Saturday, June 06, 2009

Anchorage Press Presents A Tutorial On Natural Gas Supply And Demand Problems In South Central Alaska; Why Enstar Keeps Asking For Rate Hikes

On June 1st, 2009, the Anchorage Daily News reported that Enstar Natural Gas Company, the main supplier of natural gas in Southcentral Alaska, is seeking permission to raise its rates by about 4.7 percent for its residential customers. The increase would cover Enstar's cost of delivering the gas. Rates for the gas commodity itself are set separately and have been rising rapidly in recent years as the cost of Cook Inlet area gas Enstar buys has soared.

Enstar's new filing with the Regulatory Commission of Alaska would raise the rate for gas delivery to most residential customers to $28.47 a month, while businesses would pay $67.96 a month. If approved, the increase would become effective sometime in 2010. The Regulatory Commission of Alaska (RCA) is expected to hold hearings on the rate request.

Since this will be the third increase in Enstar's rates in the past two years, the conspiracy wankers will start crying about "price fixing" and "price gouging" and all that other nonsense. They ignore the fact that delivery costs are completely separate from commodity costs, and when price hikes in either segment increase beyond the profitability point, Enstar, to remain in business, must raise costs to the customer. For all you socialists out there, that's called "capitalism". On the 2008 Fact Sheet posted on their website, Enstar discloses that for every dollar you pay them for natural gas, 83 cents pays for the commodity, 10 cents pays for delivery, 3 cents for taxes, and only 4 cents for Enstar income, out of which they must satisfy both employees and stockholders. And Enstar's income share rarely changes appreciably, since the price of gas is a pass-through cost: You pay Enstar, and Enstar in turn pays the producers, like ConocoPhillips, Marathon or Chevron.

What makes this a significant issue now is a nightmare energy scenario for South Central Alaska described in a lengthy article published on June 4th in the Anchorage Press. Despite its length, it's well worth the read because it provides an excellent tutorial on the problems of natural gas supply and demand in South Central Alaska. Here is the scenario:

A mid-winter cold snap hits Southcentral Alaska, bringing temperatures of 20 below zero. People from the Matanuska Valley to the Kenai Peninsula turn up their heat in unison, sucking natural gas from the Enstar Natural Gas Co. distribution grid buried beneath the city streets. This network is fed by transmission lines leading back to wells that pump natural gas from underground reservoirs across Cook Inlet. As more people turn up the heat, engineers search for additional molecules of natural gas to manage the increased demand. But the cold doesn’t let up. Then, a compressor trips at one of the major gas fields, and the pressure in the pipeline system drops below the threshold needed for making electricity. So the lights go out. System operators worry the drop in pressure allowed air to get into the grid, and federal regulations require them to stop delivering to customers. So the heat goes off.

The bigger problem comes next, though. To revive the system, hundreds of technicians need to go door to door to bring every customer back online one at a time, on top of a long list of other regulatory and technical requirements. It could take weeks or even months, during which time the region would be without heat or power. In winter. In Alaska. [Ed. Note: Meanwhile, thousands of water pipes would freeze due to lack of heat.] Even worse, the underground reservoirs of natural gas could be damaged from disuse, meaning if once the system is restored, it might never be the same again.

For all the issues Alaskans worry about, none threatens as many people with consequences as extreme as this scenario. If it comes to pass, half the population of Alaska would lose heat, and even more would lose power. Industry would be crippled. It’s been described as the economic equivalent of the 1964 Good Friday Earthquake.

Although this scenario is described as improbable, it is not impossible. On January 3rd 2009, during an extended cold snap when temperatures dropped to 15 below across Southcentral, the local system pulled harder on the wells and pipelines than ever before. And a compressor did fail, momentarily. In the end, the system prevailed because some things went right and some other things didn’t go wrong, but industry watchers suggest we came within a few hours of a total failure. But this was more of a deliverability issue rather than a commodity issue, although the compressors are installed to get more out of what's available. Because natural gas fields lose pressure as they age, utilities install compressors at critical junctures to keep the pressure through the lines from dropping below operating specs. And because the four largest Cook Inlet gas field from which Enstar draws the bulk of its supplies have dropped from 14 billion cubic feet in January 2004 to less than 9 billion cubic feet in September 2008, deliverability is falling at a rate of 8 to 14 percent per year.

What about Outside sources? Here's where we run into another problem. In the Lower 48, the gas market is highly liquid, meaning there are many buyers looking for the best deal and many sellers competing against each other to offer the best deal. As a result, prices constantly change as buyers leave one supplier for another, as sellers try to out-price their competitors, as explorers find new reservoirs and as pipeline builders make more efficient connections. The price at any given time is called the spot market. Our problem is that there has never been a spot market for natural gas in Alaska.

Here's why. Because companies were unable to sell Cook Inlet gas on the world market, companies signed long contracts with Anchorage-area utilities, supplying the region with relatively cheap natural gas at a stable price. Over the decades since, though, these original contracts expired and, after negotiations, were replaced with new, usually more expensive contracts, leading to steadily increasing gas and electricity bills throughout the region. These overlapping and leap-frogging contracts means there is no spot market for natural gas in Alaska. Instead, producers and local utilities negotiate supply contracts, which state regulators either approve or reject.

A prosepctive solution to the problem is the construction of storage facilities, to bank up natural gas supplies during the summer to provide a reserve for us to use during peak demands in winter. But storage facilities can be expensive; Enstar estimates that the investments needed to offset declines in gas supplies anticipated in 2011 would cost somewhere in the neighborhood of $25 million to $100 million. Where's that money supposed to come from? Part of it has to come from us, in the form of increased rates.

The remainder of the Press article provides more background, and discusses the prospective impact of the Denali Pipeline as well as the Bullet Pipeline. But this Press article shows that we haven't a lot of wiggle room - or time - left to solve this problem. In addition, we must take action to effectively pre-empt the constant threat of "public interest" litigation which is so obstructive. The transformation of Alaska's ethics complaint system into a weapon of political warfare illustrates the need to make public interest litigation more difficult and costly, so that it will screen out the frivolous "snail darter" litigation and restrict it only to areas with the greatest urgency.

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