Two commissioners of the Regulatory Commission of Alaska appeared before an Anchorage business group Aug. 6 to defend decisions they made over several years to reject contracts between Enstar Natural Gas Co. and Southcentral natural gas producers to supply gas to Enstar.
Enstar has had trouble securing gas supplies and will be short a third of its annual supply needs in 2011 when two current contracts expire, the company says.
The appearance of commissioners Kate Giard and Tony Price before Commonwealth North was unusual because members of the RCA typically do not speak in public about decisions they make.
Giard led the talk, and while Price was in the audience, he participated in the discussion.
Giard and Price had voted against the gas supply contracts.
Commonwealth North is about to release a report on Southcentral gas supply situation that is critical of the RCA.
Giard, who had seen a draft, said he felt members of the groups' gas study committee did not have the whole picture on why the commission made its decisions.
She said most of the key players in the Cook Inlet gas situation, like Enstar and gas producers, had presented information to the study group, but "you have not had the opportunity of balanced perspective. There is no advocate for the public (the consumer interest) that has appeared before you," she said.
RCA Chairman Bob Pickett had earlier appeared before this study group to provide information about the commission's role, but did not comment on the prior decisions, partly because Pickett had not been on the commission at the time.
Giard said the commission's responsibility is to balance the profit motivations of the producing companies with the interests of consumers. Enstar, being the gas utility, is the connection between the producers and consumers.
From the consumer's perspective, there were key flaws in terms of the gas contracts put forth, which were rejected.
Underlying this, however, was skepticism among some commissioners after watching how a key decision on Cook Inlet gas prices in 2001 made by the Alaska Public Utilities Commission (now the RCA) has actually played out.
"Unocal (now Chevron) said then that higher prices in Cook Inlet were needed to get more wildcatting, and that if there wasn't more exploration, we would run out of gas by 2012. They said we had 10 years of gas and then we'd run off the cliff. This is similar to what we're hearing today," Giard said.
The APUC then accepted a proposal by Unocal and Enstar to link gas prices under the Unocal contract to the Henry Hub gas-trading hub in Louisiana. This would increase the Alaska price, but it would also be the first time the Alaska price would be linked to a Lower 48 price. Other Cook Inlet gas prices are linked to world crude oil prices.
Giard said the promise that the higher prices paid to Unocal would translate to new exploration was not fulfilled, and that most of the gas actually delivered under the contract came from older producing fields, and was thus a windfall for Unocal.
The decisions the commission has made since were colored by "what was promised and what was delivered," under the Unocal contract, she said.
Because of that, there is skepticism that the gas supply situation is as serious today as it is said to be. Giard recalled the similar warnings in 2001.
One of the objectionable terms in the recent contracts, she said, was the lack of a realistic "ceiling" in the some of the contracts, a level at which gas price increases would stop.
"There was a price 'floor' of $4.50 (per thousand cubic feet, or mcf) a level at which prices would not fall below," Giard said. "With this the producers could protect themselves in recovering costs and making a small profit. But the price ceiling was $15 per mcf," which meant consumers here were at considerable risk.
Since the price of gas in the contract was linked to a gas-trading hub in Louisiana, if a hurricane hit the U.S. Gulf Coast and Lower 48 gas prices soared, Alaska gas prices would also spike.
The commission was looking for a balance in the "collar" that would keep prices in a certain range. The commission cannot interject itself into renegotiating terms of contracts, but Giard said that when the group hinted that it desired a lower ceiling, the petitioners came back with a ceiling of $14.50 per mcf.
There were other objectionable terms in the contracts. The commission rejected a contract that would have met all of Enstar's needs to 2015 because of the ceiling issue, but also because it linked prices to the Henry Hub gas-trading center in Louisiana.
To deal with this objection, the next contract proposed linked prices to a "basket" of several U.S gas trading centers. That was so the Alaska price would not change dramatically if there was a supply disruption in one place.
Giard said the commission rejected this because tying the price to a series of "city gate" prices meant that local taxes and pipeline costs were imbedded in them. Cook Inlet was a producing basin, and its price is more appropriately compared to prices in other U.S. producing basins.
The commission took the unusual step of actually proposing, in an order, the use of a set of U.S. producing basins as an index for Cook Inlet, but the producing companies did not accept this.
The impasse over gas supplies to Enstar continues. The utility has put out recent requests for proposals that specified the terms laid out by the RCA as to what it would accept, but there have been no offers.
In the discussion with Commonwealth North members, Giard said the impasse might require legislative action to clarify the commission's role, for example in setting a standard or at least clarifying in statute criteria to be used in weighing contracts.
Some legislators have suggested that the state require producing companies to supply cost information to the commission, which would extend the kind of regulated structure used with utilities to the gas producers.
Giard and Price warned against this, however. Price said the commission does not have the staff to competently judge cost information.
"Having the commission regulate the producers is not a magic bullet. I think it would be a big, big mistake. We would really see Cook Inlet dry up then," Price said.
Tim Bradner can be reached at
tim.bradner@alaskajournal.com.
