2-20-15 Alaska Gasline Board Appointees AND More On Fairbanks Gas LNG/Transportation/Distrbution Project
Yesterday, Alaska Governor Bill Walker appointed three new board members to the AGDC (Alaska Gasline Development Corporation, aka. "ASAP").
Video: note sound volume low in beginning, becomes normal after a few minutes.
STATUS: Interior Energy Project (Government project to establish a new, natural gas LNG / transmission / distribution system for Fairbanks Alaska.)
Here is our "links page" to the IAP for quick reference.
On February 12 we had become confused about status of the multi-hundred million dollar government program to provide one Alaskan community with low cost energy.
Since a previous administration had tried and failed to make such a project financially feasible, we wondered how a different administration would use the same agency (AIDEA, Alaska Industrial Development and Export Authority) to reinvent the project in a way that might serve the broad public interest.
We also include a reference to the regulatory docket, containing a full array of background information.
AGDC is the governmental corporation charged with building a small in-state gas pipeline down from the Alaska North Slope to South Central Alaska. It would serve consumers from the Interior community of Fairbanks to the largest population in the state, centered in Anchorage. The AGDC also serves as the state's representative to the larger, Alaska LNG project supported by TransCanada (i.e. of Keystone XL and Energy East fame), ExxonMobil, ConocoPhillips and BP. Most experts believe that only one of the projects will be built and that the AGDC project serves as a 'back up' project to serve consumers and provide smaller export volumes in case the larger project is never built.
The new AGDC board members replace three appointees of the previous Parnell administration whom Walker fired upon taking office.
During this video press conference, our readers will note that the qualification Walker most heavily counted on was the qualification of being an "Alaskan" (While the popular and provincial word, "Alaskan" refers to a fact of citizenship, it also connotes an emotional reference that, in this case, apparently substitutes for educational and professional credentials). This is an important reflection to investors, international trading entities and the federal government of the new governor's philosophy of governing.
Below is the text of yesterday's news release issued by legislative leaders whose original law created AGDC.
We will leave the video and press release record for our readers to digest. (Segments below, See the full release here....)
Thursday, February 19, 2015, Juneau, Alaska – House Speaker Mike Chenault (NGP Photo-R) and Representative Mike Hawker (NGP Photo-R-below), architects of the legislation creating the Alaska Gasline Development Corporation, urged a diligent review of the qualifications of three new board members appointed today by Gov. Bill Walker. The three appointees are former state Senator Joe Paskvan, a Fairbanks lawyer; former state Senator Rick Halford of Dillingham, a retired pilot; and Hugh Short of Bethel, a businessman and former mayor.
“AGDC’s original board members, some with international pipeline expertise, were a tremendous asset to AGDC,” Hawker said. Along with directing the organization, the public members added value by serving on subcommittees along with AGDC staff on commercial, engineering, and governance topics.
AGDC is not the only state corporation/entity to require specialized expertise in board members. The Alaska Aerospace Corporation, Alaska Housing Finance Corporation, Alaska Industrial Development and Export Authority, Alaska Permanent Fund Corporation, and Alaska Railroad Corporation statutes all require certain qualifications in board members.
In the case of AGDC, the presence of two cabinet-level commissioners on the board, not their designees, is designed to ensure the board as a whole considers the broader interests of the state and of all Alaskans in directing the organization.
The three fired AGDC board members were:
- Al Bolea of Big Lake, brought insights into governance and the oil and gas industry through his former roles as a BP executive; chairman of Alyeska Pipeline Service Company, and CEO of Dubai Petroleum in the United Arab Emirates.
- Drue Pearce of Anchorage, brought a wealth of expertise in federal rules related to permitting, a deep history of Alaska oil and gas development, and a comprehensive understanding of Alaskans’ needs through her former roles as a state senator; the Department of Interior’s Alaska advisor; and the federal coordinator for Alaska natural gas transportation projects.
- Richard Rabinow, of Texas, brought decades of experience in major pipelines, through his former work as President and CEO of Longhorn Pipeline Partners; as President of Exxon Mobil Pipeline Company; chairman of the Association of Oil Pipe Lines; and membership on the TransAlaska Pipeline System Owners Committee. See the full release here....
Our Friday IEP Commentary:
On February 12 we had become confused about status of a revised, multi-hundred million dollar government program to provide one Alaskan community with "low cost energy".
Since a previous administration had tried and failed to make an Interior Energy Project (IEP) financially feasible (i.e. for the Interior Alaska community of Fairbanks), we wondered how a different administration would use the same agency (AIDEA, Alaska Industrial Development and Export Authority) to reinvent the project in a way that might serve the broad public interest.
We were further confused about how the state could be considering such a huge new spending venture (i.e. even with funds obtained by an "Independent" public corporation of the state), when:
- it had already invested hundreds of millions of dollars into two gas pipeline projects that would flow gas right by the Fairbanks community, if built, and
- its operating budget, 90% dependent on Alaska North Slope (ANS) revenue was operating billions of dollars in the red, even before last year's 50% oil price drop, and
- its remaining savings accounts after this fiscal year will add up to approximately $9 billion, when the unfunded liability of the State's personnel retirement system is almost $10 billion, and
- when Alaska is the highest per capita debtor state in the nation, and
- Alaska is the highest per capita spending state in the nation, and
- the oil price drop is likely to guarantee a continued drop in ANS production upon which the state's government and economy are based.
