NERA Economist’s Role in Regulatory Commission of Alaska Docket U-15-016: Proposal of Cook Inlet Natural Gas Storage Alaska, LLC to Retain 100 Percent of the Benefits from the Sale of Found Gas

The Situation

Cook Inlet Natural Gas Storage Alaska, LLC (CINGSA) operates a natural gas storage facility and provides firm service to ENSTAR Natural Gas Company, a Division of SEMCO Energy, Inc. (ENSTAR); Chugach Electric Association, Inc. (Chugach); the Municipality of Anchorage d/b/a Municipal Light & Power (ML&P); and Homer Electric Association, Inc. (HEA) and its subsidiary, Alaska Electric and Energy Cooperative, Inc. (AEEC) (jointly, HEA). On 30 January 2015, CINGSA filed Tariff Advice 20-733 with the Regulatory Commission of Alaska (RCA) proposing tariff rules that would allow it to make commercial sales of native gas it inadvertently found remaining in the reservoir of its regulated storage facility and to retain 100 percent of the proceeds for its shareholders.

NERA's Role

Chugach retained NERA Vice President Kurt G. Strunk to evaluate CINGSA’s proposal, which would transfer all benefits of the found gas to shareholders and none to Firm Storage Service (FSS) customers. Mr. Strunk prepared pre-filed rebuttal testimony and testified in person at the hearing before the RCA, where he explained that the discovery of found gas is a unique situation: it is not common that regulatory bodies have to address the treatment of found items of such substantial value. Mr. Strunk determined that the rationale proffered by CINGSA for attribution of all proceeds to shareholders—i.e., that the discovery of gas represented the realization of a diversifiable risk—was fundamentally flawed. 

Looking beyond diversifiable versus non diversifiable risks, Mr. Strunk focused his testimony on how the cost-of-service regulatory regime treats similar increases or decreases. Mr. Strunk found that CINGSA’s FSS customers should enjoy the benefits of a cost-of-service offset for the sales proceeds of any found gas by CINGSA and testified that fairness requires that any reduction in CINGSA’s costs should be reflected in the FSS customers’ rates. Consistent with the standards outlined in Democratic Central Committee v. Washington Metropolitan Transit Area Authority Commission, 485 F.2d 786, 806 (D.C. Cir. 1973), Mr. Strunk also analyzed the risk allocation as between CINGSA and the FSS customers and assessed unusual provisions in the FSS service agreements through which the initial risks of the size of available storage in the CINGSA facility were placed on customers. Mr. Strunk testified that FSS customers, through execution of long-term firm service agreements, had effectively underwritten the construction of the storage facility. Moreover, Mr. Strunk emphasized the fact that the gas was discovered by a regulated entity in the ordinary course of its public duties. 

The Result

The RCA denied CINGSA’s proposed tariff revisions, while permitting CINGSA to sell 2 Bcf of found gas. The RCA directed CINGSA to allocate 87.6 percent of the gain on sale to FSS customers and 12.4 percent of the gain to shareholders, thereby providing FSS customers with a significant offset to their future cost-of-service based storage rates.