Fight to Divvy Alaska Gas Find Headed to Court

ANCHORAGE, Alaska (CN) - A state court judge will decide how an unexpected discovery of 14.5 billion cubic feet of natural gas on Alaska's Kenai Peninsula in 2012 should be divided and who will reap the benefits.

Making Anchorage Superior Court Judge Eric Aarseth's task more difficult is the lack of statute or case law on the books to assist in determining how the new-found treasure is to be divided. This made for a protracted battle before the Regulatory Commission of Alaska, members of which are appointed by the Legislature to oversee public utility rates and producers.

The gas was discovered in a rock formation used for natural gas storage, previously thought to be depleted by the original owners prior to selling the facility to Cook Inlet Natural Gas Storage Alaska. While overseeing the drilling for expansion of the storage area to maintain a steady supply of natural gas in times of peak demand to customers in southcentral Alaska, the new owners were surprised to find another pocket of unused gas.

In early 2015, the Cook Inlet group asked the commission for permission to sell 2 billion cubic feet of the gas, with profits going to the storage facility owners who provided the startup capital for the $160 million storage unit. The group is primarily owned by Mid-American Energy in Iowa and AltaGas of Canada.

It argued that most of the discovery would stay in the ground to provide more pressure in the reservoir, which helps gas flow easier and keeping producers from passing on the costs of drilling more wells to serve the same purpose to ratepayers. Selling just 1/5 of the supply needed in an average year would produce about $15 million, according to a state estimate.

While objecting to the Cook Inlet group's plans to keep all proceeds, the commission called the boon a "happy accident" and stated that "all involved should be grateful for this fortuitous circumstance." The regulatory affairs section of the Alaska Attorney General's Office argued that the discovery was a byproduct of the creation of a facility that will ultimately be paid for by its customers and not just those who put up initial money.

"Since the costs of operating [the storage facility] are borne by the ratepayers, the ratepayers should get the benefit of profits from the gas," Jeff Waller, the state's lead attorney in the case, argued in the commission's objection.

Three of the utility's customers - Chugach Electric Association, Anchorage Municipal Light and Power and Homer Electric Association - support the state's argument. The fourth customer, Enstar Natural Gas, is owned by AltaGas and joined settlement discussions without filing a motion against their owners who are part of the Cook Inlet group.

Three other remaining customers - the state of Alaska, Tesoro Alaska and ML&P - did not join the discussion proposing a settlement to split the natural gas sale proceeds in half between the ownership group and the four utilities at the settlement table.

In the end, the commission found that proposal not in the best interest of the public. It instead decided that 13 percent of the proceeds should go to Cook Inlet group with the remaining 87 percent going to the four utility customers, to be apportioned on the amount of gas each is able to store in the facility.

Cook Inlet group informed the commission that it would appeal, calling the decision an "unconstitutional taking without just compensation" of assets that it "undisputedly" owns.

Aarseth is the fourth judge assigned to the case, after plaintiffs and defendants each exercised a preemptive recusal. The third judge assigned was administratively reassigned.

A trial date has not yet been set.

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