Those realities pretty much beg for citizens to ask of their government, "Why are you undertaking any huge, new spending program -- no matter how well motivated it may be -- when the state simply cannot afford any new expenditures or risk?"
Since the logic defied our analysis, we sent questions to AIDEA. Some were admittedly better than others. As a former regulatory commissioner we posed some questions that may have been important, but without fully understanding all of the history and nuances. As a former oil industry executive and consultant to many of the large companies operating in the state, we asked several questions. And as a grandfather whose kids will end up inheriting the result of our state and national governmental decisions, we had questions, and still do, about the intergenerational equity of Alaska's rather cavalier, decades-old pattern of deficit spending.
So, please ignore the questions you find unhelpful and, please, feel free to send us your own questions which we will append to this commentary for reference of decision makers.
NGP February 12, 2015 Questions to AIDEA Below (slightly edited for this viewing) - AIDEA escaped answering our query and questions in this way
|Note: Yesterday we received a copy of Harvest Alaska's position, provided here for your review. Harvest seems relatively unconcerned about the transfer of LNG facilities directly to AIDEA, believing that AIDEA is bound by a sale and purchase agreement. Their greater concern probably rests with an Attorney General position to which the letter refers.|
2. Did the Administration ask AIDEA to change the focus from North Slope Gas to Cook Inlet gas? Does AIDEA believe Cook Inlet reserves -- as suggested in FNG's TA -- can now support both South Central Alaska and Interior demand? In the event that the new, Interior demand causes gas shortages or higher prices in South Central Alaska, is AIDEA comfortable with the obvious necessity of importing LNG (i.e. in the event a large ANS gas pipeline is delayed or found to be infeasible under prevailing market conditions)? How does AIDEA see the RCA process affecting its own project planning (i.e. the June 1 deadline for a final TA order)? Does AIDEA plan to involve Harvest Alaska in its planning process? Please explain.
|Since we are no longer privvy to the inner workings of the Regulatory Commission of Alaska (RCA) we asked one of the most foremost regulatory attorneys for a quick summary and links. His response is here....|
4. While state statutes allow for 'self regulation' of a municipal utility, does AIDEA see any value in having a more objective third party like the RCA economically regulate the FNSB utility--other than a local elected officials and/or a board of political appointees?
13. Since GVEA will, hopefully, be a major base load customer, how has AIDEA addressed CEO Cory Borgeson's concern expressed in a Journal of Commerce interview that, "As to whether or not AIDEA should look to Cook Inlet for a gas supply, Borgeson said the low wholesale cost of North Slope gas is hard to overcome." Has AIDEA acted to respond to that concern?
RCA Re: IEP LNG Sale Process
Since we are no longer close to the RCA's regulatory process, we asked one of the state's best respected regulatory attorneys to summarize the regulatory aspects of a proposed sale of LNG assets to Harvest Alaska, a Hilcorp affiliate.
Docket U-15-002 is FNG’s application (through Tariff Advice Letter TA37-514) for approval of a LNG supply agreement (LSA) with Hilcorp’s subsidiary, Harvest Alaska. The LSA is conditional upon the AG’s approval and upon the closing of the sale of the Pt. MacKenzie liquefaction plant and related assets from Pentex (FNG’s parent company) and Titan (FNG’s sister company) to Harvest. Attached to this email is FNG’s TA and the RCA’s Order No. 1 opening the docket. The link to the RCA web site for Docket U-15-002 follows: http://rca.alaska.gov/RCAWeb/
The liquefaction plant was transferred last year from FNG to Titan for no consideration, and is now being transferred from Titan to Harvest for undisclosed consideration. FNG has not requested, nor has the RCA approved, the recent transfer of control of FNG, the transfer of the plant to Titan, or the transfer from Titan to Harvest.
AIDEA politely answered our query and questions this way:
Good Afternoon Dave,
Please see the attached public documents. These should answer your questions.
U.S. Sen. Lisa Murkowski (NGP Photo), chairman of the Senate Energy and Natural Resources Committee, yesterday applauded passage by the House of legislation approving construction of the Keystone XL pipeline across the U.S.-Canada border. The House approved S.1 by a vote of 270 to 152.
New U.S. Sen. Dan Sullivan (NGP Photo) of Alaska delivers maiden speech (1/27/15): Supporting Keystone XL and "Big Dreams"and a federal government that, "ignites hope".
“Now that Congress has spoken overwhelmingly in favor of closer energy ties with Canada, it’s time for President Obama to make a decision,” Murkowski said. “To me this is a pretty simple choice between job creation and greater energy security on one hand or more of the status quo on the other. After six years of review – it’s been 2,336 days and counting since TransCanada first applied to for a permit – there’s no reason for further delay.”
ADN Commentary by Tim Bradner (NGP Photo). It’s been months since Alaskans voted to retain the new oil production tax system, but we still hear grumbling that this was a big giveaway to industry.
Time to pound a stake into this zombie.
Bloomberg by Jeremy Van Loon. Alberta is in discussions with Alaska about shipping oil-sands crude through the U.S. state to the Pacific as approval for the southbound Keystone XL pipeline languishes in Washington.
