Legislature(2009 - 2010)BUTROVICH 205
02/11/2009 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Overview: In-state Use of Cook Inlet Gas | |
| Enstar Natural Gas Company | |
| Regulatory Commission of Alaska | |
| 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 RESOURCES STANDING COMMITTEE
February 11, 2009
3:33 p.m.
MEMBERS PRESENT
Senator Lesil McGuire, Co-Chair
Senator Bill Wielechowski, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Hollis French
Senator Bert Stedman
Senator Gary Stevens
MEMBERS ABSENT
Senator Thomas Wagoner
COMMITTEE CALENDAR
Overview: In-State Use of Cook Inlet Gas
Invited Presenters: Chugach Electric, Enstar, ML&P, RCA,
Department of Law, Division of Regulatory Affairs & Public
Advocacy
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
BRADLEY EVANS, CEO
Chugach Electric Association
POSITION STATEMENT: Presented Chugach's view on in-state natural
gas use.
COLLEEN STARRING, President
Enstar Natural Gas
POSITION STATEMENT: Presented Enstar's position on in-state
natural gas use.
BOB PICKETT, Chairman
Regulatory Commission of Alaska (RCA)
POSITION STATEMENT: Explained the RCA's position on in-state
natural gas use.
DANIEL PATRICK O'TIERNEY, Chief Assistant Attorney General
Division of Regulatory Affairs and Public Advocacy
Department of Law (DOL)
POSITION STATEMENT: Commented on in-state natural gas use
issues.
ACTION NARRATIVE
3:33:43 PM
CO-CHAIR LESIL MCGUIRE called the Senate Resources Standing
Committee meeting to order at 3:33 p.m. Present at the call to
order were Senators Huggins, French, Stedman, McGuire and
Wielechowski.
3:34:35 PM
^Overview: In-State Use of Cook Inlet Gas
CO-CHAIR MCGUIRE announced the overview of Cook Inlet gas.
BRADLEY EVANS, CEO, Chugach Electric Association, started off
the discussion saying that Chugach is Alaska's largest electric
utility; it's vertically integrated doing generation,
transmission and distribution. It produces 27 GW of power and
has 80,682 metered retail locations. It has wholesale contracts
with Matanuska Electric Association, Homer Electric Association
and the City of Seward for 48 percent of their power; 43 percent
of it goes to retail and 9 percent goes to economy energy. Their
operating revenues total $288,292,112.
3:36:01 PM
Chugach serves power up and down the Railbelt grid through
various wholesale contracts and retail membership (slide 4). The
load center areas are the Interior, Fairbanks, Anchorage/Mat-Su
and Kenai and these are interconnected by very weak links. They
have about 75 MW of capacity with each of those links. Chugach
doesn't have the ability to transfer generation from one end all
the way to the other without some restriction.
MR. EVANS said that Railbelt generation is about 1,500 MW of
installed capacity and it has an annual peak load of 850-900 MW.
3:36:28 PM
SENATOR STEVENS joined the committee.
3:36:41 PM
SENATOR FRENCH asked him to explain the physical restriction in
moving power up and down the grid. Could power be moved from the
Anchorage generating stations to keep Fairbanks' lights on?
MR. EVANS answered no and he explained that the utilities grew
up around their population centers and eventually became
interconnected. Each of the load centers has enough generation
to serve the load there; so if you lost the interconnection the
local area generation could be used. But they don't have the
ability to move enough power to Fairbanks over the tie because
its peak demand is probably around 200MW and the tie is capable
of only 70 MW. The Kenai is a 80-90MW load and has a 70 MW tie.
They are usually moving power south off the Kenai up into the
Anchorage Mat/Su area.
3:38:05 PM
The Railbelt has a little more than 1,500 MW of installed
electric capacity; the peak load is 850-900 MW. Of that, Chugach
has 530 MW installed and through lease agreements for a unit
down on Kenai and Bradley Lake they total 629 MW (slide 6).
3:38:20 PM
SENATOR FRENCH asked why there is so much more installed
capacity on the Railbelt than is being used on an annual basis.
