Project to get gas to Interior moves forward with help

ANCHORAGE — Former Interior Gas Utility chair Bob Shefchik has taken the reins of the Interior Energy Project. 

Shefchik notified IGU leadership and the Legislature Feb. 9 that he would be resigning from his post as the head of the utility board Feb. 10. 

With Shefchik as the project leader, Alaska Industrial Development and Export Authority Energy Infrastructure Development Officer Nick Szymoniak, Alaska Energy Authority Energy Policy and Outreach Director Gene Therriault and AEA Railbelt Energy Infrastructure Engineer Kirk Warren will join Shefchik’s team.

All three have worked extensively on the Interior Energy Project, Shefchik said.

Authority spokesman Karsten Rodvik wrote in a statement that the reorganized team is designed to move quickly with Shefchik at the helm.

“We believe that Bob’s experience combined with his roots in Fairbanks will be an asset to the team, and will help move the project forward,” Rodvik wrote.

AIDEA Executive Director Ted Leonard was originally set to retire at the end of January but has stayed on with the authority to assure the project moves forward.

The Interior Gas Utility got approval for a $37.7 million construction loan from the AIDEA board at a special Feb. 5 meeting.

With several members attending via teleconference, the board unanimously approved the loan for development of the utility’s natural gas distribution system.

AIDEA will fund the loan from the $332.5 million Senate Bill 23 Interior Energy Project financing package it was authorized to use toward getting natural gas to the region.

The Sustainable Energy Transmission and Supply Fund loan package is an expansion of an $8.1 million loan AIDEA approved to get IGU’s distribution system work started last April. It will cover the cost of initial distribution construction in North Pole and installation of temporary gas storage. Engineering of subsequent build-out phases beyond Downtown North Pole also is included.

The Fairbanks North Star Borough formed IGU in November 2012 to spur additional natural gas use in the borough. With little cash or collateral to back it and favorable terms — 1 percent interest and a 48-year payback — the loan to the utility is outside of AIDEA’s normal lending practices because it is SB 23 money.

“(SB 23) pretty much says, do what you need to do to meet the Legislature’s intent,” Leonard said.

Originally, the $8.1 million was approved in April as a 20-month fixed line of credit intended to convert to a term loan in conjunction with AIDEA’s financing of the utility’s 2015 build out, which has now happened. 

With approval of the $29.6 million to fund construction and further engineering, the entire $37.7 million will be loaned as a 24-month line of credit. After two years, interest will capitalize at 1 percent over an eight-year deferment period, when up to 40 years of repayments would begin. 

AIDEA staff said board approval would be required for IGU to make draws on the line of credit.

AIDEA’s proposed purchase of Fairbanks Natural Gas, the other gas utility in the area, and its parent company, has put the Interior Energy Project back on a late-2016 timeline for first gas, according to those familiar with the project.

As IGU board chair, Shefchik said getting natural gas to the utility by the fall of 2016 will give it a customer base and subsequent revenues with which it can pay off the loan.

Shefchik said in an interview he felt his utility could secure such favorable terms after reviewing the now-expired concession agreement the authority signed with its former private project partner MWH Global Inc.

“If we would have presented (those terms) earlier in the year we probably would’ve been confronted with a different response,” he said.

Temporary storage capacity equivalent to three days of peak demand for both IGU and Golden Valley Electric Association — numerous LNG tanks of about 50,000 gallons — is planned for a lot adjacent to Golden Valley’s North Pole power plant.

To make sure demand grows, Shefchik said a natural gas conversion working group is in discussions with area banks to investigate ways to finance home conversions from oil to natural gas heating systems. 

Converting to natural gas could cost homeowners anywhere from $1,500 to $10,000 or more depending on their current oil or wood-burning systems. That conversion cost is seen as an impediment to signing up new gas customers, a lynchpin to success for the overall project.

He said he is hopeful a program where the gas utility’s provide a “backstop for defaults” on home conversion loans. The banks would treat the conversion loans as they would any other, but not bear the entire burden of non-payment.

With the utilities taking on a portion of the loan risk Shefchik said he foresees terms in the 10-year range at 3 percent to 4 percent interest.

“Because banks have a lot of money right now and they’re sitting on that is really drawing very little, the attractiveness of low-risk investment that’s going to help the community — we’ve had three or four banks step up and talk about participating in this,” Shefchik told the board.

 

Senate hears about utility purchase

Soldotna Republican Sen. Peter Micciche continued to offer skepticism over AIDEA’s proposed purchase of Pentex Alaska Natural Gas Co., the consortium of entities that make up Fairbanks Natural Gas and its LNG supply chain, during a Feb. 5 Senate Energy Committee hearing.

He shares the authority’s goal of getting affordable energy to the Interior, Micciche said multiple times. He also repeatedly questioned AIDEA’s plan to buy Titan Alaska LNG, the operating company for Pentex’s LNG plant at Point MacKenzie, when Hilcorp already agreed to purchase the plant under its subsidiary Harvest Alaska LLC.

“I’m still trying to understand the value of purchasing the liquefaction,” Micciche said.

Each time, AIDEA Executive Director Leonard said the authority had no plans of impeding the sale that is pending approval by the Regulatory Commission of Alaska and Attorney General Craig Richards. He said AIDEA is focused on the assets Pentex holds as Fairbanks Natural Gas and that company ownership wished to sell its holdings in one lot.

The authority announced its intent to purchase Pextex for $52.5 million Jan. 28.

“AIDEA is not making this investment to directly operate a utility. AIDEA would be taking this (ownership) role in essence as the investor in Pentex that would still, in our belief, utilize FNG to operate this company,” Leonard told the committee. “In our view it would allow us to change the structure from just profit to ensure that we have coordination with the utilities to bring the best distribution system to the Fairbanks area.”

Micciche also said he sees value in integrating Fairbanks Natural Gas and IGU.

At the same time, he wondered philosophically whether state intervention through AIDEA has deterred a private solution to the Interior’s energy and clean air crisis.

“Fairbanks is a lucrative market; how much government interference has kept the typical providers out of the market?” Micciche wondered. “I can’t believe that if we (the state) just got out of the way something wouldn’t have happened sooner.”

Further, he noted that Hilcorp subsidiary Harvest Alaska has agreed to supply LNG to Fairbanks on a 10-year contract at the equivalent of $15 per thousand cubic feet, or mcf, of natural gas.

With added regasification, storage and distribution costs quoted extensively by utility leadership the final “burner tip” cost of that gas would be in the $20 per mcf range, similar to what was projected the North Slope-focused version of the Interior Energy Project could deliver.

The stated goal of the project is get gas to residential consumers at a price near $15 per mcf, about half the energy equivalent cost of fuel oil at $4 per gallon.

Fairbanks Natural Gas currently sells to its customers at about $23 per mcf as an unregulated utility. Tariff proceedings for the utility are ongoing in the RCA.

Leonard said he agrees that the state should stay out of the way of private enterprise to the extent possible, but also noted that Fairbanks Natural Gas has served about 1,100 commercial and residential customers since the late 1990s without significant expansion.

Fairbanks Natural Gas President and CEO Dan Britton has long said the small utility could not secure the long-term gas supply contract it would need to expand. Its agreement with Harvest Alaska is to supply its existing customer base.

Elwood Brehmer is a reporter for the Alaska Journal of Commerce. He can be reached at elwood.brehmer@alaskajournal.com.


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