The Alaska plan would involve constructing a pipeline along the Mackenzie River valley and then west to existing ports on the U.S. coast, Alberta Premier Jim Prentice said Friday in an interview at Bloomberg’s headquarters in New York. Alaskan ports have been staging points for maritime crude shipments for decades.
Our state government is facing staggering reductions in revenue -- about 50 percent from last year -- because crude oil prices have dropped through the floor. Our state finances about 90 percent of its budget with oil money. We’re now looking at a deficit of $3.5 billion but that could grow by the end of the fiscal year on June 30.
Next year looks to have a similar deficit. Luckily, we have big savings accounts to ride us through this.
But the fact is that the deficit would have been a lot worse had the Legislature not made the oil tax change. Sen. Peter Micciche, R-Kenai, says that had the old tax remained on the books there would be $1 billion less revenue last year and this year. More here....
Today's relevant energy links from the Alaska gas pipeline office of the Federal Coordinator:
- Proposed gas pipeline to Petronas LNG plant in B.C. now at 560 miles
- LNG hopefuls urge Canada to allow accelerated depreciation
- Eastern Canada LNG projects lack local gas supply — and pipelines
- Japan reportedly ready to restart nuclear reactor early summer
- Tokyo Electric, Chubu may combine power plants under joint venture
- Yamal LNG nears 25% completion mark, energy ministry says
- Most of Gazprom’s LNG from Yamal will go to Europe, South America
- First passenger flight lands at new airport to serve Yamal LNG
- Falling LNG price in Asia cuts into European re-export trade
- Cheaper LNG prices in Asia send more cargoes to U.K.
- Lack of cargoes hits short-term LNG charters
- Ichthys LNG still on target to start production December 2016
- China’s oil and gas companies pull back on deals
- Low-cost gas will help U.S. petrochemicals industry retain advantage
- B.C. developer completes purchase of land for LNG project
- TransCanada plans to join oil-by-rail business
- Rail-to-marine oil terminals proposed for Washington coast
Alaska's Challenge of Cash & Energy Shortage: FOLLOW UP NEWS AND REPORTS
Useful Links, Interior Energy Project (IEP):
- 2-20-15. Commentary, AIDEA questions asked and answered and Harvest Alaska's letter.
- 2-2-15. Spectrum LNG letter to Governor Bill Walker
- 2-2-15. Ray Latchem email to NGP
- 2-2-15 KTOO on IEP
- 1-28-15. ADN on IEP
- 1-28-15. AIDEA's IEP News Announcement
- 1-8-15. AJC On Old IEP Failure
- 10-25-14. News Miner, IEP Permitting Complete
- 9-19-14. AIDEA-MWH Sign Agreement
- 7-3-14. MWH Announcement
- 1-1-14. ABM on Flint Hills Closing
- RCA's Docket Link re: FNG, Harvest Alaska
- RCA's Order Re: FNG's TA
- FNG's 11-21-14 RCA TA Filing
2-5-15. Fairbanks News Miner: Senate Special Committee on Energy hearing today on Alaska Industrial Development and Export Authority purchase of Fairbanks gas company.
- 2-2-15 KTOO by By Dan Bross, KUAC - Fairbanks and Alexandra Gutierrez, APRN - Anchorage.
Governor Bill Walker’s latest move to advance the state backed Interior Energy Project with the purchase of a private natural gas utility is expected to expand availability and lower the price of gas in Fairbanks.
The Alaska Industrial Development and Export Authority has signed a letter of intent to purchase Fairbanks Natural Gas parent company Pentex. AIDEA spokesman Karsten Rodvik says the state corporation would pay $52.5 million for Pentex company assets currently used to supply about a thousand Fairbanks area customers with Cook Inlet gas.
1-8-15, Alaska Journal of Commerce by Elwood Brehmer.
After a year-and-a-half of work, time has run out on the Interior Energy Project — at least for now.
MHW Global Inc., the Alaska Industrial Development and Export Authority’s partner in the plan to truck North Slope-sourced liquefied natural gas to the Fairbanks area, withdrew its request for an extension to its contract on the project in a Dec. 30 letter.
The working contract, known as the concession agreement, expired Dec 31. The AIDEA board of directors discussed the option to extend the agreement up to 90 days in an executive session at its Dec. 16 meeting but did not take any action on the matter.
AIDEA spokesman Karsten Rodvik said the authority formally terminated its agreement with MWH Jan. 5.
Alaska's Challenge of Cash & Energy Shortage: Part III
Are we for an agreeably priced, desirable and stable source of home heating fuel for Fairbanks? Absolutely. The question is whether a state-of-the-art LNG transportation/gas distribution system is better done:
1. by a state government agency owned and operated/or supervised city gas utility, or
2. by an open process which invites competitive, private sector proposals from qualified proposers in order to achieve the most cost effective possible project?
In this series, we have tried to construct a background for this discussion so that our readers will have a basis for decision making. We do encourage all citizens to become informed and make their views known.