MR. EVANS explained that Chugach is required to have a certain
amount of reserves and they usually shoot for 30 percent. Part
of the original arrangement is that each area before they became
interconnected had its own generation. After they became
interconnected they had a surplus. That surplus isn't all
efficient, though. Some of the equipment is over 40 years old
and you wouldn't really want to run it. "It's kind of the Alaska
thing," they never throw anything away as long as it's running.
Out of that their base load is little bit south of that peak
load. You can run hydro all the time so it doesn't have 100
percent peak load.
3:39:41 PM
Today the Chugach system is 90 percent natural gas-fired and 10
percent hydro. Their long term vision is to reduce dependence on
fossil fuels, for supply, security, and environmental reasons -
and they hope to reverse the 90/10 fossil/hydro to 10/90.
CO-CHAIR MCGUIRE said the committee would like to see and get
updates of their portfolio mix as they go along in looking at
setting energy policy.
3:41:08 PM
MR. EVANS said that Chugach has four natural gas suppliers -
Marathon, ConocoPhillips, Chevron and ML&P. They have four
contracts that are indexed to three commodities - West Texas
Intermediate (WTI), heating oil and natural gas - and the prices
change quarterly based on how those commodities react in the
open market. They are volumetric contracts to be consumed in
2010 and 2011.
3:41:27 PM
CO-CHAIR WIELECHOWSKI asked the status of negotiations to get
gas supply in the future.
MR. EVANS said he has confidentiality agreements, but they are
ongoing and not easy to negotiate.
3:42:17 PM
CO-CHAIR WIELECHOWSKI asked if they filed something with the
Ninth Circuit Court of Appeals.
MR. EVANS replied not as part of their gas negotiations.
CO-CHAIR WIELECHOWSKI asked what the rationale was to block the
Department of Energy's (DOE) extension of the LNG plant.
MR. EVANS replied that Chugach didn't agree with exporting LNG.
3:42:45 PM
CO-CHAIR WIELECHOWSKI asked if he thought exporting LNG has an
impact on Chugach's ability to negotiate a reasonable price for
Cook Inlet and Railbelt consumers.
MR. EVANS replied a balance has to be reached between all the
economic interests. He understands that LNG exports are
important for production in the Cook Inlet and that there might
be a loss of reserves if they don't produce at a certain rate.
3:43:11 PM
SENATOR HUGGINS asked in the near term if they had an increased
supply of natural gas, would that make him more optimistic.
MR. EVANS replied that question is probably why he is here
today. They are very concerned with the mix of players and
policies. It will take at least 10 years to make substantial
headway in getting a substitute for Enstar's natural gas supply;
in the meantime there are supply issues.
3:44:46 PM
CO-CHAIR WIELECHOWSKI asked how much Chugach pays for its
natural gas now.
MR. EVANS replied their current average price is $6.67/mcf. They
consume about 30 bcf/yr.
CO-CHAIR WIELECHOWSKI asked if they had a 22 percent increase
similar to what Enstar struck, what would that do to the
Southcentral consumers' electricity bills.
MR. EVANS answered that cost was around $8/mcf; so if you
ratchet up from $6.67 you are looking at another 15 percent
increase. Half of Chugach's bill is gas and he showed them a
slide of a residential bill. He said that Enstar delivers the
molecules, but Chugach converts the molecules to a different
energy form and there is a tremendous cost associated with that;
so the base rate of their bill is built upon that.
3:47:14 PM
Current Chugach Activities were on slide 11. Gas contract
negotiations are underway for volumes beyond current contracts.
They are working on building more efficient combined-cycled
generations so they can lower consumption of fuel by 25-40
percent depending on which unit is shut down. Their conservation
program has already seen good results, and they are also working
on small wind and hydro renewables.
He said Chugach's contracts with the people it sells power to
have been modified so those projects can be brought online
without coming back to the RCA for modifications. They are also
support the Railbelt Unified Power Provider concept, which is
necessary for the various utilities to work under to be able to
migrate away from fossil fuels.
3:48:59 PM
SENATOR STEDMAN asked where the other 90 percent of energy will
come from when they flip to 10 percent fossil fuel.
