-term best
interest of all stakeholders. The issues we face
cannot be boiled down to simplistic solutions. These
are complex matters that demand careful consideration
of the long term consequences of all decisions that
are made. I want to assure you that we are committed
to doing our part to reach the best possible outcome
for all concerned.
11:26:47 AM
In this regard, we are once again working with Enstar,
for the third time, to reach an agreement that will be
acceptable to the RCA, and there will undoubtedly be
more effort to follow with other Alaskan utilities.
However, I would be remiss if I left you with the
impression that all is well. It is not. The process of
reaching closure on gas contracting has become very
troublesome. The lack of well defined standards has
made negotiating a contract difficult, with much
uncertainty around what will be acceptable to the
regulatory agencies. This, in turn, leads to
uncertainty for the utilities, for the gas producers
and for the area citizens. For the utilities including
Enstar, gas reliability is central to their customer
service requirements, yet we sit here today with
uncertainty abounding. For Marathon, we face an
investment commitment in order to ensure this high
reliability, yet at the same time we must strive to
find ways to manage subsurface technical risk,
operational risk and escalating cost of operations, as
well as the market volatility and uncertainty - These
all must be managed in a way that enables projects in
Cook Inlet to effectively compete with other global
projects in our portfolio for finite funding -
especially in the challenging economy that we are
facing today. It is imperative that all parties to
these discussions understand the potential unintended
consequences of meddling with such a delicate
commercial balance.
Marathon is the minority owner of the Kenai LNG plant
with our partner and operator ConocoPhillips. Some
have taken the view that this strategic facility
should be closed to that gas export volumes can be
kept for local consumption with accompanying price
reductions. While on the surface, this might seem to
make sense, taking such action could have profoundly
negative consequences for Southcentral Alaskan gas
customers. As the State recognized, the plant provides
critical scale for upstream natural gas investments in
the Cook Inlet and is a vital backup supply to the
local utilities. It's existence is essential despite
potentially different views on future Cook Inlet gas
supplies. For example, the partners are investigating
the potential for alternatives at the plant as a means
to extend its life and add to energy security of cold
peak day supplies for Alaskan consumers. It is
absolutely essential to understand that while gas
resources can be plentiful, it matters very little if
the industry is not able to produce, transport, store,
and deliver the product at the right place at the
right time. This is an industry challenge for all
energy participants, not just producers. Nor is the
challenge merely to find an immediate solution at the
expense of future, long-term gas supply security.
Marathon will continue to work toward a solution in
pursuing new gas contracts, but we cannot be expected
to do so alone. It takes trust, collaboration, and a
desire to understand that solutions will not come from
shifting blame from party to party. We look to be a
partner with industry, government, and regulators to
find these solutions.
11:29:58 AM
CHAIR FRENCH thanked her for coming and for her statement. He
said the last scheduled witnesses are from the Department of
Law, regulatory affairs and public advocacy section.
11:30:28 AM
STEVE DE VRIES, Assistant Attorney General, Civil Division,
representing Regulatory Affairs and Public Advocacy (RAPA),
Department of Law, introduced himself.
CRAIG TILLERY, Deputy Attorney General, Civil Division,
Department of Law, introduced himself.
MR. DE VRIES offered to answer questions.
11:31:20 AM
CHAIR FRENCH asked him to explain to the public what it is he
does. Mr. Stoller touched on how the two roles within the
Department of Law (DOL) differ but some background would be
helpful.
MR. DE VRIES explained that DOL is authorized by AS 44.23.020(e)
to have the attorney general participate as a party before the
RCA when the attorney general believes that it's in the public's
interest. In those proceedings where it's deemed important for a
public advocacy role to be identified, the attorney general
participates as a public advocate. That role includes
representing the interest of consumers and making sure that
utilities get a square deal as well. It's designed to ensure
that everybody is treated fairly and that reasonable results
come out of commission proceedings in which the attorney general
participates.
CHAIR FRENCH asked how to balance the tension between the two
needs. Enstar needs to move gas and the consumer needs to pay as
little as necessary to keep the gas fields producing.
MR. DE VRIES said that's a critical question and the role is
basically to identify what a reasonable price is for gas. To
that end an outside economist was hired to look at pricing and
the precedent that the commission had established and guidelines
it had provided in the past. In 2001, under the Unocal contract,
the commission moved toward a market-based structure allowing
the use of Henry Hub as a pricing proxy for Cook Inlet gas.
Before that time most of Enstar's supply contracts used a base
price with escalators. The commission allowed that market-based
structure because it was characterized as an exploration
contract, not harvesting existing reserves. Unocal had promised
to find new reserves to meet the perceived gas supply shortage
facing Cook Inlet. The next contract before the commission was
the 2003 Northstar gas contract to supply gas to Homer. It too
was characterized by the commission as an exploration contract
because additional delineation and development was required. The
next contract presented to the commission was ATL V Marathon,
which the commission rejected in 2006. It was not characterized
as an exploration contract. The pricing was based on Henry Hub
and the commission rejected it for a number of reasons among
which was that a nexus for using Henry Hub for pricing Cook
Inlet gas was not demonstrated. Thus the viability of the Unocal
precedent didn't apply. The commission did provide some guidance
in that order, labeled U-06-2 Order No. 15. It said that any
contracts presented to the commission that are based on a market
proxy must have some demonstrated nexus to Cook Inlet. In that
docket expert testimony was presented and the attorney general
first advanced what has been characterized as the Cook Inlet
Composite Index. It provided a legitimate nexus to Cook Inlet by
providing five pricing points representing the logical places
that Alaska gas would trade if it were ever to be exported to
the West Coast.