Lastly, we seek accuracy. Please contact us here with any factual corrections. Just as we provided Business Leader Buzz Otis' opinion at the outset, and Ray Latchem's so will we provide space in our archives for your own responsibly framed comments. Thank you for reading! -dh
USA Today: "Drill With Care In ANWR and Everywhere" (Thanks to Parish Braden in Congressman Don Young's office for this link....)
NPR. Jim Prentice, the premier of Alberta, Canada, says ...., "if President Obama vetoes a bill that would approve construction, the issue would not necessarily go away."
Calgary Herald. Premier Jim Prentice is optimistic the fiery debate around the long-delayed Keystone XL oil pipeline is finally coming to a head, but one prominent U.S. senator says Canadians shouldn’t be holding their breath just yet.
And, NGP Readers, CBC now Reports a development that gives President Obama a 'plausible' reason -- other than politics -- to delay approval of the Keystone XL pipeline project. Is there anyone who seriously believes that the White House did not call EPA and say, "Hey, we need some cover on this Keystone thing...." -dh
In Part I we described the history of Alaska's fiscal challenges, its worsening cash shortage. In Part II, we devoted more focus in particular on Interior Alaska's energy shortage which is really a challenge more of price than scarcity.
After all, at some price, almost anything is available and what Fairbanks is experiencing is a lack of an affordably priced, stable supply of a desirable fuel for home heating and power generation. (Note: we normally find that the term "affordability" in public dialog usually refers to the word "subsidy". Public officials find it difficult to define the term "affordability" because the definition truly varies from the eye of one beholder to another's. As a result, there is commonly a consensus that something needs to be made -- in general -- more "affordable" for a certain group at the expense of another group. In between the groups, politicians hear testimony, test the wind, calculate what is most desirable for their own constituents and for themselves...and then go about amending/supporting/opposing whatever legislative bill becomes the solution for "affordability" and -- in the end -- the majority rules.)
In this case, we see a nexus coming as Alaska's cash shortage (described in Part I) runs headlong into Fairbanks' desire to have subsidized support of a desirable and stable supply of agreeably priced fuel (Described in Part II).
Close to Fairbanks is a stable supply of reasonably priced coal local citizens could use if they are willing to convince the EPA that emissions will improve rather than detract from air quality, and if they are willing to keep the boilers burning with shovelfuls of coal throughout most of the year. Of course, the city's coal fired, downtown hot water heating system could be expanded but then the cost might not be acceptable.
And, Fairbanks could continue to import a stable supply of heating oil whose price varies with world commodity supply and demand. But the price of fuel oil is the very reason citizens have motivated their elected officials to 'do something'.
Fairbanks' electric cooperative generates some electricity from the Wind. But wind generated power only works when the wind blows and requires a back up source of reliable power--which sort of defeats the rationale for wind power in the first place (unless one happens to be located in a place where the wind blows almost all the time, where consumers are willing to pay premium rates, where government subsidies make wind generated electricity more "affordable", and where weather, bird migrations, FAA flight patterns and other factors are favorable).
Insufficient hydro power from ice free areas exists to be of much assistance right now to Fairbanks, though the AIDEA controlled Susitna-Watana Dam and Hydro Project could provide some relief, someday. And, its price could be reasonable. Federal air quality concerns might be replaced, however, with water quality and other issues conceived by environmental activists. Plus, electricity is more efficiently employed for power and light than space heating.
And, there are other options farther down on the list of viable possibilities, including biofuels, nuclear and geothermal.
That brings us back to the current proposal now on the table.
Yesterday (in Part II) we saw how former Governor Sean Parnell's Alaska North Slope LNG trucking/gas distribution system failed while current Governor Bill Walker proposes with AIDEA that it be refashioned into an LNG trucking/gas distribution system with an, as yet, unidentified source of gas.
Alaska LNG expert Ray Latchem explained in an email to us and a letter to Governor Walker how the private sector could more efficiently manage the complex project based on the original Alaska North Slope LNG construction site. Meanwhile, one of Alaska's most important producing companies, Hilcorp, with assets in both Cook Inlet and on the North Slope began a process for supporting an Interior LNG project staged from the Cook Inlet producing area. Some observers have alleged that the administration has used its regulatory and legal power to stop or delay that project in favor of the one proposed by AIDEA.
Fairbanks News Miner. To the editor:
I would recommend the reader look up the definition of socialism. Our state already owns the railroad, a lot of land, property and I don’t know what else. Now Fairbanks Natural Gas is next.
State of Alaska, please stay away from our Permanent Fund Dividend.
We expect to see all of these concerns answered in coming weeks both as Walker faces the press and as the Legislature begins to question the administration.
As those in responsible positions prepare their strategies, we would offer a few questions and comments from this not very knowledgeable observer who is very high up here in the grandstands. But if we attended a press conference tomorrow with all the executives quoted in the news release, these are the sorts of questions we would expect could be asked. One hopes there are easy, informative, non defensive. transparent answers to such honest questions dealing with the disposition of public funds.