3:49:13 PM
MR. EVANS replied that under the Railbelt Unified Power Provider
several other potential projects are coming up that are worth
pursuing. They have been engaged in the Fire Island wind
project, one outside of Healy and another one on the Kenai. They
need geographical diversity because "the wind is blowing
somewhere." The obvious hydro that is worth pursuing is Susitna.
The reason they think if failed in the first place is because it
was too large; so scaling it to meet today's needs with the
option of adding on later could be the right approach. For
instance, the civil part of the project could be built, but the
transmission and the power house that is needed for today's load
could be installed. This is the expensive part, but other
proposals include building the dam in stages of height. He said
there has also been an interest in Chakachamna and other
geothermal projects. He emphasized, however, that "You
absolutely need the unification of the Railbelt utilities to do
this. It's not something that one utility can take on by
themselves."
3:51:14 PM
SENATOR STEDMAN asked if they could get to 90 percent non-fossil
fuels without Susitna and Chakachamna.
MR. EVANS replied he had no good answer; but he thought they
needed a large scale hydro approach to get there quickly.
3:51:57 PM
CO-CHAIR WIELECHOWSKI recollected that the whole Susitna project
would cost $18 billion. At what point do you say well for that
much money maybe they do a bullet line instead?
MR. EVANS answered that $18 billion is a high number for the
ultimate build-out of 1500 MW. If it was scaled back to 400 MW,
it might be more doable. They need to run good numbers through
an integrated resource plan model.
3:53:02 PM
CO-CHAIR WIELECHOWSKI said the legislature is being pulled in a
lot of directions this session to incentivize the bullet line,
and they want to know where best to spend their efforts. He
asked Mr. Evans to continue giving input on this issue.
3:53:36 PM
MR. EVANS answered they are just about ready to issue the
contract for the integrated resource plan for the electric
utilities in the Railbelt and those numbers would be run through
it. That would indicate a preferred path to follow this year, at
least on an economic basis.
CO-CHAIR WIELECHOWSKI asked if the governor's proposal of a
joint utility fits in with his vision.
MR. EVANS replied yes, and that the governor supports his
mission, but it doesn't mean they have a detailed plan. It is a
good first step to solve this problem in the most efficient
manner.
CO-CHAIR MCGUIRE asked what the timelines of the governor's
proposal are and what conversations had he been a part of.
MR. EVANS replied they meet weekly with the administration on
this with the other CEOs, the AEA and the RCA. He hoped to get
enabling legislation this year, and then it would take a year to
develop a more detailed transition plan; it's like bringing
different businesses together. He would hope to report on it at
the next session.
CO-CHAIR MCGUIRE asked if he meant setting up the structure for
the task force.
MR. EVANS answered no; more along the lines of a corporation
that everyone could work together in.
CO-CHAIR MCGUIRE asked if the utilities would be incentivized to
become members.
MR. EVANS said that is a good question. Chugach is there now,
and he thought the incentive was to have a more affordable
future.
3:57:48 PM
CO-CHAIR MCGUIRE asked what if individual utilities don't want
to be members.
MR. EVANS replied that would be a problem. That utility might
contract services in or buy power from the Regional Railbelt
Energy Corporation. Industry has a lot of incentive to work
together if you look at the structural problems.
SENATOR HUGGINS said these things are easier broken down in
phases and asked if they had four or less phases, how that would
help unification.
MR. EVANS answered that enabling legislation would develop a
light framework around developing the concept. The first year
would be spent studying an integrated resource plan to come up
with an affordable future for everyone. Governance and financing
matters would have to happen at the same time. The long term
would be the vision of going to renewables or not. It would be a
good thing to unify the transmission system that has different
owners, so if you're an IPP or renewable developer, you would
only have to deal with one person.
SENATOR HUGGINS asked if he is looking at a prototypical model.
MR. EVANS replied that Alaska is really unique in a lot of
different ways and sometimes it's inappropriate to take large
scale systems and bring them up here. They are taking the best
of what is out there to put something together that would work
for Alaska.
4:03:42 PM
MR. EVANS said the problem is that we are moving from an era of
abundance to limited supply. Security of supply and
affordability are issues and they collide with each other; many
organizations are involved and have different priorities. Prior
activities have not produced a comprehensive resource management
plan and management of the Cook Inlet is lacking.
