RCA decision could throw gas storage project off schedule

Posted: Monday, January 03, 2011

A conditional approval given a planned $180 million gas storage facility by the Regulatory Commission of Alaska contains a poison-pill provision that could cause the project to slip a year or more in schedule, developers of the project told the regulatory commission in an appeal of the decision.

If the gas storage facility isn't completed so that it can be used in the 2012-13 winter, Southcentral Alaska gas and electric consumers could get hit with $30 million or more in extra costs if gas and electric utilities have to buy high-price peak period gas from producers, Enstar Natural Gas Co. told the regulatory commission.

In a Dec. 16 order granting conditional approval, and designating the project as a utility, the RCA required Cook Inlet Natural Gas Storage Alaska LLC, or CINGSA, to complete acquisition of all property rights by Dec. 30.

If that doesn't happen, a schedule for hearings and final approval by Jan. 31 of a Certificate of Public Convenience and Necessity would be voided, which would throw the project off the tracks in terms of its construction timetable, Enstar spokesman John Sims said.

The storage project is in an old gas field on the Kenai Peninsula. CINGSA is a joint venture of Enstar parent SEMCO Energy and Mid-American Energy Holdings. Enstar, the regional gas utility, and two regional electric utilities, Chugach Electric Association and Municipal Light and Power, have agreed to purchase and store gas in the facility.

In a motion appealing the RCA order CINGSA said it will be impossible to meet the Dec. 30 deadline and that making the approval conditional on completing property acquisition with an eminent domain power that designation as a utility confers "makes the project a hostage" of 44 property owners with which it is now negotiating, CINGSA said in its appeal. One of the entities with which CINGSA is still negotiating is Marathon Oil Co., which holds leases at the Cannery Loop gas field in which the storage project would be located.

The state of Alaska has approved a gas storage lease for the Sterling C pool in the Cannery Loop field, but Marathon has not yet agreed to relinquish its rights to the Sterling C pool.

In its appeal of the RCA order CINGSA said having eminent domain powers of an approved utility will enable it to complete negotiations with the various property owners and to pay fair market prices.

"Without an unconditional certificate and specified service territory (conferred by the regulatory commission) CINGSA has no way to compel those property owners to negotiate in good faith or to accept fair market value for their property," CINGSA said in its appeals.

There is ample precedent of the Alaska regulatory commission giving approvals to projects such as gas pipelines before all property rights are secured, CINGSA said.

If the acquisitions are not completed and the company cannot get final approval by Jan. 31 of a certificate, the project schedule is in jeopardy, the appeal said.

Sims said the certificate is necessary to give investors confidence and to allow procurement of equipment and materials to proceed.

"If the regulatory commission grants a certificate the investors know CINGSA is legally a utility with authority to recover costs in the tariff. It will provide clarity. Without that security we will be unable to raise the investment needed," Sims said.

Enstar and MidAmerican have invested $15 million to date in project planning and permitting.

Sims said the storage project, the first in Alaska not owned by a producer, must be completed and ready for gas injection in the fall of 2012 so that Enstar and the electric utilities can withdraw gas during the winter of 2012-2013.

Absent that, the utilities would have to purchase peaking supplies under non-firm contracts with producers, Sims said. Given the current declines in Cook Inlet gas production there is no guarantee that the peaking supplies will actually be available in mid-winter.

Gas supplies are increasingly tight in the region. Enstar is now short 1 billion cubic feet of its 33 billion cubic feet requirement for 2012.

If the storage is not available Enstar has estimated that the additional costs to consumers could be $30 million because of the premium peak gas price, but there is also the danger that the gas might not be available.

The utilities want their own storage project so they can purchase gas in the low-demand summer months and inject it for storage and withdrawal during the winter, Sims said.

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