In absence of an actual press conference event, then, here is a variety of questions coming immediately to mind:
- We reported yesterday that when one adds up the savings assets (aside from the Permanent Fund) and deducts from those 1) this year's savings subsidy to the operating budget and 2) Alaska's retired employee unfunded pension liability, Alaska is virtually broke -- with the exception of the "rainy day Permanent Fund". Problem is that as another 'rail' of Alaska politics, few citizens and no politicians want to suggest dipping into the Permanent Fund in support of state operating or capital projects. Question: where would AIDEA get $52.5 million to fund a Fairbanks LNG transportation and scores or hundreds of miles of natural gas distribution lines, as this news release suggests? Is it money left over from Parnell's earlier LNG trucking project? If so, does use of it for another project require legislative approval?
- The state of Alaska has already allocated hundreds of millions of dollars toward potential ownership in either 1) an in-state gas pipeline or, 2) an LNG/pipeline project to move gas primarily to Asian markets...and also to Alaska markets. Questions: Since both of those pipelines run right by Fairbanks and since both plan for community access to the gas, what happens to AIDEA's proposed LNG trucking project if cheaper gas becomes available right at Fairbanks' front door? Will the trucking and gas conditioning facilities be made surplus, and sold? Will the state pay the outstanding LNG Project debt (i.e. with what money?) or will gas utility rate payers be on the hook for both the surplus LNG assets and the cost of service of the gas pipeline project?
- The AIDEA release begins with the phrase: "In conjunction with Governor Bill Walker, the Alaska Industrial Development and Export Authority (AIDEA) has signed a Letter of Intent to purchase Pentex Alaska Natural Gas Company, LLC and its assets, including Fairbanks Natural Gas (FNG). Questions: Where can we find AIDEA board minutes/transcripts from a public meeting indicating approval of the board to 'work in conjunction' with the Governor on a project and to 'intend' to purchase a gas utility for a specific price? What does "In conjunction with Governor Bill Walker" mean? And, in what form does AIDEA have his commitment? Is a copy of the "Letter of Intent posted on the Internet?
- The news release says, "AIDEA will immediately commence due diligence on the proposed Pentex purchase at the Letter of Intent price of $52.5 million." Questions: Have Pentex and AIDEA agreed to this price? Can AIDEA produce any correspondence between itself and Pentex affirming all the 'intended' details of the sale? In what board meeting were the price and conditions approved, or is this a violation of Alaska's public meeting law? How could AIDEA, as a responsible project manager, agree on an 'intended' price before conducting a 'due diligence' investigation? What due diligence was undertaken to assure the board and Governor that $52.2 million was a just and reasonable market price to put in an 'intent' letter? Why would it have been inappropriate to have the letter of intent merely signify a willingness of the parties to perform sufficient due diligence to create an agreed upon price with specific purchase terms and conditions and then proceed only if the results were acceptable to the parties?
- AIDEA's news release goes on to say, "If AIDEA’s Board approves the purchase, the investment will enable AIDEA to effectively advance the goal of bringing affordable natural gas to Interior Alaska." Questions: How can AIDEA commit to the public that a project "will" bring "affordable" energy to a community without completing an acceptable series of engineering, environmental, economic, distribution, marketing studies--much like AGDC has done? What is AIDEA's definition of "affordable"? Did AIDEA also believe that the previous Alaska North Slope LNG trucking project would be 'affordable'? What makes the outlook for this project more attractive to AIDEA than the previous effort?
- The release claims that, "AIDEA’s acquisition of Pentex would promote an integrated gas distribution system that can be built and operated in a more efficient manner for the benefit of Fairbanks and North Pole residents and businesses?" Questions. Is AIDEA claiming that its experience as an LNG transportation and gas distribution managing owner can produce a "more efficient" gas distribution system? Can AIDEA describe what system against which its conceived project would be comparably, "more efficient"? How will AIDEA organize itself to either manage or supervise management of a Fairbanks LNG transportation and gas distribution system?
- The release quotes Governor Bill Walker as stating that, "AIDEA’s initiative to help streamline gas distribution systems in the Interior is a positive development.” Questions. Why would this effort streamline gas distribution when the previous effort failed? What exactly does 'streamline' mean when there is currently no gas system covering most of the city? Without engineering and cost studies and nothing more than the confidence of news release statements, how can any conclusion be drawn at this time that AIDEA's "initiative" will "streamline" gas distribution any better than the previous effort? Speaking of "AIDEA's initiative", was it AIDEA that asked the Governor to support a new attempt to provide a government-owned Fairbanks distribution and supply system, or, did the Governor ask AIDEA to explore this new effort? In either case, where are there public meeting records or emails affirming that AIDEA's adoption of the effort is a lawfully approved activity of the agency?
- AIDEA's board chairman stated in the release: "Pentex, under AIDEA ownership, will work closely with the community and utilities to reduce construction and operation costs for both natural gas distribution systems,” said AIDEA Board Chairman Dana Pruhs. “This efficient approach will lead to lower cost energy for consumers.” Questions. Will the current gas utility operate independently of the new service area, or do you envision combining the two into one? Do you anticipate City or Borough ownership of any or all of the facilities either from the beginning of operations or at a later time? Is it your vision that AIDEA will own and Pentex will be contracted to operate all or part of one or two utilities? Where does AIDEA intend to get the proposed $52.2 million purchase price? Why not let Mr. Britton continue serving his certificated area with +- 1 thousand customers while you apply the $52.2 million and other resources to a competitively bid project serving the rest of the city and allow a proposals to be submitted that are open to all qualified proposers and any project that will most efficiently meet Fairbanks needs? Wouldn't having two certificated areas promote price and efficiency competition? After the purchase will AIDEA put management of the utility out to bid, or is it AIDEA's intent to grant Pentex/FNG with a sole source contract? If the latter is the plan, what are the conditions and what are the triggers for replacing the manager if the management does not produce an efficient system leading to, "lower cost energy for consumers?" What is "lower cost" compared to; lower than comparable BTU of delivered fuel oil or lower than Pentex/FNG currently charges customers? Does Mr. Pruhs support the RCA's economic regulation of the new system? If it does not wish to submit to cost of service regulation, how can AIDEA show that the gas distribution system is either efficient or that customer rates are just and reasonable? Has AIDEA discussed with Mr. Britton compensation packages for management assuming AIDEA purchases and owns the system and contracts with Pentex to operate it?
