Deal on Tacoma LNG plant would alter 2008 promise by PSE’s parent company

A view of a portion of Puget Sound Energy’s proposed 30-acre liquid natural gas plant site on the Tacoma Tideflats. The $275 million plant would be situated along Alexander Avenue and East 11th Street between the Blair (in background) and Hylebos waterways.
A view of a portion of Puget Sound Energy’s proposed 30-acre liquid natural gas plant site on the Tacoma Tideflats. The $275 million plant would be situated along Alexander Avenue and East 11th Street between the Blair (in background) and Hylebos waterways. dperine@thenewstribune.com

For more than a year, state utilities regulators have grappled with a simple question about the complex financial machinations attached to Puget Sound Energy’s proposed liquified natural gas plant: Will this put ratepayers at risk?

After protracted negotiation, PSE, the Utilities and Transportation Commission staff and a handful of other parties say they have worked out a compromise that claims, repeatedly, that the answer is no. Their agreement lays out an intricate system of split ownership and management for the LNG plant between the utility and the private investor group that owns it. This week, the agreement goes before a judge, who will hear public comments and evidence about the deal before deciding whether he approves.

If the deal wins approval, it will alter a pledge Puget Sound Energy’s Australia-based owners made to state and federal regulators to win permission to buy the utility in 2008.

The regulators’ approval came with a written agreement that Puget Energy — the holding company that owns Puget Sound Energy — would not own or operate another business besides the utility company. The proposal to make and sell LNG as a subsidiary company would be barred under that agreement.

The agreement was intended to keep the utility’s accounts, including liabilities for debts, separate from any financial risks associated with the business ventures of the multinational Macquarie Group, its owner.

At the time of the company’s 2008 sale, the Federal Energy Regulatory Commission said in a news release that its chairman, Joseph T. Kelliher, was “particularly pleased” with the structure to “insulate PSE’s customers from financial activities associated with the new holding company structure.”

The agreement before state administrative law Judge Dennis Moss modifies that arrangement. If he deems it legal, the three-member commission will vote on its approval.

FERC does not have jurisdiction over the Tideflats LNG plant because it is not an import/export or interstate pipeline project. That’s why the modification of the 2008 agreement is being handled as a state matter.

The price tag to build the plant has gone up since PSE first announced it in 2014 as a $275 million project. The construction cost is estimated in the September settlement filing at $310.7 million, a nearly 13 percent increase, before construction starts.

That expense would be split between PSE and a new sibling company, called Puget LNG. PSE would be on the hook for $133.7 million for the plant, and Puget LNG would pick up the rest.

For its stake, PSE would gain a percentage of ownership of the various aspects of the LNG plant, depending on how much of it is construed as part of utility service. For example, PSE would own 79 percent of the LNG storage tank on the property, since most of its purpose is to hold reserve supplies for the utility system. The new LNG company would own 90 percent of the plant’s LNG production process, since the majority of what it produces is intended to be sold to LNG-buying customers, not utility ratepayers.

The LNG plant is being built for three services, according to PSE’s filings:

▪ Making and storing extra supplies that can be injected back into PSE’s gas pipeline for regional use during a half-dozen peak demand days a year. This will require less than 10 percent of the plant’s capacity.

▪ Providing LNG for Totem Ocean Shipping Express for two Alaska-to-Tacoma ships that currently run on dirtier diesel-based fuel.

▪ Selling LNG to other industrial customers, either terrestrial or marine. No such buyers have signed on yet, a PSE spokesman said Thursday.

The plant will be able to produce 250,000 gallons of LNG a day, with an 8 million gallon on-site storage tank. PSE officials said that if they cannot find buyers for the LNG that the utility and TOTE don’t need, the plant will produce less of it.

At the beginning of negotiations in the spring, PSE asked state regulators to consider the TOTE ship fuel business part of the utility’s state-regulated operations. Puget LNG, according to an analysis filed in May by the Utilities and Trade Commission’s staff, would have been a “shell company” with zero employees that depended on PSE for money, including borrowing capacity. Profits would have been split 50-50 between the utility company and its investors.

