The lower Kenai Peninsula’s deal to help pay for a natural gas distribution line from Anchor Point to Homer could cost gas users more than the $1 per million cubic feet tariff to be paid over 10 years that the Homer City Council supported in 2012.

In comments by the mayor at Monday’s Homer City Council meeting, Mayor Ken Castner warned that he’d discovered ENSTAR Natural Gas’ recovery of what’s called a “contribution in aid of construction,” or CIAC, wasn’t penciling out the way the city had been told it would.

“I just need to inform the public that we have … a problem with what we thought the deal was,” Castner said.

He also shared a “letter from the mayor” about the issue (see sidebar).

According to Regulatory of Commission of Alaska records, a line surcharge pitched by ENSTAR as costing $2.5 million in 2012 now has a balance of $5.4 million.

Unclear is how much, how or even if ENSTAR will seek to recover money to pay for the increased line surcharge.

In an email to the Homer News, RCA Media Liaison M. Grace Salazar said that in a 2016 filing where ENSTAR sought a tariff — and the RCA denied — to spread the line extension surcharge among all customers, “ENSTAR indicated that if the Commission determined not to put the Homer Extension into rate base, ENSTAR will evaluate raising the $1 per (million cubic feet) surcharge.”

The $1 tariff dates back to negotiations in 2012 to get a state grant for a trunk line from Anchor Point to Homer. In 2011 when former Gov. Sean Parnell vetoed a grant to build the Anchor Point-Homer natural gas distribution line, Parnell had said he wanted more “skin in the game” from the lower Kenai Peninsula — a local contribution to the cost of the transmission line.

Former Rep. Paul Seaton had discovered a $1 per million cubic feet tariff already on the books in the event gas came to the lower peninsula. That tariff satisfied Parnell’s request for a local contribution. In a grant proposal funded by the 2012 Alaska Legislature, the state paid $8.15 million to help complete the natural gas trunk line, an appropriation Parnell did not veto.

In an April 2012 letter to Parnell, then ENSTAR President M. Colleen Starling wrote that the total estimated cost of the project was $10.6 million, and that if the state provided the $8.15 million grant, the tariff would pay off the balance of $2.5 million over 10 years.

The council also passed a February 2012 resolution stating its support for the tariff with the understanding $2.5 million would be raised over 10 years. Gas customers in Homer, Kachemak City and in the Kenai Peninsula Borough south of Anchor Point pay that tariff.

Seven years later, those numbers have changed, according to annual reports filed by ENSTAR with the RCA. The construction cost above the state grant came in at $3.5 million. The tariffs raised have averaged $200,000 annually from 2014 to 2017, the last report filed — slightly less than the $250,000 annual average needed to raise $2.5 million in 10 years.

And according to ENSTAR’s books, because ENSTAR has added what’s called an internal rate of return, the line extension surcharge balance has increased from an actual construction cost of $3.5 million to $5.4 million as of Dec. 31, 2017.

That’s the number the Castner said kept him up all night once he’d figured out what was going on and what compelled him to give the bad news to the council on Monday.

In his comments on Monday, Castner said he discovered the new amount after talking with City Manager Katie Koester about city fund balances, including the debt to fund the build-out of the gas line in the city. Castner thought to call ENSTAR President John Sims and ask about the $2.5 million pay down. Sims told Castner it wasn’t doing very well because ENSTAR had added an internal rate of return and charged income taxes to the surcharge. That rate is 13.75 percent according to RCA records. With that figure and interest added, over four years the surcharge has ballooned to double what ENSTAR said consumers would have to pay.

“I don’t have enough information to draw conclusions, but appreciate Mayor Castner discovering this and bringing it to the attention of the public, and am anxious to fully understand how we got here,” Homer City Manager Katie Koester wrote in an email about the new surcharge numbers.

Castner said that in business terms, an internal rate of return is what a company can expect to earn on its capital investments. For the entire build out of the gas line to Kachemak City, Homer and surrounding areas, all but that $3.5 million capital cost has been paid by the state or special assessment districts.

“Here they’re going to end up with a $10 million transmission line,” Seaton said in a phone interview. “… Not hardly putting any money on this thing and ending up with total ownership is a hell of a good deal.”

Seaton said in all his discussions with ENSTAR about the tariff and the pay out, no one ever mentioned that the gas company would add in the internal rate of return.

“I had no idea that original tariff, which was the model for us, had any interest on it,” Seaton said. “That was never said. We never investigated it. … That’s what I thought the deal was. I think it’s bull####, to tell you the truth.”

Koester had been Seaton’s chief of staff and then became the city Economic and Development Coordinator in 2011 before becoming city manager in 2015. She also said she had no knowledge of communications by ENSTAR or the RCA to the city about the issue of an increased line surcharge.

The original tariff was part of a 2003 filing. Salazar wrote that in that filing, “The surcharge would continue until actual capital costs of the pipeline from Anchor Point to Homer are recovered, estimated to be approximately 10 years.”

But in an August 2012 tariff filing after ENSTAR got the state grant, the surcharge was defined to include “total net construction costs … (less any contributions in aid from the State of Alaska or the City of Homer), rate of return and income taxes.”

Lindsay Hobson, an ENSTAR spokesperson, said that the $2.5 million payout was calculated to take 10 years based on ENSTAR’s calculations of the customer base and gas use. While it guessed correctly on the number of customers, the actual use was lower, she said. ENSTAR had figured lower peninsula customers would use an average of 140 million cubic feet a year, but that worked out to 90 million cubic feet per year.

“As a consequence customers are not consuming to the extent that they can repay that loan, that balance, the ENSTAR portion,” Hobson said.

In the 2016 filing, Hobson said ENSTAR tried to spread the Homer extension surcharge out among all customers. In a 2016 report, the surcharge is shown as dropping to $958,000. But the RCA denied that filing.

“The commission didn’t believe that existing customers should subsidize Homer customers,” Salazar said. “It’s cost-causer, cost-payer.”

ENSTAR hasn’t filed any tariffs since, Hobson and Salazar both said.

“An additional tariff is not part of that consideration, increasing the dollar amount is not part of that consideration,” Hobson said. “Certainly we could extend the life of the repayment period. That would be one way to do it.”

Seaton said that wouldn’t work.

“Lengthening the period doesn’t do anything if you’re going into the hole,” he said.

Hobson said the current balance of $5.4 million could be stopped from growing by removing the equity portion of it.

“ENSTAR is looking at what options there are to resolve this,” she said.

After an initial interview, Hobson later called back to clarify that it’s premature to speculate how ENSTAR might address paying down the surcharge balance. That should be formally done in a tariff filing, she said.

In his comments to the council, Castner said of the surcharge, “Our hands are clean.” The city didn’t sign any deal regarding the $1 million cubic feet tariff. How ENSTAR recovers that is an issue for all lower peninsula gas customers, not just Homer residents.

Castner did say the city is talking to a lawyer who is an expert in regulatory filings.

Reach Michael Armstrong at marmstrong@homernews.com.

The following was submitted by Homer Mayor Ken Castner and has been published exactly as received.

Message from the mayor:

The natural gas customers south of Anchor Point will be understandably alarmed by the news that the contribution balance for the aid of the construction of the trunk line to Homer has not been decreasing over time. The path to a solution is not clear, but the Homer and Kachemak City governments are working together to find a speedy resolution.

The chart below is a tongue-in-cheek view of a process that is of no help in solving problems. There is no sense in hunting for those to blame or vilifying those that benefited. Our common goal is to extract ourselves with the least amount of financial pain.

We should all react to this as we do in seismic events: with calm and purposeful measures.

Thank you.

— Homer Mayor Ken Castner