What’s the USAD? Residential natural gas hookups less affordable than in past

Editor’s note: This is part two in a series of stories examining the challenges of extending natural gas service on the Kenai Peninsula.

By Jenny Neyman

Redoubt Reporter

Sometimes, saving money isn’t cheap.

That’s the case when it comes to accessing natural gas service on much of the Kenai Peninsula. Even with Enstar rates increasing, natural gas still is a desirable way to heat homes and power appliances, being cheaper than electricity, fuel oil or propane, and cleaner and more convenient than wood stoves.

For those who live in residences already hooked up to natural gas, enjoying those savings is as easy as setting the thermostat, and requires as much thought or effort as tossing a load of laundry in the dryer and pushing the “on” button.

As with many things in real estate, natural gas service on the Kenai Peninsula comes down to location, location, location. Some have it — primarily in cities, with some other subdivisions sprinkled here and there in more rural areas — while many in rural areas don’t. Going from the latter category to the former can involve a long, time-consuming and expensive process that gets increasingly more costly as time goes on.

For the sake of utility, an existing homeowner wanting natural gas service, or a builder or buyer in an area not already hooked up to gas, might do better to just move to where service already exists, rather than trying to extend natural gas to their location. But for those determined, monthly bill-watching souls who want the same access to cost-saving heating that urban residents enjoy, they can roll up their sleeves, dip into their pocketbooks and get to work. They’ll need:

• Patience.
• Persistence.
• Persuasiveness.
• An aptitude for paperwork, hoop jumping, “i” dotting, “t” crossing and navigating governmental channels.
• A positive relationship with many, many neighbors (keep this in mind the next time Fido from down the street digs in the garden, or the area snowmachiners decide that others’ driveways make great thoroughfares).
• While they’re at it, they should get to know their political representatives, both on the Kenai Peninsula Borough Assembly and in the Legislature.
• Money. Potentially lots and lots of it.
• Luck to be in the right place, at the right time (that time would be four or five years ago, so a time machine wouldn’t hurt).

There are a few basic ground rules to keep in mind when considering natural gas service extensions. One is that the projects aren’t cheap, and the costs of materials and labor increase over time. An average price for installing a natural gas service line to a subdivision about 15 years ago was around $9 or $10 per foot. In 2009, Enstar’s construction rate for 2-inch pipe was $14.81 per foot, and the price for 4-inch pipe was $21.24 per foot.

“The cost of business has gone up and our price is adjusted annually,” said Charlie Pierce, southern division manager with Enstar.

The farther away a project is, the higher the construction cost, and the higher the risk of other factors getting in the way that will increase costs even more — such as crossing roads and wetlands. If a project involves other agencies and entities — such as the Environmental Protection Agency requiring a Stormwater Pollution Prevention Plan, or Enstar needing to negotiate with pipeline owners to tap their lines, which then has to be approved by the Regulatory Commission of Alaska. All that takes additional work and time, which, as the saying goes, is money.

Proximity to a gas line doesn’t necessarily mean a service extension project won’t involve great distances and be cheap. What matters more is living near a pipeline access point. The natural gas distribution system on the Kenai Peninsula consists primarily of high-pressure transmission lines, requiring a pressure-reducing station to be able to take natural gas out of the lines for residential use.

A reg station, as it’s called, costs $250,000 to $300,000. In areas where Enstar expects future growth to result in a significant increase in customers, like Girdwood, the company has installed pressure-reducing stations of its own accord.

“Some of them are borne by the company, some borne by consumers. Some areas we would install one based on future load, in areas like Kasilof, though, you don’t have significant growth,” said John Sims, manager of corporate communications for Enstar.

If a homeowner lived near enough to an existing reg station, they’d just be on the hook for paying for a distribution line to their neighborhood, a service line to their house, a meter and all the labor required for the installation and hookups. That alone can easily cost $100,000 or more. If a reg station would need to be installed, as well, the cost of the project bumps into brand-new-mansion range, even if it would only be serving a property with a Tyvek-sided trailer on it.

A feeling of unfairness upon getting a new Ferrari-level cost estimate from Enstar is a common response among residents of outlying areas, just wanting access to a utility service their neighbors in town can get at a fraction of those costs by being already in the vicinity of distribution systems.

Enstar is a company, not a charitable nonprofit agency or member-owned cooperative, like Homer Electric Association. Like most businesses, Enstar will pass costs on to customers in the form of higher prices, rather than absorb them all with its bottom line. However, Enstar’s rates and operations are subject to approval by the Regulatory Commission of Alaska, lending a level of required consistency and deliberation to its rates and charges.

“We file with the commission all our footage costs. Those are things that have to be passed and approved,” Sims said.

In assessing costs to customers, the governing principle is what’s most fair for the most customers, Sims said. Enstar is governed by the idea that he or she who causes an expense is the one who pays for it.

“People are frustrated and don’t understand the cost and kind of expect Enstar to just build a system out to them. Unfortunately, what that does is spread those costs throughout the rest of the rate base, and that’s something that’s frowned upon in the utility industry because you really want the cost causer to be the cost payer, because it keeps overall rates low,” Sims said.

That concept governs Enstar’s cost charges more today than it did in the past. That’s good for a resident of, say, Kenai, who is already hooked up to natural gas and may not want to help pay for someone in Kasilof to get a service line to their house, or someone from Ninilchik to connect a meter for the first time.