4:05:13 PM
The graph of Cook Inlet gas production shows a steep cliff
starting in 2006. The slide on page 16 showed the gas demand:
LNG exports, gas utilities, electric utilities and military
bases. To reduce the demand they are trying load interruptions -
with other sources of energy, for instance - and conservation.
4:07:00 PM
They are suggesting that the Comprehensive Cook Inlet Resource
Management Plan would meet and protect consumer needs, address
fuel supplies security, increase transparency and information
sharing amongst the consumers, the producers and the
administration, provide input to a Railbelt Integrated Resource
Plan, provide guidance for investment decisions, optimize
resource management, and provide information for rational policy
decisions. All of the studies have been done, but "no one has
knit it together to make it work and we think we need to do
that." He said they need someone to give them some direction.
4:08:42 PM
SENATOR FRENCH asked to whom he is assigning this task.
4:08:57 PM
MR. EVANS said he didn't like investing this issue in one agency
because it crosses a lot of boundaries of divergent interest.
They have room for two agencies, like DNR and DOR, to be in
charge and then an advisory steering committee, made up of
consumers, stakeholders, RCA, the producers and the various
utilities for them to report to.
4:09:58 PM
CO-CHAIR WIELECHOWSKI said he liked this idea and said it merits
further discussion.
SENATOR HUGGINS said that Mr. Evans' point that bringing the
players together is very important, and he agreed that the
stakeholders should be brought in. The idea needs to be matured.
He stated the previous administration pursued the concept of the
state facilitating bringing one or more jack up rigs into Cook
Inlet for exploration and he asked for Mr. Evans' thoughts on
that and if he knew what happened to that initiative.
MR. EVANS replied it was an important initiative and he didn't
know what happened. Cook Inlet resources are scarce and
expensive and if they are going to be developed, maybe they need
to look at issuing different leases and how the state partners
with them, so consumers' expectations are realistic.
4:15:22 PM
SENATOR HUGGINS said his MEA "got skewered" because they were
pursuing a course of action that potentially would have involved
coal. He asked if that was part of a scenario for him in some
phase.
MR. EVANS replied that Chugach spent quite a bit of effort
looking at a coal model at Beluga and wanted to go down the
gasification path if they were to choose coal versus
conventional pulverized or fluidized bed. They would actually
get CO2 as a byproduct out of coal gasification, and that can be
used in the oil and gas industry to enhance recovery in the Cook
Inlet, a ready market. But it has a lot of risk, which they
couldn't take on by themselves. Coal is not very popular,
there's a lot of risk in terms of cap and tax trading systems
going forward and it was expensive. Also the coal technology
wasn't mature enough to take the risk in Alaska because when you
have project failure and you don't have backup, you have a
bigger problem than you started out with. He thought coal
gasification could be looked at again in another decade. In the
meantime a lot of other resources can be developed.
4:18:00 PM
CO-CHAIR MCGUIRE announced an at ease at 4:18 p.m.
4:19:37 PM
CO-CHAIR MCGUIRE called the meeting back to order at 4:20 and
announced that Ms. Starring would present an overview for
Enstar.
4:20:29 PM
CO-CHAIR MCGUIRE announced an at ease at 4:20 p.m. She called
the meeting back to order at 4:23 p.m.
^Enstar Natural Gas Company
COLLEEN STARRING, President, Enstar Natural Gas Company, said
the first graph was Enstar's 10-year supply outlook. On her
power point the blue line indicated their Beluga contract tied
to oil; the red line is the Marathon contract which is tied to
oil; the small pink and yellow lines are the deals they have
with both Conoco and Marathon selling gas at the weighted
average cost of the system. The year 2011 showed a 10 bcf
shortfall, and this continues to grow. Unocal has the option to
step down their contract by 3 bcf each year going out and 2008
is the first year they did that.
4:24:13 PM
Slide 3 showed Enstar's in-state gas market and the entities
that are receiving gas from Cook Inlet now are listed in yellow;
the light green are the military bases.
