Following recent revelations that ENSTAR Natural Gas had recalculated how long it would take to pay off its share of constructing a 22-mile natural gas trunk line from Anchor Point to Kachemak City, ENSTAR on Feb. 6 filed a new tariff, TA 310-4, with the Regulatory Commission of Alaska (RCA) to change the methodology it used to for that calculation.
However, that proposal got intense scrutiny on Monday from Homer Mayor Ken Castner and the Homer City Council when ENSTAR officials briefed the council on the proposed tariff at the Committee of the Whole meeting. Last month, in a conversation with ENSTAR President John Sims, Castner found out that ENSTAR’s cost of building the trunk line wasn’t the $2.5 million surcharge the city had been told in 2014, but $3.6 million. In 2014 when the Homer City Council passed a resolution supporting the $1 per million cubic feet tariff, it did so with the understanding that the surcharge would be $2.5 million and the tariff would pay that off in 10 years.
Castner also discovered that a $1 per million cubic feet tariff the RCA approved was nowhere near paying off the $3.6 million the tariff was intended for. Even worse, because the RCA had allowed ENSTAR to add something called carrying costs to the surcharge, not only had the balance not dropped, it had increased.
ENSTAR’s latest tariff filing would not increase the $1 per million cubic feet tariff, but it would keep it on the books beyond the original 10 years proposed. It’s unclear from ENSTAR’s 2014 tariff filing or its proposed tariff filing how long the tariff would stay on the books — a question Castner asked of ENSTAR but didn’t get an answer to on Monday.
ENSTAR in 2014 received an $8.15 million state grant to build the trunk line and bring natural gas to the lower Kenai Peninsula. Then Gov. Sean Parnell approved the grant because former Rep. Paul Seaton and his staff had discovered the $1 per million cubic feet tariff on the books — a tariff ENSTAR got in 2003 as part of the RCA designating ENSTAR the natural gas utility for the lower peninsula. Parnell had wanted a local contribution as part of the grant. The line wound up costing $11.7 million. The city of Homer and Kachemak City also financed through special assessment districts the cost of building out distribution lines to both cities — capital improvements ENSTAR benefitted from but didn’t fund on its own.
At Monday’s meeting, Castner told ENSTAR officials Lindsay Hobson, director of marketing and communications, and David Bell, director of business development, that ENSTAR could have been better at informing the city.
“Three weeks later you came in with a new rate filing,” Castner said of the new tariff. “I think that having known the whole thing was untenable and unworkable, we could have had some communication. … It seems like the people being punished are the rate payers.”
Hobson defended the 2014 tariff change that allowed ENSTAR’s recovery method. The RCA approved adding a rate of return and income taxes, called the carrying costs, to the $3.6 million surcharge. A rate of return is what ENSTAR earns in equity on the $3.6 million investment of the pipeline.
“Through that process ENSTAR was cross examined by the RCA re. the recovery mechanism and the appropriateness of including a rate of return in the surcharge,” she said of the 2014 tariff filing. “ENSTAR’s proposal was thoroughly vetted.”
She also noted that the tariff filing was publicly noticed.
Just to add another wrinkle to the issue, Hobson also told the council that ENSTAR hadn’t properly estimated the average consumer use of natural gas. Elsewhere in its service area, ENSTAR figured the average customer used 148 million cubic feet per month. It calculated Homer would use 140 million cubic feet because of its warmer climate. Based on figures from 2014 to 2018, the actual consumption is between 80 and 95 million cubic feet.
“The reality is that while we were right on the number of customers, residents in this area are not consuming at the rate predicted,” Hobson said.
In its latest tariff filing, ENSTAR wrote, “Anecdotal evidence suggests that the customers in the Homer area are behaving differently than those in other areas ENSTAR has expanded into and are not fully converting their buildings to gas when hooking up for service.” Council member Tom Stroozas also questioned ENSTAR’s marketing plan. Before retiring in 2006, Stroozasworked as the department head for commercial marketing at Piedmont Natural Gas Company in North Carolina.
“My simple question is, when did you discover that Homer was not consuming the amount of gas you projected, and when you did discover that, did you develop a plan to market further consuming?” he said.
Hobson said that in 2018 ENSTAR had a broad based ad campaign to encourage customers to convert.
“I think it has been largely on social media,” she said. “We also have had a radio campaign. I think there is an opportunity, as people realize those savings or as existing appliances wear out — people found that when they had working furnaces they aren’t just going to replace it.”
The proposed tariff will reduce ENSTAR’s rate of return from 8.59 percent to its approved cost of debt of 5.06 percent. It also changes how the carrying cost is calculated. The change would reduce the surcharge balance from $53,000 a month to about $26,000 a month. In a letter to ENSTAR included in Monday’s supplemental council packet, Castner asked for a better understanding of how long it would take to pay off the surcharge.
“Please provide your complete recovery model that indicates your projected tariff against the fees/interest, taxes and amortized equity recovery,” he wrote.
Castner also said consumers need to know how long they would continue to pay the $1 million cubic feet tariff.
“Please provide a total final cost to the consumer,” he wrote.
He also asked for the total amount of the $1 million cubic feet ENSTAR has collected. Castner also reiterated the point he made the Monday’s meeting.
“Please improve upon your communications to Homer,” he wrote. “Cooperation and communication will benefit us both in the long haul.”
Reach Michael Armstrong at email@example.com.