Alaska's Challenge of Cash & Energy Shortage: Part III

(Reference: Part I, Part II)

Here, we'll track future follow-up

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

Other News:

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.

Herb Butler

Fairbanks

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.

Accordingly, we wish all project participants well and look forward to having these and many other questions answered with the passage of time.

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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!  

                  -dh