An apparently surprise discovery of natural gas near Cook Inlet has sparked a dispute: What to do with tens of millions of dollars in potential profit?
Should all or much of the gain be used to benefit electric and gas rate payers in Southcentral Alaska? The state attorney general's office says that approach appears to be supported by precedent.
Or should the profits go to the owners of Cook Inlet Natural Gas Storage Alaska? Officials there say they should, and argue that the gas was found during the creation of the underground storage reservoir they paid for.
The dispute is playing out in filings before the Regulatory Commission of Alaska, which can decide how a potential gas sale should proceed.
The attorney general's Regulatory Affairs and Public Advocacy section says the challenge of divvying up a windfall potentially worth $30 million is a "welcome" one.
The discovery occurred in early 2012, as the new public utility was creating the gas-storage reservoir beneath the city of Kenai.
When CINGSA acquired the reservoir, it believed the gas had been almost entirely removed by the previous leaseholder, Marathon Oil, utility officials say.
The plan was to inject gas into the reservoir each summer so it could be extracted in the winter -- as has happened the last two years -- helping the state's most populated region weather seasonal demand for gas and avoid a dangerous shutdown of heat and power if the gas supply was interrupted.
With much of the gas in Cook Inlet removed after decades of production -- reducing the rate at which gas flows -- the storage provides an important option for CINGSA's customers: Enstar Natural Gas, Chugach Electric, Municipal Light and Power, and Homer Electric Association.
However, the reservoir wasn't depleted. As CINGSA drilled a well needed for injecting and removing stored gas, it discovered the "unexpected" pool containing 14.5 billion cubic feet of gas.
CINGSA argues that its owners -- primarily Enstar parent company AltaGas of Canada and Mid-American Energy in Iowa (also, two Alaska entities own 8 percent) -- provided the startup capital for the $160 million storage unit and should receive all the benefit from the sale of the gas.
"They put all the capital up front to ensure this project went forward. The customers in no way, shape or form paid for that initial investment in the wells," said John Sims, vice president of corporate resources and business development at Enstar and CINGSA.
CINGSA said before the commission that most of the discovery will stay in the ground to help provide more pressure in the reservoir than was initially intended. That extra pressure will help gas flow more easily, offsetting costs for ratepayers by reducing the number of wells that need to be drilled.
It "absolutely provides a benefit to customers," said Sims.
The storage entity says it can initially sell 2 billion cubic feet of the discovery without affecting its contractual obligations to its gas-storage customers. It also wants the option to sell more later, as long as experts show its contractual obligations to its customers won't be affected.
The attorney general's office argues that CINGSA says the amount it can safely sell will likely grow to 4 billion cubic feet. That could be worth about $30 million, writes Steve DeVries, chief assistant attorney general.
DeVries argues that commission precedent suggests that ratepayers with the electric companies and Enstar should benefit from the sale, by receiving "all or a significant part of any gain realized from sales of excess gas."
The new gas is a byproduct of the acquisition of the facility, "whose costs were capitalized and included in CINGSA's rate base," writes DeVries. In other words, ratepayers are bearing the cost of the work that led to the discovery, he said.
The utility already gets a "generous" 12.5 percent return on equity, compensating CINGSA for its investment plus any risk that comes with the facility's operation, he writes.
DeVries acknowledged that there may be important facts the state does not know. He said CINGSA should be given a full opportunity to explain its side of the story.
"The nice thing about an investigation is you can figure out if there's more we should know or if there's anything else CINGSA might provide that may shed light (on the situation)," he said.
Also challenging the storage facility and its owners is Kenai Landing, a 55-acre, mixed-use development in Kenai. Investors in that development believe they're entitled to about 8 percent of the gas, said Steve Agni, an investor.
A filing submitted by Jon Faulkner, president of Kenai Landing, claims CINGSA "secretly" knew it was likely to discover gas where it did, based on evidence it received from Marathon when it acquired the oil and gas leases.
CINGSA kept that information hidden even as it was condemning the subsurface portion of the reservoir that once belonged to Kenai Landing, Faulkner argues. Like the state, Kenai Landing also argues that ratepayers should benefit from sales of CINGSA's discovery.
What the storage entity owes Kenai Landing for the condemnation of the subsurface land is yet to be decided by the Superior Court. "We feel they are trying to do an end run around our lawsuit," said Agni.
But the court, while it has not decided the case, said in a summary judgment that Kenai Landing has no rights to the found oil and gas, according to Moira Smith, vice president and general counsel at Enstar and CINGSA.
CINGSA officials pointed to a line in the order that said potential compensation for Kenai Landing "does not include ownership or other rights regarding" the found gas.
The storage entity holds full rights to the oil and gas, purchased from Marathon, said Smith.
Kenai Landing "glosses over huge swaths of facts and findings of the court, so it's disappointing we're still engaged in this conversation," she said.
CINGSA officials said the utility did not expect to find gas and did not hide information. Had Marathon known extra gas was there, the company would have argued for a higher sale price.
"Everyone at that time believed it was depleted," she said. "We were wrong."
Friday is the deadline for comments before the commission.