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Council will act on franchise agreement for natural gas service

By Staff | Aug 10, 2010

The fate of commercial and residential natural gas service for the city of Rugby may become much clearer on Thursday, Aug. 12.

The Rugby City Council has set a special noon meeting that day to consider granting a 30-year exclusive franchise agreement with Knife River Gas Company LLC to supply and sell natural gas.

If the agreement is approved, that would set the wheels in motion for the company to pursue customers, secure financing for the construction and eventual service of natural gas to the city. A timeframe that could take about 18 months, according to Kurt Rushmore, of Major Pipeline, which is partnering with Bismarck engineering firm, Kadrmas Lee and Jackson on the proposal.

Rushmore and David Blair, of KL&J, met with city officials at the Aug. 2 council meeting.

Under this agreement, there is no financial obligation for the city and it’s quite different than an earlier pitch by Major Pipeline and KL&J to city officials. In earlier discussions, the proposal was for the city to establish its own municipal gas utility and set rates for customers while Major would transport the gas to Rugby customers. However, it was determined the liability insurance for city’s to provide this service to simply too great of a burden to proceed, Rushmore explained.

As a result, Knife River, which is a newly-developed partnership between Major Pipeline and Porter Investment Group, would assume the liability and therefore own and operate the gas lines and product.

While the franchise agreement would enable Knife River the right to supply and sell natural gas, it first needs customers.

Rushmore said customers are under no obligation to buy the product, but he’s confident a good percentage will sign up.

“I’m looking for a volume number, not a number of customers,’ he said.

A few large customers would go a long way to recoup the $5 million capital investment by Knife River and make the project feasible.

Project officials have already spoke to representatives of a number of businesses and public entities in the community about the prospects of natural gas as a heating source and all expressed interest, said Blair.Among them – TBEI-Rugby, Rugby Farmers Union Elevator, the Heart of America Medical Center and Rugby Public Schools.

Natural gas could provide significant savings to those operations to the tune of 15 to 20 percent on heating bills compared to propane and fuel oil.

Knife River has yet to determine where it would tap into natural gas. One option is from the Alliance Pipeline just west of Towner. The company would strip out heavy gas properties until methane is produced which would then be piped down the line.

Another option is tapping into a gas line in Devils Lake. That option is appealing because Knife River would not have to first strip out heavy gases. That pipeline already has “burner tip” quality gas.

The downsize is now that gas line would have to bored 60 miles to reach Rugby instead of 25.

A grid of low-pressure gas lines would then be bored underground from alleys and streets to reach businesses and residences where a meter could be installed. The company has to invest the capital to lay the lines throughout the city so it is available for every residence and business.

Arland Geiszler, ward four councilman, asked whether there would be a need to break up some streets to lay the low pressure distribution gas lines. Rushmore told the council that streets would not have to be torn up. He did say, however, they may be a few locations where there is no other alternative but to go through concrete. In those cases, construction crews would work closely with the city public works department, and of course, pay for restoring the street back to its original condition.

Rugby Mayor Dave Cichos asked what the average cost would be for customers to install the line in their home to convert appliances and heating sources to gas. Rushomore estimated that would be around $400.

Cichos added it may be more difficult to get some residential customers to sign on who are served with electric heat throughout their home rather than propane or fuel oil.

He acknowledged that electric rates provided by Otter Tail Power Company are among the lowest in the country and providing customers a significant savings with natural gas over electric heat will be challenging. However, he’s confident customers will be willing to make the switch over time as well.

Rushmore said data shows that about 60 percent convert to natural gas immediately when it becomes available. Over time about 30 percent of customers follow suit. He did not share what the potential rates would be for customers.

Unlike other fuel suppliers, natural gas is a “pay as you use” service. Although, customer would also be paying a monthly charge for their meter. Rushmore said that would be around the $7 range.

Knife River would need a full-time staff of about five to provide maintenance service on its gas lines and operate its distribution plant.

In addition to providing new jobs to town and savings to customers, natural gas also could spur additional economic development. At an earlier meeting, Rushmore said companies that need a prolonged heating source are looking for natural gas availability. Natural gas opens the door for those types of businesses in the Rugby area.

The Rugby Area Job Development Authority has been working closely with Major Pipeline and KL&J and see the potential this added heating source would bring to the community.

Knife River is also proposing to bring natural gas to the cities of Hazen and Beulah and discussion with city officials there is at about the same point.

In the future, Knife River would like to expand its services to the communities north of Rugby, including Rolla, Rolette and Belcourt.

The council tabled the issue to allow city officials to thoroughly review the drafted franchise agreement. The Aug. 12 meeting will be held in the council chambers at city hall.

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