- The gas system seller said, in conclusion, "We have appreciated working with AIDEA on the Interior Energy Project and look forward to a seamless transition,” said Pentex President Dan Britton. The Letter of Intent announcement happened rather suddenly last week following the statewide, November election and termination of the previous project. Is it your expectation now that instead of operating a +-1,000 customer distribution system, you will now preside over an AIDEA owned system, or two systems, covering the whole city? Have you discussed potential compensation, terms and conditions that could develop formally between yourself and AIDEA? Can you provide documentation in the form of emails or draft papers that give insight into any matter discussed in these questions? We believe that you have resisted the RCA's economic regulation of FNG over the years; now, under AIDEA ownership, would you support economic, cost of service regulation of the IEP?
We are always inclined -- if not required -- to give the benefit of the doubt to those engaged in great projects. Indeed, we applaud those who work tirelessly and unselfishly to coordinate and construct great works. We also remind readers that were this project entirely in private hands, we would probably ask nary a question unless some news event or public interest matter arose.
However, readers must also realize that from the tenor of the AIDEA news release, a publicly owned project is envisioned, fed with public monies. That elicits a very different array of questions designed to create transparency of the real and anticipated costs, nature and purpose of publicly funded efforts.
* * *
Please remember that we provide our news links, maps, presentations, documents and commentary for the archives so that those who follow us will have access to decades of data on Northern North American gas pipelines and the energy related policies affecting them.
We are especially concerned with accuracy in our own commentary, for while we follow these issues closely, we depend upon the eyes and brains of dozens of experts who regularly correspond with us.
Whenever a correction or addition to one of our commentaries is merited, we make the change so that the archives have the best possible information. Of course, we do not normally change our editorial position, but will even do that if a factual error is the basis for an editorial opinion. Accordingly, your input is invited all the time.
Thank you for your readership!
"Alaska's Challenge of Cash & Energy Shortage: Part I"
Additional references and historical background In "Alaska LNG Challenges"
First, there is the Challenge of Cash Shortage.
In the early 1980s, Alaska was feeling its oats.
Second, there is the Challenge of Energy Shortage, which we shall more fully address tomorrow in Part II, and it involves gas pipelines, distribution systems, state funded project competition and more....
To begin that discussion, below is a letter from one of a number of good, long-time Fairbanks friends, Buzz Otis (NGP Photo), and my initial response. In Part II we will examine a State Energy Shortage issue in more detail and provide what we hope are useful questions for decision makers to answer in their quest for solutions. Read more....
Elected officials were sitting on a cash dowry created by a decade of about a dozen tax increases levied on Alaska's infant oil industry.
The tax increases were primarily aimed at the unbelievably productive Prudhoe Bay oil field -- a 2 million barrel per day elephant field, the largest in North America.
But concerned citizens throughout the state were not unaware of this new phenomenon and where it might end if not properly handled.
State leaders and the citizens had in 1976 created the Alaska Permanent Fund in partial response to the question of, "What if we encountered a rainy day". Since that time the fund has been largely thought of as a source of annual payments to Alaska citizens of a Permanent Fund Dividend rather than a rainy day fund. The thought of actually using it for the purpose it was created -- to fund government operations on a "rainy day" -- is an anathema to most citizen beneficiaries and their elected representatives.
In the early 1980s a number of business, social, academic and political leaders from all regions of the state assembled for the most important forum of that day, called "The Challenge of Plenty". There citizens discussed the possibility of a constitutional amendment to control spending based on a population growth/CPI formula, and other ways of wisely preparing for the future.
Your writer played a role in organizing that conference and it was truly heartwarming to see all political parties and regions of Alaska participate courteously, collegially and in a true spirit of joint problem solving.
Suffice to say that while the highly cooperative leaders agreed upon the problem and potential solutions, they were never able to obtain legislation as the group recommended (i.e. though there was a constitutional spending limit effort in the early 90s which fatally eliminated or diluted the most critical provisions; and another effort by a minority of far-thinking legislators in the late 1990s.)
While Challenge of Plenty participants were highly concerned about unsustainable state spending, they also focused on the Federal Government's actions since statehood to steadily remove from the reach of citizens, access to resources on federal lands -- best illustrated by passage of the Alaska National Interest Lands Conservation Act.
A series of federal governments also succeeded in using various environmental Acts of Congress (i.e. ESA, CWA, CAA, NEPA, etc.) to restrict reasonable and traditional multiple use -- and wealth production -- on federal lands as well as reasonable ownership activity on private land.
