Integration into Upstream Fuel Markets by Alaska’s Electric Utilities: The Role of a NERA Expert

The Situation

On 11 March 2016, the Municipality of Anchorage d/b/a Municipal Light & Power Department (ML&P) and Chugach Electric Association, Inc. (Chugach) filed a joint request for approval to acquire ConocoPhillips Alaska, Inc.’s (CPAI’s) interest in the Beluga River Unit (BRU) and for related approvals. ENSTAR Natural Gas Company (ENSTAR), a local gas distributor, entered regulatory proceedings as an intervenor, arguing that approval of the acquisition would have a significant impact on its position as the primary natural gas purchaser in Southeastern Alaska and as a party to the gas supply agreement that would be directly affected by the transaction. At issue was the proposed assignment of CPAI’s interest as seller in CPAI’s gas supply agreement with ENSTAR affiliate Alaska Pipeline Company. In addition, ENSTAR was concerned about the transaction’s impact on the Cook Inlet Gas market, specifically on remaining utility gas purchasers such as ENSTAR.

NERA's Role

Chugach and ML&P retained NERA Vice President Kurt G. Strunk to analyze the acquisition and to present the results of his analysis as support for their request for regulatory approval. Mr. Strunk prepared a valuation analysis focused on the net present value effects of the acquisition on each utility’s future cash flow. Mr. Strunk also built a revenue requirements model to analyze the effects of the acquisition on customer rates. He summarized his work in a report entitled “An Economic Analysis of the Acquisition of ConocoPhillips’ Interest in the Beluga River Unit.” The Regulatory Commission of Alaska (RCA) relied on this report as direct testimony in proceedings related to the joint request for approval. Mr. Strunk’s report presented NERA’s analysis of the costs, benefits, and risks of the BRU acquisition for ML&P and Chugach. It considered the effects of the BRU acquisition on the expected cash cost of gas, estimated gas revenue requirements to be recovered in electric rates, the volatility of gas costs over time, and the security of gas supply. NERA’s base case analysis outlined significant savings for both ML&P and Chugach customers, while various sensitivity cases demonstrated that the acquisition decision is open to a wide range of plausible market outcomes. Mr. Strunk appeared as an expert witness before the RCA and responded to cross examination questions from the parties to the case and to inquiries from the bench.

The Result

The RCA affirmed the approval of ML&P and Chugach’s acquisition of CPAI’s interest in the BRU. Relying in part on NERA’s economic analysis, the RCA based its decision on the finding that ML&P and Chugach’s customers would accrue more benefits than costs from the acquisition. In addition, the RCA was persuaded that the acquisition would provide the utilities and their customers with increased gas cost stability and enhanced gas supply security, which would qualitatively benefit ML&P and Chugach customers throughout the remainder of the BRU’s existence.