4:24:52 PM
CO-CHAIR MCGUIRE announced an at ease at 4:24 p.m. and called
the meeting back to order at 4:25 p.m.
4:25:23 PM
MS. STARRING said the teal circles were current or future
markets that could be served through a bullet line.
4:25:47 PM
Slide 4 showed current demand using their 10-year forecast in
the Interior and Southcentral. Enstar is projected to be about
42 bcf/yr., power generation is at 40 bcf/yr., LNG as it was
being exported when the plant was at full capacity was at 78
bcf/yr. If the Agrium plant came back, that would be another 55
bcf/yr. and other Cook Inlet industrials was at 6 bcf for a
total of 221 bcf/yr. and an average of 606 MMcf/day.
4:26:46 PM
Slide 5 indicated a Cook Inlet comparison of peak days for the
years 99/07/09 at -19°/-10°/-11°F. Total Cook Inlet
deliverability was estimated at 763/543/440 MMcf/day
respectively. Over a seven-year period, there was about a 30
percent per year decline in deliverability. This year they
experienced a new peak day on the system on January 3, a holiday
weekend when it was only -11°F, and Enstar transported 314
MMcf/day. The deliverability in Cook Inlet was only 440
MMcf/day. It's interesting that the LNG plant which diverts in
times of need was down to 40 MMcf/reserve. "That's what was left
in the Inlet and Enstar's concerns that as we look out and have
a sustained cold period that we are not going to be able to meet
the demand."
4:28:23 PM
To address some of these issues, Ms. Starring said, they had
completed various projects in the last two years spending $4.2
million. About five to six years ago the gas supply used to come
from the west side, but now it comes from the east side and the
system has had to be reconfigured, increase pressures, and add
compression to be able to get the gas where they need it at the
times they need it.
4:29:09 PM
MS. STARRING said in the coming years the Cook Inlet gathering
system could be a bi-directional line. Enstar is looking at
increasing compression on its 12 and 16 inch twin lines on the
east side of the Inlet. They could look at some kind of
subsidization of the tariff, LNG regasification and other
storage.
4:29:30 PM
SENATOR FRENCH asked what "incentives to deliver gas on the west
side" meant.
MS. STARRING replied that tariffs are associated with each of
the pipelines and most of the gas now comes from the east side.
Tariffs are involved when you ship back to the west and some
kind of a reduction in the tariff could happen on the Beluga
line.
4:30:28 PM
MS. STARRING answered Enstar has a requirement to develop
storage, and they are looking at the existing LNG facility and
infield storage, but they haven't been able to find a suitable
reservoir. However, she said, infield storage would probably be
a good partnership for all of the utilities to develop together.
SENATOR FRENCH said someone told him the answer to all our
problems or at least one component of getting between now and
first gas is an LNG import facility. How much would that cost or
could the valves be turned around?
MS. STARRING answered that slide 9 indicated they looked at
regasification equipment, which would address that need. They do
know that the LNG facility is critical to Southcentral for
short-term, mid-term and long-term needs, but it has many issues
around it - like FERC issues - and it could be used as a peak
shaving facility or as an import facility. Also a ship could be
brought in to supply peak needs as early as 2011, although she
didn't know what the LNG would cost.
4:33:24 PM
SENATOR FRENCH asked what a peak shaving facility operation is.
MS. STARRING answered that Enstar looks at their gas supply in
terms of base gas, seasonal gas, and peak gas. The peak needs
are why Enstar's load is so hard to serve. There may be 11 days
a year they need that peak amount of gas for that coldest time
of year. Having a re-gas facility would let them pull the gas
quickly to suit their needs in those cold periods.
4:34:14 PM
SENATOR HUGGINS reemphasized what Ms. Starring said, that you
can't turn your back on the key the LNG facility holds to lots
of scenarios. The capability flowing both ways of serving
emergencies and expansion is "hugely important."
4:34:52 PM
MS. STARRING said one producer in the Inlet has proved up 8 bcf,
but there is no pipeline. That would be about a $20-million
expenditure and they are considering it. That could help in the
short term and allow them to do additional exploration, but it
wouldn't be enough for the long term. World energy prices are an
unknown and importing LNG into Alaska is a foreign idea, but
that, too, should be explored. Enstar has been negotiating
contracts for the last four years; it has brought four before
the RCA and hasn't gained approval for any of them. A week ago
she sent out an RFP to seven producers; Enstar asked for strict
compliance with RCA Order 8 and are hopeful they will get a
response so they can purchase gas they need in 2011.