Readers can thus appreciate how Alaskans have been caught between the charybdis of over spending and scylla of shrinking opportunity for natural resource revenue generation. -dh
Like Joseph of old interpreting the Pharaoh's dream to compel saving during years of plenty for the coming years of drought and famine, Alaska's political leaders were not unaware of the challenge. Like Pharaoh, they created a "Joseph"--the Alaska Permanent Fund--so savings during good times could allow for a sustainable economy during the lean years coming.
But the constantly changing demographic profile of voters and elected officials could not enforce management of the savings in modern times as the dictator, Pharaoh did in his era.
The University of Alaska-Anchorage's 50-year-old Institute of Social and Economic Research (ISER) has studied the importance of a "safe landing" for Alaska's economy and the discipline required to make that happen. Professor Scott Goldsmith (NGP Photo) has led this effort for over two decades, issuing "Fiscal Policy Paper #1" on August 1, 1989. That first paper states what has now become a long term, perhaps economically fatal challenge: "Alaska faces a problem that will be very tough to solve but is easy to explain: state government is spending more than it collects."
The challenge of sustainability has worsened over two and a half decades: for, as Prudhoe Bay production declined, spending never sufficiently declined to reach a sustainable equilibrium and, now, oil commodity prices (i.e. at half what they were last summer) are exacerbating the challenge for this highly oil-dependent state.
ISER's most recent analysis of the situation shows how to obtain a sustainable glide path for the Alaskan economy, but so far elected officials have found it impossible to convert that wise counsel into sustainable reality. (Other Fiscal Policy Papers in archive here)
Alaska now has the greatest debt per capita of any state and the greatest per capita spending along with the greatest dependence on a volatile commodity and the most expensive oil and gas operating area in the country. Some have tried to make these facts the fault of an oil industry whose productivity has provided Alaska with the opportunity to make its own wise or unwise taxing, debt and spending decisions.
But state leaders are now seriously facing the cash shortage issue as a matter of imminent, not theoretical, danger. ISER has clearly demonstrated that the cash flow runs into default in a few years, without dramatic budgetary changes.
Furthermore, from a balance sheet viewpoint, the picture is somewhat more bleak when citizens realize that the unfunded state employee retirement fund is short just under $10 billion, balancing out a similar amount of non-Permanent Fund savings accounts acting as subsidies for annual operating budget deficits.
So, in effect, the day of reckoning is not a few years 'down the pike', but is here TODAY.
In Parts II and III (Scroll up), you will be considering whether increased state government debt (even AIDEA revenue bond debt) or use of depleted savings for a Fairbanks gas utility is either rational or necessary.
Email received yesterday, 2-1-15, from Buzz Otis, Fairbanks businessman and community volunteer:
On Feb 1, 2015, at 2:33 PM, Buzz Otis <buzz@xxxxx> wrote:
Morning Dave, I wrote this late last night.... Any suggestions are welcome. With respect, Buzz
Good evening Dave,
(Answering Buzz's email, received yesterday. How can anyone with a heart not be drawn to his heartfelt and articulate description of Fairbanks' Energy Challenge? Tomorrow, we'll go into much more detail, in Part II.)
You've written a thoughtful, compelling piece. Thank you for sharing it with me. I will run your message Monday.
As a former regulator I try to look at all sides of issues like this and believe my best role is to help educate fellow citizens without becoming an advocate or project opponent before all the facts are known.
I also urge you and our very smart mutual and respected friends there to think strategically about the long term, and answer to your satisfaction every possible question--including those both identified and inferred in the News Miner article. I'll try to help by providing some of my own questions in Part II, tomorrow.
I will make two more observations to you and my Golden Heart friends.
1. I completely understand the gravity of the situation. We agree that where possible the private sector is best equipped to respond to economic supply and demand issues. While Alaska has many examples of failed government projects, it also has a number of public facility projects that are in the public interest. Bradley Lake Hydro, certain roads and bridges come to mind--although a stable energy supply project like hydro is hard to compare to an energy supply governed by commodity pricing and variable costs subject to regulatory 'cost of service' reviews.
2. The trick for those requiring (and may I even say, "desperately needing") a successful Interior energy project not fully appreciated by private investors, is to make sure government applies the same due diligence discipline as you would apply to a new company project before you stake family and company money on it. The questions the News Miner and I and others have raised seem mostly like simple due diligence questions to me. They are the type of questions your banker might ask you about your proposed project. And, they are the type of questions th which the Governor and Legislature will likely wrestle as the initial and continuing due diligence phase begins.
That said, we all agree Fairbanks is in dire need of an efficient energy remedy. Many would also agree that the solution could merit government assistance. In support of these propositions, it might be helpful if:
1. Project advocates approached all questions and concerns as you have: eagerly, positively and non defensively. Successfully doing one's homework, cheerfully and knowledgeably answering all concerns would avoid conflict and best prepare for statewide consensus. Having the other party's (Hilcorp's) concerns quickly addressed are probably also in Fairbanks' interest due to that company's significant investment in production that supplies gas (for both heating and power generation) to both South Central and to Interior Alaska consumers in household, business and commercial sectors.