“There’s been a real shift, I’d say in the last 10 to 15 years, where any cost the company incurs you want to make sure the causer of that cost is the one that’s given the burden,” Sims said.

In 2008, for example, Enstar instituted late fees and finance charges.

“Which we had never done before, even though they’re a significant cost. Anytime there’s somebody late (with payment), we’ve got reconnections, disconnections and all these things, and that was being spread among the rate base,” Sims said.

It used to be that Enstar installed service lines to homes for $20, and gas meters for a similarly negligible charge. Not anymore.

“It costs us, with all the labor, materials and everything, about $1,500 to do that. We were essentially charging $1,480 to the rest of the rate base every time we did that,” Sims said. Now it costs a new customer about $1,000, he said. “We changed that methodology, as well. It’s a shift in an effort to keep rates down because the cost of the commodity has gone up over the years — nowhere near electricity or heating oil — but, still, we’re trying to keep as competitive as possible.”

Extending natural gas service to new customers is good for Enstar because the company makes its money by transporting natural gas. More customers, more gas transportation, more money. It does not benefit from natural gas prices going up.

“As far as the actual commodity of gas, we would love it if the cost of gas were the lowest possible, because then people are going to use more gas. If it’s high, they start conserving. If there’s a low cost they use more, that means we transport more, which means we make more. So from that standpoint we’d love it if the gas were free and we just transport and got our fee for that,” Sims said.

Enstar doesn’t make money off of the work of installing distribution or service lines. Those charges are simply a matter of passing the costs on to the customer that will be served. Even when those costs are exorbitant, Sims said that Enstar isn’t adding anything to those charges to make a profit.

“We make money because we know with those hookups comes the transportation of gas. As far as the access to it, it goes back to the cost causer, cost payer. If the customer gets a connection for free, somebody has to pay for that, and it’s either that customer or the entire rate base that pays for it. I guess it just depends on what type of methodology you believe in, but here for the utilities, the Regulatory Commission of Alaska prefers the cost-causer, cost-payer system,” Sims said.

Strength in numbers

Enstar requires payment up front for service-extension projects. So how does one go about paying for a multiple hundred-thousand-dollar extension project? Generally, not alone.

The Kenai Peninsula Borough operates a utility special assessment district process, which allows neighbors to band together and spread costs amongst them. The borough essentially loans money to an approved USAD, and the residents pay that money back at a rate of prime plus 2 percent.

There are additional costs involved, including a $6,000 administrative overhead fee per project, and a charge of $70 per lot included in the USAD, and a $1,000 nonrefundable filing fee.

“The kicker is, as a consumer, you need to pay to have that utility extended into your subdivision or neighborhood. You can pay it out of pocket or you can go to the borough for the USAD. Those fees are per-project fees. If you’ve got 100 people or 100 parcels in that project and everybody contributes to those fees, then those costs are negligible in the grand scheme of things,” said Clyde Johnson, sales tax supervisor with the borough.

A USAD group spreads out the costs of a distribution line to their neighborhood, a reg station, if one is needed, and one service line running to each lot. There are some caveats, like a property can’t be assessed a charge greater than 21% of the adjusted value (including natural gas access) of the property. But in general, each lot is assessed the same amount, and each lot gets one service line to it.

USADs don’t have to be organized along any existing subdivision or neighborhood boundaries. A petitioner can choose to include whatever parcels they like, and the more the merrier because the more people those costs are spread over, the cheaper they are for each parcel owner. However, 70 percent of the lot owners within a proposed USAD must sign a petition that they are in favor of it, and owners of undeveloped property typically aren’t as motivated to sign on to a USAD. There needs to be a big enough USAD pool to make the costs affordable, but the bigger the USAD area, the harder it can be to gain enough approval.

“Generally speaking, the person spearheading the project would bring a proposed boundary to the borough. Basically what they’re doing is looking at the density of homes in that area. If you’re the petitioner trying to run a utility into undeveloped land, it doesn’t go too well,” Johnson said. “There’s no set, hard, fast, rectangular or whatever boundaries, it’s down this street because there’s houses down this street, it’s not down this next street because there’s not houses down that street.”

Once a USAD petition is signed, submitted and vetted by the borough, the Assembly must approve it. Enstar gets a say, too, and can determine whether or not the project will be refundable, meaning that, after 10 years, Enstar will reimburse the borough for the original cost of that project, minus any rebates Enstar has paid the borough for new customers hooking up to the distribution system in those 10 years, and the borough then refunds that money back to the property owners. With costs continuing to rise, however, Enstar rarely deems new projects to be refundable.

For that matter, these days, residents rarely deem the costs of hooking up to natural gas to be worthwhile.

“Historically, the borough has averaged about two to three of these (USADs) a year. That has dropped off over the last couple of years because the cost of doing these, mainly from the utility side, has gone up dramatically,” Johnson said. “They’re just not as attractive as they once were. And then on top of that we can’t go a month without seeing something in the paper about running out of natural gas. So then you’ve got people saying, ‘Why should I be in favor of spending all this money to do a gas line when Enstar can’t even give us enough gas in the wintertime? They’re talking about brownouts. So I think the favorability of these things sort of dropped off.”

Saving money is good. But at some point the costs involved in getting set up to save become too great.

Part three in this series will consider plans to extend natural gas service to Homer and Anchor Point. Part one last week, about some Kasilof residents’ frustration over a lack of access to natural gas, is available to read online at http://www.redoubtreporter.wordpress.com.

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