Fairbanks gas territory up for grabs

A competition has emerged between Fairbanks Natural Gas Co. and the Interior Alaska Natural Gas Utility over who will serve the Fairbanks North Star Borough with natural gas.

Fairbanks Natural Gas, or FNG, filed an application with the state Regulatory Commission on April 5 to expand its service area to include nearly all of the populated areas of the Fairbanks North Star Borough. The area runs south and east from Fairbanks to North Pole and the area surrounding Eielson Air Force Base.

FNG’s initial application outlines a plan for $27.5 million worth of private infrastructure investment through 2016.

On April 22, the Interior Alaska Natural Gas Utility, or IGU, filed with the Regulatory Commission to serve a similar area. IGU’s application said the borough-owned gas utility has a $484.7 million plan for a full infrastructure build-out to reach an estimated 13,000 customers by 2019.

FNG, which currently serves about 1,100 natural gas customers in Fairbanks, later revised its plan to meet the needs of 8,000 customers by 2021. FNG President and CEO Dan Britton said his company’s full plan takes advantage of $150 million in state bonds available through the Alaska Industrial Development and Export Authority and private debt and equity financing through the financial backing of its parent company Pentex Alaska Natural Gas Co.

AIDEA is the state development corporation leading the overall effort to get natural gas from the North Slope to the Interior.

Britton said the disparity between customer numbers is a matter of FNG being conservative with its estimates in an effort to mitigate costs if the customers don’t materialize once the gas lines are buried.

The Fairbanks North Star Borough formed IGU in late 2012 with a goal to spur investment in natural gas transmission lines through the borough’s populated core.

In its application, IGU reports that the average borough household spends about $5,000 per year on fuel oil for heat. It claims the ability to provide natural gas to residents for $15 per thousand cubic feet, or mcf. That’s about half the cost of fuel oil per British thermal unit.

In its Regulatory Commission filings, FNG estimates a customer cost of $13.90 per mcf of gas in 2021.

IGU Chairman Bob Shefchik said the utility’s plan includes $120 million for 20 million gallons of gas storage in the region to stabilize demand and availability swings.

FNG is in the midst of building a 5.25 million-gallon gas storage facility near Fairbanks.

As far as transmission costs are concerned, Shefchik said AIDEA recently gave IGU a revised study on the overall pipe needed to serve its desired area. IGU’s proposal calls for about 1,000 miles of pipe at a cost of $370 million.

AIDEA’s study uses slightly more than 500 miles of pipe totaling about $170 million, Shefchik said.

Shefchik noted a difference in the models being that IGU’s cost estimate runs pipe all the way “to the meter” on the side of a potential customer’s house. AIDEA’s model runs gas line “street-side” and relies on customers to pay for the final transmission lines to their homes, he said.

Britton said he wonders how IGU will fund its project, claiming it is “based on a financial plan that will never exist.”

IGU’s application states it plans to finance its project with $481.7 million in loans from the state’s Sustainable Energy Transmission and Supply, or SETS, fund.

“It is expected that these loans will have a 50-year term and carry a one percent interest rate,” the filing states.

Further, IGU anticipates a state-funded capital reimbursement for gas storage of $60 million, which it would use to pay down debt, according to the application.

The financing plan could be revised with a higher interest rate or a shorter loan term, Shefchik said, depending on what the final cost for infrastructure is determined to be.

Shefchik questioned FNG’s ability and desire to serve residential and small commercial customers — what he called the primary goal of IGU. He said FNG’s application focuses on serving the Flint Hills oil refinery and Golden Valley Electric Association with gas.

Flint Hills’ officials have said their demand for gas has faded as their operations have shrunk because of a lack of demand for products such as jet fuel. Golden Valley is openly seeking gas for its power production and has proposed a plan opposite FNG to operate a gas liquefaction plant on the North Slope.

“We think there’s lots of building to be done in the city of Fairbanks — that FNG could build for five years until they reach a 90 percent penetration rate just up and down the streets of Fairbanks,” Shefchik said.

Britton said any utility needs large customers to support its small ones and that a limited gas supply has kept FNG from expanding beyond its current service area.

“The borough utility has criticized FNG by saying we have not done enough for residential customers, that we’ve cherry picked customers. The facts are half of our customers are residential,” Britton said. “When an efficient utility system is built you utilize large users to justify the expense to build more pipe out further to more areas.”

In 2012, FNG served 458 residential customers, 621 small commercial customers and 28 large commercial customers, according to their figures. The large customers accounted for 33 percent of their total gas sold.

FNG’s application states under its plan a transmission line will run from a storage facility to the Flint Hills and Golden Valley facilities.

When the dust settles, Shefchik said he foresees the possibility of FNG being a partner in a gas system with IGU.

“There are only two main gas players in the state and we would look to FNG or Enstar (Natural Gas Co. in Anchorage) to bring them on as a managing partner in the project,” he said.

Britton said he has a hard time believing FNG would be working with IGU in the future, based on the differences in the groups’ applications for expanded service.

“Our plan’s based on a defined and realistic source for the gas and it’s also based on a defined and realistic ability to build out a system with a defined and real financing plan, and the other plans are not,” Britton said. “That’s about as cut and dry as it gets.”

Elwood Brehmer is a reporter for the Alaska Journal of Commerce.