FAIRBANKS -- The small private natural gas utility in Fairbanks, which has about 1,100 customers, "engaged in numerous highly irregular transactions" that warrant a state investigation, according to the Fairbanks North Star Borough.
The borough raised numerous objections to the proposed 6.92 percent rate hike by Fairbanks Natural Gas and asked the Regulatory Commission of Alaska to review the company's operations.
FNG provides natural gas service to the urban center of Fairbanks, while a municipal utility is forming to serve North Pole and suburban Fairbanks. Both entities competed for the right to serve the less populated areas but the RCA awarded a certificate to the municipal entity in late 2013.
Even with the recent rate increase in the Anchorage area, FNG customers typically pay 2.5 to three times as much as Enstar customers in Southcentral Alaska per thousand cubic feet of natural gas. The Fairbanks company has a plant at Point MacKenzie to liquefy natural gas and it ships the fuel north by truck to supply its system.
In a complaint filed Friday, the borough said a prime example of the "irregular, unreasonable and unsupported transactions" by FNG took place last year when the company created a new corporate enterprise to sell gas to itself. FNG now buys liquefied natural gas from Titan Alaska LNG, an unregulated company owned by the same interests that own FNG.
Dan Britton, president of Fairbanks Natural Gas, is also president of Titan Alaska LNG and Arctic Energy Transportation, a transportation affiliate. FNG is to become regulated but it is now a customer of both Titan and Arctic Energy, which are not regulated.
The borough charged that the absence of supporting documentation for the corporate shuffle suggests that the "highly irregular and unsupported transactions have been concocted to circumvent and avoid the commission's cost-based regulation of those assets."
"By all appearances, FNG is being gutted of its financial viability by this shell game, permitting FNG's owners to realize monopoly returns through affiliated but nonregulated companies to the detriment of the public interest and its ratepayers," the borough said.
In seeking the rate increase, Britton told the commission in his prefiled testimony June 30 that the purpose of creating new companies was not to avoid RCA regulation. He said that with the state set to regulate FNG rates, "it made sense" for the company to just go back to a model in which it had both regulated and non-regulated lines of business.
A decade ago, he said, the RCA granted FNG an exemption from rate regulation. When that happened in 2003, all of the companies were combined for convenience because all were unregulated. Now that FNG rates are to be regulated, the company finds it convenient to have its LNG supply and transportation company unregulated.
"While the RCA does not directly regulate LNG plants or trucking, the commission will effectively have considerable authority over the rates charged by Titan," Britton said in his testimony.
"Titan is giving FNG a great deal, considerably less than a market price," Britton said.
The borough said FNG provided "no basis for this claim" and it asked the RCA to allow the filed rates to go into effect, "subject to investigation and refund pending the conclusion of its investigation."
In addition to the new corporate entities, the borough challenged a transfer of FNG ownership that took place in June 2013 without prior approval by the RCA. Because it operates with a certificate of public convenience and necessity, FNG was obligated to seek advance approval of the change, the borough said.
FNG is owned by Pentex, which is controlled by Harrington Partners L.P., which is controlled by Lydiard partners L.P., which is controlled by Series L1 of Merced Capital Partners.
The city government has also asked for an RCA review, in a comment filed by Mayor John Eberhart.
"This appears to be the wrong time for FNG to be seeking a 6.92 percent increase to its rates. The city believes that further investigation by the RCA is needed," he wrote.
Dermot Cole can be reached at dermot(at)alaskadispatch.com.