4:36:26 PM
SENATOR HUGGINS asked what the price tag is in going through an
RFP process.
MS. STARRING replied they have incurred $2.3 million for the
last two years in legal fees and other costs associated with the
negotiation and the approval process of contracts.
4:37:52 PM
CO-CHAIR WIELECHOWSKI said the biggest problem he sees is huge
spikes in price along with people on fixed incomes. Is it
possible to lock in today's low prices for the next 20 years?
4:37:54 PM
MS. STARRING replied she doesn't own the resource. The price is
negotiated with the producers and Henry Hub is at a record low.
A significant portion of one of their contracts is tied to Henry
Hub and it has been in the $4-$5 range. She was once involved
with a company that had a "frozen program" that allowed them to
negotiate a supply. At that time it was $5 for five years and it
wasn't easy to get. Over the lifetime of that contract,
consumers in a small community saved over $60 million.
SENATOR WIELECHOWSKI said he wanted to see efforts like that.
The Japanese were paying half of what Cook Inlet consumers were
at one time because they negotiated long-term contracts.
MS. STARRING said, "I understand that."
4:39:32 PM
She said Enstar has to continue making infrastructure
investments to just insure the energy security of its current
customers; however, they are a public utility and have a duty to
serve their future customers as well. Enstar believes that a
bullet line is the right solution, and now is the time to move
forward with that. That is what they intend to do.
CO-CHAIR WIELECHOWSKI recalled that Anadarko said absolute
earliest first gas is 2016. Enstar has testified that it needs
it by 2015.
MS. STARRING responded that there is no disconnect with Anadarko
who they talk to on a regular basis. Anadarko's first gas is
possible at 2016/17 and Enstar's need is 2015. There are ways to
bridge that one-year gap with storage or finding additional
resources.
4:42:07 PM
CO-CHAIR MCGUIRE asked if Enstar supports Chugach's concept of
having a comprehensive plan for Cook Inlet.
MS. STARRING replied that she supported the concept.
CHAIR MCGUIRE asked specifically what she thought about an
integrated co-op.
MS. STARRING said she hadn't been part of the weekly meetings.
Fundamentally, the business is a little different, so she would
have to see the plan. She is open to listening to any of the
ideas.
SENATOR HUGGINS asked what dynamic storage creates for Enstar.
MS. STARRING answered in the short term it has to be developed
to meet peaking needs. Long term, if there is a big line, the
optimum way to flow that line is the same amount every day; it's
not going to want to ramp up and ramp down. Enstar thinks
utilities should develop storage for themselves, because it
would smooth out the costs for their customers. They could buy
gas at non-peak times when prices were lower and store it for
use at peak times.
^Regulatory Commission of Alaska
4:44:31 PM
BOB PICKETT, Chairman, Regulatory Commission of Alaska (RCA),
said the RCA is the state agency that protects Alaska's rate
payers from unfair and unreasonable rates for public utility
service. A very important component of the rate for public
utility service is the price of gas in Southcentral Alaska.
These prices are passed through to the consumers directly, so
any increase or decrease in the price of natural gas has an
immediate effect on business owners or families' economic
wellbeing.
4:46:21 PM
We are going from an area of relative abundance and very
inexpensive natural gas to a time where constraints on supply
and deliverability are much more apparent, he said. Over the
last five years in Cook Inlet rate payers have seen an
unprecedented increase in the price of natural gas. The typical
large commercial user in 2003 paid $17,000 for natural gas
supplies while for that same amount in 2009 he would pay
$44,000. In 2003, the price for Enstar was roughly $2.55/mcf;
this year they are looking at $8.75/mcf, nearly double the Henry
Hub price.