11:37:08 AM
CHAIR FRENCH referred to page 7 of U-08-58 Order No. 8 and asked
if TCPL Alberta [(AECO-C)], Canadian Border [(Sumas)], PG&E
Malin, PG&E City Gate [and SoCal Gas] were the pricing points
that made up the so-called Cook Inlet Composite Index.
MR. DE VRIES said yes; CICI was the proxy that the attorney
general first advanced in the APL V contract that the commission
rejected in 2006. He emphasized that was the cap, the price for
gas that we thought would be fully compensatory to producers to
meet Enstar's substantial swing needs was that composite price.
Today ConocoPhillips said they used that price in the current
contract, but they used it as the floor rather than the ceiling.
They built upon the CICI basket and added tiers that function to
increase the price above what RAPA previously recommended.
11:38:46 AM
CHAIR FRENCH asked if he's saying that the tier concept is new
in these contracts. "Isn't that a fairly standard natural gas
pricing mechanism?"
MR. DE VRIES replied, "Tier contracts are a new concept in
Alaska gas contracting for Enstar."
SENATOR WIELECHOWSKI asked if he said that the Unocal contract
was the first market-based contract.
MR. DE VRIES said yes; it was the first contract that developed
a price by using a Lower 48 natural gas trading hub as a proxy
for pricing Cook Inlet gas.
SENATOR WIELECHOWSKI asked on what the RCA based pricing
decisions before the Unocal contract.
MR. DE VRIES replied he didn't litigate those cases and so he
didn't have an answer.
SENATOR WIELECHOWSKI asked if he agrees or disagrees with the
producers' testimony that the commission has been inconsistent
in applying pricing standards.
MR. DE VRIES said it could be viewed that way, but there is a
thread that explains what the commission has done and why they
have done it. Lessons from the earlier Unocal and Northstar
contracts were that it would allow Henry Hub based pricing for
exploration contracts.
SENATOR WIELECHOWSKI questioned whether Unocal and Northstar
actually did much exploration.
MR. DE VRIES replied some figures indicate that Unocal spent in
excess of $200 million, but he can't say how much went toward
exploration and exploration related efforts.
SENATOR WIELECHOWSKI asked if the standard the commission
adopted will encourage investment in the Cook Inlet for further
gas exploration.
MR. DE VRIES replied he isn't qualified to answer that question.
CHAIR FRENCH said it's fair to point out that you're looking at
this from the perspective of Enstar and the consumer.
11:41:43 AM
MR. DE VRIES said that what he can say is that the pricing proxy
that the commission structured is competitive with what is
obtained in producing hubs in the Lower 48. "So from that
perspective it appears to be certainly [a] viable means of
comparison."
CHAIR FRENCH asked if it's simpler to say that he doesn't
believe that the producers will lose money under this pricing
structure.
MR. DE VRIES replied he can't answer that question. "Evidence
regarding the producers' cost to do business in the Cook Inlet
was not produced nor discussed nor a matter that was before the
commission."
SENATOR THERRIAULT remarked that this function of the attorney
general is to look out for the consumer, but it isn't done with
absolute blinders because driving the cost of gas too low would
make it unsustainable. He asked how those things are balanced.
11:43:26 AM
MR. DE VRIES replied the balance is to consider all the factors
that will impact the utility market. In the current case the
attorney general looked at the evidence regarding: existing
reserves; a pricing proxy and what was suggested to be
compensatory; earlier direction from the commission about what
would and would not be reasonable; available information about
when Enstar needed gas; and pricing vehicles that could be
viewed as a reasonable proxy for Cook Inlet gas. Also, they did
not advocate for a pricing structure that, in RAPA's opinion,
would not have been reasonable and compensatory.
11:44:36 AM
SENATOR HUGGINS asked if it's practical to expect that Enstar
could call on the existing Beluga field contract and pass $11
gas on to those 400 customers.
MR. DE VRIES said if that contract is a viable source for
additional gas for Enstar, they could call on it and those gas
costs would be passed along to consumers.
11:45:30 AM
REPRESENTATIVE GARA asked if the state is entitled to take as
royalty in kind one-eighth of the gas that is exported.
MR. DE VRIES replied he isn't the one who can answer that
question.
REPRESENTATIVE GARA asked if there is any advantage to Enstar
not to negotiate for a lower price with Marathon and
ConocoPhillips and tell consumers that the $11 gas from Beluga
is the available option.
MR. DE VRIES replied it would obviously cost consumers more and
he must note that this is the first he's heard that the Beluga
contract offered a vehicle for meeting Enstar's 2009 gas needs.
He didn't recall that Enstar mentioned that during the course of
the proceedings before the commission. "I don't know if Enstar
would care to comment on that before the committee, but in any
event, I don't know that that's true nor do I know that it's not
true."
11:47:45 AM
REPRESENTATIVE GARA questioned whether consumers should worry
that Enstar might appeal leaving the Beluga field and paying
more for gas as their only recourse.
MR. DE VRIES replied he had no idea of the advantage that might
provide to Enstar.
11:48:37 AM
CHAIR FRENCH found no further questions and said that on
December 2 he'll wake up with a keen eye for developments in the
case. He added that he continues to believe that the 400 people
who received the letter are caught in the middle, but he has
every faith that these big commercial players will work this out
before next week.
There being no further business to come before the committee,
Chair French adjourned the meeting at 11:49:36 AM.
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