Background. A copy of the Amendment is attached for the Commission s information.

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1 3000 Spenard Road PO Box Anchorage, AK West Eighth Avenue, Suite 300 Anchorage, Alaska Subject: Tariff Advice Letter Dear Commissioners: The tariff filing described below is transmitted to you for filing in compliance with Section 3 AAC AAC of the Alaska Administrative Code. There are no tariff sheets involved with this filing. ENSTAR Natural Gas Company, a division of SEMCO Energy, Inc., is requesting Commission approval of a change in a cost element of ENSTAR gas cost adjustment provision, relating to its Firm Storage Service ( FSS ) Agreement with Cook Inlet Natural Gas Storage Alaska, LLC ( CINGSA ). CINGSA and ENSTAR have entered into an agreement to amend ENSTAR s FSS Agreement to increase ENSTAR s Maximum Daily Withdrawal Quantity ( MDWQ ) from 91,000 Mcf/day to 102,900 Mcf/day (the Amendment ). CINGSA s FSS Agreements with its customers are special contracts under the Commission s regulations, and CINGSA has submitted the Amendment for approval under its Tariff Advice , filed concurrently with this request. 1 The Amendment will help ENSTAR ensure reliable peak day supplies for all gas sales customers served under ENSTAR s Tariff. 2 Background In Docket U-10-51, the Commission considered and approved CINGSA s application for a certificate of public convenience and necessity to provide natural gas storage services in Southcentral Alaska. 3 On August 26, 2011, CINGSA submitted the FSS Agreements with all four of its initial customers, 4 including ENSTAR s, to the Commission for approval as special 1 A copy of the Amendment is attached for the Commission s information. 2 ENSTAR had 144,223 gas sales customers as of November 30, In U-10-51(9), dated January 31, 2011, the Commission granted CINGSA a certificate of public convenience and necessity for the storage facility that will serve its initial customers and approved CINGSA's tariff and inception rates. 4 CINGSA FSS Customers: Chugach Electric Association, Inc. (Chugach), the Municipality of Anchorage d/b/a Municipal Light & Power (ML&P), and Alaska Energy and Electric Cooperative, Inc. and Homer Electric Association, Inc. (collectively, AEEC/HEA), and ENSTAR Natural Gas Company. Anchorage: Kenai Peninsula Office: Mat-Su Office:

2 Page 2 of 5 contracts. The FSS Agreements were approved by the Commission in LO# L on October 24, Also on August 26, 2011, ENSTAR filed proposed tariff revision TA 214-4, which sought to revise ENSTAR s GCA tariff provision to include the costs of gas withdrawn from storage (including transportation, reservation, and capacity fees) and financing costs on the balance of gas in storage. The Commission approved ENSTAR s requested revision of the GCA provision, with modifications recommended by the RCA Staff, in Letter Order No. L , dated October 26, 2011, and the tariff revisions became effective December 31, In ENSTAR s 2015 test year rate case (TA 285-4/U ) filed on June 1, 2016, ENSTAR proposed a change to the GCA methodology to recover all prospective storage reservation and capacity fees annually in the GCA, rather than in the cost of stored gas. ENSTAR requested that the Commission approve the new GCA methodology effective October 1, The Commission approved the methodology change in Order U (6) dated September 27, The FSS design capacity of CINGSA s facility is 11 Bcf of Maximum Storage Quantity ( MSQ ); 150,000 Mcf in Contract Injection Quantity or Maximum Daily Injection Quantity ( MDIQ ); and 150,000 Mcf in Contract Withdrawal Quantity or Maximum Daily Withdrawal Quantity ( MDWQ ). The FSS Agreements approved in LO# L subscribed for all the design capacity for MSQ and MDIQ, but the subscribed MDWQ was not contracted up to the full design capacity. 136,000 Mcf of MDWQ was subscribed for in Contract Year 1, 142,100 Mcf for the period April 2013 through March 2017, and 138,100 Mcf for the remaining life off the FSS Agreements after March This leaves 11,900 Mcf/day of MDWQ under the current design capacity that is not contracted for at this time. In a meeting to discuss an Open Season with all of its FSS customers on November 9, 2017, CINGSA discussed the under-contracted MDWQ with all FSS customers. The under-contracted MDWQ is only available to FSS customers, because there is no incremental MSQ or MDIQ available. CINGSA has advised ENSTAR that ENSTAR is the only FSS customer that has expressed interest in the additional 11,900 Mcf/day in MDWQ. ENSTAR s Reasons for the Revision ENSTAR s interest in the under-contracted MDWQ was identified during the lead up to the CINGSA Open Season. The attached Table 1 shows ENSTAR s current contracted deliverability from gas producers for 2017 through ENSTAR s firm contracted deliverability declines slightly in 2018, but more steeply by January 2019 and January By 2023, ENSTAR will need to contract for the vast majority of its non-cingsa deliverability, as well as its overall gas supply. As shown by the Table, the additional MDWQ will help ENSTAR maintain a high level of firm peak day deliverability commitments, thus enhancing its service reliability. 5 There were other changes to the gas cost adjustment provision relating to the removal of the carrying costs on the stored gas balance and inclusion of the stored gas balance in rate base that were addressed in Orders U (18) and U (19), but they are not germane to this request and therefore not detailed here.