4:47:13 PM
What is RCA's roll with natural gas in Cook Inlet? The RCA
regulates utilities under AS 42.05 and natural gas pipelines
under AS 42.06 for instate service. It is involved in the
natural gas arena in a couple of ways. They do not directly
regulate the producers, but they evaluate gas sale agreements
between utilities and the producers. The RCA's standard of
review considers whether the utility acted in a prudent manner
and whether the terms of the gas sale agreements insure reliable
and reasonably-priced utility service.
MR. PICKETT explained in this responsibility, the RCA is guided
by AS 42.05.431(a). Under this subsection, the RCA is required
to determine whether a gas sale agreement's particular terms
within such an agreement are unjust, unreasonable, unduly
discriminatory or preferential. In making this determination,
the utility filing a gas sale agreement with the RCA has the
burden of proof. And the RCA basis its decision on the record
developed in the proceeding. This determination must be viewed
in the context of Cook Inlet, which is unique among natural gas
markets in the United States.
The reserves-to-production ratio for Cook Inlet is approximately
10:1. This is in the same range as is typical for Lower 48
production areas. Cook Inlet is unique as it is the home of the
only plant in the U.S. that liquefies natural gas and ships it
out of the immediate area as LNG and it has been doing so for 40
years.
4:49:25 PM
MR. PICKETT said the RCA has determined that Cook Inlet is a
natural gas production basin.
SENATOR FRENCH asked why that finding is significant.
MR. PICKETT answered the significance is in looking at the Cook
Inlet basin, two of the 100 largest fields in the U.S., the
Beluga River and the north Cook Inlet field, are present. Cook
Inlet is not a consumption basin. Existing pricing mechanisms of
a consumption basin will be significantly higher than those
found in production basins. The difference between the two is
the cost of gas. Generally a consumption basin is far from the
source and incurs additional transportation rates to ship the
gas, in the Lower 48 sometimes, many thousands of miles.
4:50:49 PM
SENATOR FRENCH said it seems in a production basin you would
normally find prices lower than in a consumption basin.
4:51:05 PM
MR. PICKETT replied that is normally the case. He said the
Commission has also found that the Cook Inlet market is unique
in terms of the presence of market power. ConocoPhillips,
Marathon and Union Oil of California, a division of Chevron
Union, control the vast majority of natural gas that is supplied
in Cook Inlet. Of these three, ConocoPhillips and Marathon are
the two largest; they also own the Kenai LNG export facility.
The Cook Inlet market is vertically integrated with the two
largest producers being their own best customers through the
medium of sales to the LNG export facility.
4:52:16 PM
This leads to the issue of pricing Cook Inlet gas because Cook
Inlet is not an open and transparent natural gas market. No
commonly accepted natural gas pricing mechanism exists in Cook
Inlet and since the 2001 RCA "Henry Hub" order, a variety of
pricing proxies have been considered by utilities, producers,
the Attorney General, and the RCA. To date, none of these
pricing proxies has resulted in an RCA-approved gas sale
agreement that currently delivers gas to utility customers.
4:52:41 PM
MR. PICKETT offered some comments specifically related to the
LNG plant and the findings of the Commission. They found in
their review of the latest record, which resulted from three and
a half weeks of hearings, that the Department of Energy's (DOE)
decision to extend the producers' export authority negatively
impacted Enstar's negotiating position with resulting terms of
the contracts brought forth to the Commission.
He stressed that that it's important to look at Cook Inlet as an
over-all system, incorporating both the regulated utilities and
the unregulated producers, and just the impact it has on
residences and businesses in the whole Inlet. The idea of a
comprehensive resource management plan should be pursued.
The RCA recognizes the importance of the LNG export facility
that has benefits to Alaska as a whole and that the export of
LNG stimulates the exploration and development of new reserves.
Having said that, he said, they believe that it is in the
interests of local utility rate payers to require that the
producers finalize the contracts with the local utilities before
receiving authorization to explore for natural gas.
4:54:18 PM
SENATOR FRENCH asked what specific steps the legislature could
take to make Cook Inlet an open and transparent natural gas
market.
MR. PICKETT replied that is extremely difficult to answer; "The
RCA doesn't have the ability to compel non-regulated producers
to do anything." It is in the best interest of all the parties
to realize they are at a "tipping point" for the Inlet. To
continue the commercial and industrial side and meet the needs
of the consumer it's very important that some reasonable proxy
be developed or accepted, and RCA's Order UO858 is a good
starting point.