2. As questions are answered, it might be well to encourage public forums -- not for the purpose of beating the drums for or against the project--but for the purpose of helpfully answering all reasonable questions and concerns.
I join others who would love to see Fairbanks' longstanding energy needs responsibly met, quickly. If it is wholly or partly done with public funds, I am sure Fairbanks would agree that those in charge of turning the dream into reality will best encounter public consensus when they've done sufficient due diligence to face the public confidently, with well studied answers.
Since the due diligence stage is not complete, it would be to everyone's advantage if the questions that are answerable at this early date -- and future mileposts -- are timely addressed.
Sent from my iPhone
I do hope this finds you and your family well. I appreciate your correspondence on a regular basis and yesterday’s article that the state of Alaska, through AIDEA would purchase Pentex Alaska Natural Gas Company, LLC and its assets which include Fairbanks Natural Gas for 52.5 million.
I would like to applaud Governor Walker for taking such bold and quick action to address interior Alaska’s energy needs. Being a private businessman in the interior since 1976, this may come as a surprise to my friends and colleagues, so I will attempt to explain my position in the hopes that you and others can understand the strangle hold we have had on our economic neck with the outrageous costs of energy here in Fairbanks and the surrounding area.
First of all, I am a staunch private enterprise advocate and will continue to fight for the freedom that private enterprise gives to so many Americans until the good Lord decides it is my time to leave here. I have been proactive over the years, encouraging various plans, through my involvement in the Fairbanks Chamber, Fairbanks and North Pole Economic Development Corporations, and the Support Industry Alliance, that promised to lower the cost of energy in Alaska and particularly Fairbanks, to no avail.
When I worked on the Alyeska Pipeline in 1975 we were told the next big project was a gas line that would surely start within a year or two of the oil lines completion.
I remember many gas line projects starting and stopping as you have. I remember when Ray Latchem came to Fairbanks with Fairbanks Natural Gas, I remember touring Point McKenzie with Ray and looking at his small plant there and him telling me how we were going to have lower energy costs in Fairbanks as a result, and we did. However, that only lasted a short while and as the economics of shipping small amounts of gas north by truck, gas contracts renegotiated out of Cook Inlet, and the cost of doing business always having an upward bias, plus wanting to maximize profitability, our natural gas prices came up to par with fuel oil.
In the Fairbanks area, we are heating our homes 7 to 8 months out of the year. Up until recently, we were paying close to $4.00 per gallon for # 2 heating oil. Even today with the price of crude dropping 50 to 60 % our price of heating oil only dropped 25 to 30 %.
As a result, folks here are burning wood, coal, or pellets trying to make it by. Many of our residents are using state of the art wood or coal burning stoves or boilers, with clean dry fuel. Others aren’t doing that. Many oil fired boilers aren’t tuned correctly which when added together, and coupled with our geography, it puts Fairbanks and North Pole air quality out of compliance with EPA on certain days throughout the winter. Not particularly attractive for business or personal health.
I remember Bill Popp, at ADEC, telling me a few years ago that he likes to see a prosperous Fairbanks because it is great for Anchorage’s economy, after all, just about everything that comes to Fairbanks comes through the port of Anchorage! Bill Popp gets it!
* * *
Dave, on top of the high cost of fuel can you believe the cost of electricity for my small commercial buildings is over .21 per kilowatt hour?!
Unfortunately, private enterprise hasn’t delivered low cost energy to Fairbanks! Our energy costs are some of the highest in the nation. It is costing us economic opportunity and causing people to leave our community! We have a US Air Force base that we have had to fight to keep open on two separate occasions, in the past 7 years. Even though we enjoy an extremely strategic location, the military costs are driven by outrageous energy prices. Next month we will be doing our best to keep our Army troops here. I can’t help but believe that if we enjoyed low cost energy like our neighbors to the south we would be in a better position to grow business here.
Our past and present legislative members and past governors, many of which question Governor Walkers intentions, when he put forward the proposal to have AIDEA purchase Fairbanks Natural Gas, are the same individuals that have insisted that every barrel of crude oil is monetized, rather than using some of our royalty oil to ensure economic stability in Alaska. Fairbanks has a crude oil line and until recently had two refineries in North Pole and we pay some of the highest energy prices? Just think what a lower cost of refined product, done through proper negotiations with the refiners, could do for our industry here. Marginal projects become viable. Citizens have disposal income to spend elsewhere! Abundance and positivity would be on every business person’s tongue!
To sum up we need low cost natural gas to fuel our homes, businesses, schools, mines, and military installations while providing a lower cost for electrical generation. PRIVATE ENTERPRISE HAS NOT PROVIDED LOW COST ENERGY! WE CAN’T WAIT ANY LONGER Personally, I have built energy efficient buildings, burn coal at one facility and burn wood in my home and in my shop. These buildings also have oil backup for security. Without energy efficient buildings and burning alternative fuel sources our bottom line would be negligible.
This is no time to divide and conquer. We need your support. Please consider helping Interior Alaska find its way out of these high energy costs and support a more timely solution. I believe the only way forward in a timely manner, if at all, is with state participation. We don’t have such a fiscal crisis that we can’t invest in the future of Alaska. Please find a way to support the governor.