That proposed setup, according to the analysis, meant one in which the private ownership group “rationally, and perhaps justifiably, seeks to reduce the risk of its LNG business venture by placing a share of that venture on ratepayers’ shoulders.” If the LNG plant went bankrupt, the utility company would bear the risk, the staff analysis said.

The arrangement now up for official approval is structured differently.

Under it, the plant’s sales of LNG to TOTE and any future customers are handled by the new Puget LNG company, and PSE is a “co-tenant” of the to-be-built plant. They’ll share the estimated $9.2 million bill for running the plant, including the $2.6 million yearly rent to the Port of Tacoma for the plant’s 30-acre site. No breakdown is given for this split. And Puget LNG’s sales to TOTE and other customers won’t be state-regulated business.

Each company will seat two managers on a four-member board that will oversee the facility. The 17-page agreement says PSE and its ratepayers won’t take on debts if the Puget LNG business or a successor company cannot pay its bills, files for bankruptcy or goes out of business. It does allow that more operating costs could shift to PSE if the new LNG company goes out of business. No limit to the potential shifted cost is given.

The agreement also includes language that will allow PSE to borrow money to build the LNG plant, which modifies the terms of the 2008 agreement.

Representatives for PSE, the Northwest Industrial Gas Users trade group, Utilities and Transportation Commission staff and the state attorney general’s public counsel unit filed joint testimony Oct. 7 in favor of the agreement’s terms and addressed a UTC hearing Monday.

Their joint filing said the arrangement is “consistent with the public interest and will not cause harm to PSE or its customers.”

David C. Gomez, an analyst for the UTC staff, wrote in an additional filing that PSE building and sharing the Tideflats facility with the new company “could save tens of millions of dollars” for PSE by helping to meet gas capacity needs.

Commission staff, he wrote, had looked into building a peak-service LNG facility elsewhere and “found it to not be cost effective” compared to building at the Port of Tacoma, where LNG can be sold to marine and other customers.

On Monday, Gomez said the project’s benefits for the public include the development of vacant industrial land at the Port and the potential air-pollution improvement of making LNG available as a local fuel source.

“As far as I see it, there’s a lot of public interest,” Gomez said.

At the same UTC hearing, PSE representatives provided extra detail about the proposed plant.

Jason Kuzma, attorney for the utility, said the “16 or 17” employees at the plant when it is in operation in 2020 will all be PSE employees. Roger Garratt, PSE’s director of strategic initiatives, said PSE will bill the new LNG company for workers’ time.

UTC commissioners quizzed the officials who supported the settlement on how well it would insulate ratepayers from bankruptcy, liability issues and other business turbulence.

“We will still see benefit regardless of what happens on the unregulated side,” Gomez said, “or if TOTE is the only customer.”

The proposed deal has drawn criticism from state Sen. Maralyn Chase, D-Edmonds, who was an opponent of PSE’s sale to Macquarie Group in 2008.

In 2009, Chase was lead sponsor of a state House bill that called for that deal to come back to the UTC for an additional hearing because of “its future impact on ratepayers and the state general fund.” The bill never came up for a floor vote.

She said last week that the proposed deal is evidence the state was not a strong enough bargainer in the past.

“Macquarie is making a fool out of the UTC,” Chase said. “They made an agreement with the UTC, and now they’re trying to change it.”

She added that she does not trust the deal to properly insulate PSE’s ratepayers from the costs of the LNG venture.

“If we ever needed a reason for … public ownership of our utilities, this is it,” Chase said.

No timetable has been set for an official decision, though PSE has said it aims to have the plant in operation in 2019.

Derrick Nunnally: 253-597-8693, @dcnunnally

Public hearing

The Utilities and Transportation Commission will meet at 6 p.m. Wednesday to take public comment on a deal it negotiated with Puget Sound Energy and others over the ownership and management of a proposed liquified natural gas plant on Tacoma’s Tideflats. The meeting is at the Richard Hemstad Building at 1300 S. Evergreen Park Drive Southwest in Olympia.