4:55:28 PM
CO-CHAIR WIELECHOWSKI said he appreciated their decision in
trying to protect the consumers of Alaska and keep gas prices at
a reasonable rate. To that end, he asked the status of the
litigation surround the RCA's denial of the requested rate
increases for future years that also said they should be capped
at other production basins throughout the country, particularly
in Texas, Oklahoma and Alberta.
MR. PICKETT replied they are not involved in any litigation on
that issue at this time. Enstar is using the weighted average
cost of gas in Cook Inlet, which is allowed under their existing
tariff and has been in place since 1981.
SENATOR WIELECHOWSKI asked if that was charging 21.9 percent
instead of charging their requested 22 percent.
MR. PICKETT said he didn't know the exact differences, but that
sounded approximately correct. The bottom line is in 2009 they
were entitled to collect roughly $8.75 Mcf.
SENATOR WIELECHOWSKI asked if the contracts been renegotiated to
the satisfaction of the RCA for future years.
MR. PICKETT answered he understood that Enstar executed two
contracts for a two-year period, and Ms. Starring said they have
an RFP on the streets to look to the outlying years.
4:57:38 PM
DANIEL PATRICK O'TIERNEY, Chief Assistant Attorney General,
Division of Regulatory Affairs and Public Advocacy, Department
of Law (DOL), observed that from the perspective of the AG in
his role as a public advocate that the Commission has
articulated a standard which is the end result of Docket UO858;
it adopts a price proxy index that consists of a number of
production basin price points in sort of a market basket that is
averaged, and that mechanism is meant to serve as a cap on
pricing in the Cook Inlet. Given that it is a very imperfect
market and, therefore, that a price proxy index is necessary in
the first instance is what the Commission came up with after a
lot of consideration. "It is considerably consistent with the
advocacy of the AG in this case and in prior cases, that
advocacy being the market basket approach to a price proxy index
is probably the best substitute for a free market driven price."
5:00:22 PM
MR. O'TIERNEY said the question now is what the producers and
Enstar will be able to do with it. Meanwhile Chugach is trying
to negotiate its own supply contract going forward.
5:01:01 PM
SENATOR WIELECHOWSKI asked what hammer the people of Alaska have
to force the RCA to intervene in the Ninth Circuit case.
5:01:37 PM
MR. O'TIERNEY answered it's not clear that the AG in his
capacity as the public advocate under existing statute is
actually empowered to unilaterally take action in the Ninth
Circuit context. The second point he can make is that state as
que estate has intervened in that proceeding and he couldn't say
more because his section, Division of Regulatory Affairs and
Public Advocacy, is not prosecuting that case.
SENATOR WIELECHOWSKI asked if there is a contingency plan to
require adherence to the RCA order.
MR. O'TIERNEY replied from the AG's perspective, the RCA order
stands relative to docket UO858; it can only be applied when
there is a contract in hand to apply it to. "So, first there has
to be a contract on the table between Cook Inlet producer's
supplier and a supply recipient." That could be Chugach or
Enstar. Once those are presented for Commission review, there
will be an opportunity for the AG as a public advocate to
participate, as well as the state in its capacity as the que
estate if one of the other state agencies sees fit.
5:04:29 PM
CO-CHAIR MCGUIRE asked if there has been any discussion of
changing the way leases are offered in Cook Inlet.
MR. O'TIERNEY replied that he is not in a position to answer
that question, but representatives from DNR are talking before
the RCA today on current thinking about lease holds as it
relates to storage and other things.
5:05:35 PM
CO-CHAIR MCGUIRE thanked everyone for their comments and
adjourned the meeting at 5:05 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Chugach Presentation - 02-11-09.ppt |
SRES 2/11/2009 3:30:00 PM |
|
| Presentation on Cook Inlet Gas Use by Enstar.ppt |
SRES 2/11/2009 3:30:00 PM |
|
| RCA Presentation - Feb 11, 2009.ppt |
SRES 2/11/2009 3:30:00 PM |