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LNG plant’s business plan raises concern with state utility watchers

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Puget Sound Energy wants its proposed liquefied natural gas plant to be run by a wholly owned shell company as a way to sell the gas on the unregulated market, while also storing it under regulated utility terms.
Critics fear the proposal puts customers at risk of subsidizing the facility through higher utility rates. The UTC and two utility consumer organizations, Industrial Customers of Northwest Utilities and Northwest Industrial Gas Users, voiced their opposition for that very reason. More opinions are likely as the plan plays out.
It’s a seemingly complex financial structure that is raising questions with the state’s Utilities and Transportation Commission, which is tasked with making sense of it while overseeing the emerging industry rather than just critics. The scheme adds to the roster of legal and safety questions surrounding the planned facility.
Permits are in the works for an 8 million gallon facility on the Hylebos Waterway that would manufacture liquefied natural gas that the privately owned utility company would then sell to container ships and other commercial transportation customers seeking lower-emission fuels. Only Totem Ocean Trailer Express has signed on so far. The facility would also store gas that the utility could tap into during unusual weather conditions.
Plans for the facility have raised concerns in local environmental circles with worries about the proximity the plant would have to downtown and residential areas if an accident occurred.
Information about the plant’s safety and disaster plans are part of a Freedom of Information Act request that PSE is fighting. A judge ruled that the records should be disclosed, but the utility has appealed the decision. PSE filings state that any mishap would be contained within the 500-foot fence around the facility, and poses no threat to surrounding businesses or residents. A hearing on the disclosure is set for January.
The Puyallup Tribe is also challenging the environmental review of the proposal, citing concerns about the potential release of contaminated soil into the salmon-bearing waters during its construction. That issue is also working its way through the legal process.
And now PSE will be facing a hearing later this month regarding the request to form a shell company. And it’s this issue that makes an already complicated plan downright convoluted.

Here’s how it would work:
PSE is owned by an Australian investment conglomerate called the Macquarie Group, which bought the utility in 2008. As part of the regulatory approval for the purchase, the state’s utility commission required the company to create what are known in financial jargon as “ring fencings” that would protect PSE’s utility customers from financial risk borne from business activities under the new ownership.
PSE now wants the utility commission to waive two of these “ring-fencing” provisions so that it could create a shell company called Puget LNG to run the proposed facility. PSE, a regulated utility provider with about 2 million customers, would build the $275 million facility under the idea that it is needed for the few days a year when weather spikes cause jumps in demand. Those spikes would roughly make up about 7 percent of the facility’s use. The sale of the remaining 93 percent of the site’s capacity would then be sold to other customers. TOTE is expected to purchase about 46 percent, with the remaining 47 percent projected to be trucked to other customers or otherwise delivered to yet-determined container ships on the tideflats. Operations could start in 2019 and have an annual production capacity of 87 million gallons, according to records. The 7-percent “peak shaving” side of the facility would be state regulated, while the remaining 93 percent of the LNG production could be sold through private contracts at higher prices.
“They don’t want any of that to be regulated by the UTC,” said Senior Research Associate Tarika Powell at Sightline Institute, an environmental think tank that specializes in utility and regulatory issues. “The problem is that utility customers could be on the hook financially if the unregulated business fails. That is pretty dangerous. The UTC has a duty to protect customers.”
PSE’s utility customers would first be at financial risk if the shell company struggles to find other customers for the liquefied natural gas, but then not benefit from lower utility rates when there are profits from those private sales. Those would go to investors, not ratepayers.
“In both proposals, utility customers would not benefit at all,” Powell said.
So far the UTC has denied the waivers, citing that PSE is requesting to do something it specifically pledge in 2007 to never do when it sought approval of the ownership change.
“Puget Energy seeks to operate and own a business other than PSE,” UTC filings stated that were obtained through a public-disclosure request by Sightline. “The company’s second request is an attempt at risk mitigation and recognition that the project as currently conceived provides services to rate payers that would likely be more costly if the company were to build a facility that solely served the need of the regulated activities. Staff wants to make clear that while it cannot issue its support at this time for the company’s plan, it is not per se opposed to an LNG facility at the Port of Tacoma. There may very well be broad merit to the plans offered by the company; however, the company’s proposals invoke novel and complex questions of law and policy.”
UTC staffers want a fuller and broader discussion of the financial framework PSE has in mind. But those efforts have so far not gained approval during the two months of negotiations. The issue is set for a status hearing on July 29.
At the end of the day, however, PSE might get the waivers approved since state law regarding regulatory authority are largely silent on the relatively new, and booming, LNG industry when it comes to natural gas as a fuel for trucks and container ships.
“PSE’s proposal to the UTC was a very complex proposal that presented unique regulatory questions because LNG as transportation fuel is quite new to the U.S.,” Powell stated. “Washington administrative law does not yet address LNG bunkering and most federal laws don’t either. This shell company concept is an attempt to circumvent those regulatory issues by setting up a legal entity not subject to UTC’s regulatory authority. … If PSE must charge regulated rates on all the LNG they sell, they’ll have trouble making up the money they’ve invested in the facility and utility customers would be at risk of having to pay for those losses. In this proposal, utility customers would receive no benefits from the non-regulated sales.”
Granted, the question of a private company’s financial plans is more than a bit esoteric, but the discussions of the plan could have wide reaching ramifications. Little of the current financial structure of the planned facility was mentioned in the environmental review process, for example. Neither were the details about its incident response scenarios that are part of the legal challenge set for a decision in early 2017, or the concerns by the Puyallup Tribe regarding runoff from the former Superfund cleanup site.
All of these open questions are fueling calls for the city to begin another round of environmental reviews to address questions left unanswered or update information concerning potential impacts as details about the proposed plant change in the dynamic market for liquefied natural gas that has arose in recent years as transportation companies face tougher emission standards to shift the industry away from diesel engines.
PSE has stated that they LNG would be trucked from the site to its customers, something critics fear would further congest the already log-jammed trucking corridors on the tideflats and lead to the use of rail cars.
“The rail line is right there,” said John Carlton, a member of the grassroots environmental watch group Redline. “But really trucks are the big concern.”
The environmental review states that moving LNG by rail is currently not allowed but also mentions the maintenance of a rail spur on the 30-acre property. The location has a pier, but PSE has stated barging is currently not being considered because of cleanup and regulatory requirements. That leaves trucks as a yes and rail as a future option.
“I think it's definitely in play if a buyer wants it shipped that way,” Powell said. “It would add another monster to the oil train nightmare we already have. The lack of details on whether rail shipments are on the table is one of the problems I have with the facility's plans. There's nothing to prevent that from happening and yet the public has not had an opportunity to give input because it's not clear in the plans that LNG by rail is indeed on the table. It is.”
PSE did not respond to attempts for interview by press time.