3 Page 3 of 5 While the Table shows that ENSTAR does have a variety of options available to help meet its peak requirements, this additional firm storage deliverability will result in reduction in gas supply costs under the current approved Gas Supply contracts. It will allow ENSTAR to decrease the purchases of more expensive optional deliverability peak gas as well as interruptible (non-firm, thus less secure) CINGSA overrun or ISS service during the winter by utilizing the storage service to a greater degree. As shown in the first column of Table 1, ENSTAR had to utilize CINGSA s Overrun service during the cold weather event on January 19, 2017, when temperatures were still well above historical cold weather lows. Contracting for an additional MDWQ will allow customers to save money in gas costs over the duration of the APL-14 GSA. When ENSTAR determines the maximum amount to purchase on a given day, it has to estimate how much gas its customers will demand on the Design Day. Design Day, an extreme cold weather event, is a day when ENSTAR expects to experience the highest flow volume that customers will consume in a single day. ENSTAR, when contracting for gas supply, strives to make sure it has enough contracted deliverability to meet the anticipated demand. The lack of peak deliverability in the marketplace in Cook Inlet is very well-known. Currently, Hilcorp is the only producer who is willing and capable of providing the deliverability on the coldest day. The following is an example of the type of savings that results from contracting for the additional CINGSA MDWQ. Under the APL-14 GSA,ENSTAR has an annual Needle Peak Call Option to purchase up to an additional 20,000 Mcf/day on up to 25 days (which may be nonconsecutive) during the months of December, January, and February of each Contract Year to manage extreme cold weather demand. ENSTAR must notify Hilcorp by March 15 if it wants to acquire the Needle Peak Call Option for the following Contract Year. Once ENSTAR exercises this option, it has to pay $3,000,000 per year. Based on the current contracted deliverability under gas supply contracts and storage, ENSTAR has to exercise this option during the next 5 years for the duration of the APL-14 GSA to ensure it has sufficient deliverability to meet customers demand on the coldest days. Contracting for an additional MDWQ (which will, at current CINGSA s current tariff rates, cost approximately $1.13 million per year) should provide enough deliverability to allow ENSTAR to avoid purchasing the Needle Peak Option and save customers approximately $1.87 million per year. ENSTAR believes that this additional deliverability will also put it in a better negotiation position with local producers and allow ENSTAR to further mitigate its seasonal swings in gas purchases. In recent discussions, two producers indicated that they would be willing to reduce their proposed price of gas if ENSTAR decreases its requirements for deliverability and utilizes its storage to a greater capacity. This is an important advantage as ENSTAR negotiates for the major additional gas supplies it will need beginning in In accordance with CINGSA s tariff, the MDIQ and MDWQ Ratchets are based on the Customers Storage Quantity as percentage of MSQ. While ENSTAR s MSQ is 80% of CINGSA total available MSQ, the current MDWQ is only 66% of total available MDWQ. Signing up for the additional MDWQ will bring ENSTAR s MDWQ to 69%. Also, the increase of ENSTAR s

4 Page 4 of 5 MDWQ to 102,900 Mcf/day will bring it closer in line with its current MDIQ of 106,000 Mcf/day. By comparison, Chugach s MSQ is 15% of CINGSA total available MSQ, but its current MDWQ is 21% of total available MDWQ, ML&P s MSQ is 5% of CINGSA total available MSQ, but its current MDWQ is 7% of total available MDWQ, and AEEC/HEA s MSQ is 1% of CINGSA total available MSQ, but its current MDWQ is 4% of total available MDWQ. Thus, all of the other FSS customers have contracted for a high proportional deliverability from CINGSA that ENSTAR will have even after the amendment. Overview of the FSS Amendment Appendix A: The Amendment reflects the parties agreement to increase the MDWQ from 91,000 Mcf/day to 102,900 Mcf/day under 100%-45% Ratchet, increase MDWQ from 66,430 Mcf/day to 75,617 Mcf/day under 45%-20% Ratchet, and increase MDWQ from 50,960 Mcf/day to 57,624 Mcf/day under <20% Ratchet. At current CINGSA rates, the additional contracted deliverability will increase the reservation fee ENSTAR pays CINGSA by $94, per month (11,900 Mcf X $7.9005/Mcf), or $1,128, per year. No Revised Tariff Sheets ENSTAR is not seeking a revision of any tariff sheet in this filing. Storage Reservation fees are already listed as an element in ENSTAR s gas cost adjustment provision in Section 708c(1)(c)(i) on Tariff Sheet 87. Given the fact that ENSTAR s gas cost adjustment ( GCA ) includes estimates of volumes and prices, and because the Amendment will not go into effect until the 3rd quarter of the current GCA period, ENSTAR is not seeking a revision of its approved GCA at this time. Commission Approval ENSTAR is specifically requesting that the Commission approve the Amendment as a revised cost element of ENSTAR gas cost adjustment provision (Section 708c(1)(c): Storage Fees). As the Agreement amends a special contract, it cannot take affect without the prior approval of the Commission. In TA , CINGSA requests that the Commission approve the Amendment by the end of the 45-day statutory notice and review period. The amendment provides that it is effective from the first day of the month following Commission approval or January 1, 2018, whichever is later. ENSTAR requests that the Commission approve the revised cost element with the same effective date as the FSS Amendment.

5 Page 5 of 5 Please feel free to contact me at if you have any questions. Sincerely, ENSTAR Natural Gas Company Attachments: Amendment No. 2 to FSS Agreement between CINGSA and ENSTAR Table 1 Daniel M. Dieckgraeff Director of Rates and Regulatory Affairs Phone: Fax: Dan.dieckgraeff@enstarnaturalgas.com