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TransCanada, Customers Squabble Over Costs of Mainline Conversion

TransCanada Corp. is digging in for a fight with its natural gas customers, calling their protest against costs that they blame on its Energy East plan to switch part of its Mainline into oil service a "patent and extreme" attack on its ability to manage the system.

The pipeline said the gas shippers created their own problem -- up to C$600 million (US$480 million) in costs of maintaining service after the conversion -- by failing to book enough delivery capacity to satisfy their needs during the planning stage of the project.

The pipeline company insists the gas grievance belongs in the law courts because the arena chosen by the protesters, the National Energy Board (NEB), has no authority to intervene against commercial contracts that impose the extra costs.

In a lengthy reply to the complaint lodged with the NEB by Enbridge Gas Distribution Inc. and Union Gas Ltd. (Spectra), TransCanada on Wednesday urged the board just to dismiss the affair as beyond its limited jurisdiction over pipeline tariffs and tolls.

The Ontario and Quebec energy ministries support the complaint (see Daily GPI, July 24). Enbridge and Union are Canada's largest gas distributors, with a combined total of 3.4 million customers in the Toronto region and southern and eastern Ontario. Their networks and the Mainline tie Quebec into the continental market spanning Canada and the United States.

Along with the Ontario and Quebec governments, Enbridge and Union enlisted support by Gaz Metro in Quebec, Centra Gas in Manitoba, Utilities Kingston in eastern Ontario, Northland Power in Toronto, the Canadian Industrial Gas Users Association, fabric and building materials manufacturers Morbern Inc. and Iko Industries Ltd., Ontario Power Generation, TransAlta Corp., and three customers of TransCanada gas export services in the U.S.: New York State Electric and Gas Co., St. Lawrence Gas Co. and Alberta Northeast Gas, a supply procurement agency of distribution companies in New England, New York and New Jersey.

Energy East ranks high on the economic agenda of the national Conservative government in Ottawa as a path to widening Canada's oil exports beyond the United States, as well as on official wish lists in the western oil-producing provinces and the Atlantic region.

Enbridge and Union said, "Gas shippers should not be required to backstop the enormous development costs of these facilities." They cite repeated promises by TransCanada to replace all gas delivery capacity lost due to the partial Mainline switch to carry 1.1 million b/d of oil.

Forecast costs add up to C$13.5 billion (US$12 billion): C$12 billion (US$10.7 billion) for the pipeline conversion and an extension to an East Coast tanker port, plus C$1.5 billion (US$1.2 billion) to build a new gas Eastern Mainline for Ontario and Quebec.

TransCanada said the gas portion of the scheme was based on the market for pipeline capacity as shown by firm service bookings.

During planning stages of Energy East, the pipeline said gas shippers' responses to contract offers during capacity open seasons showed their losses from the oil conversion would only be about 215 MMcf/d.

Demand has since risen to nearly 550 MMcf/d. The contested costs are for developing "incremental" expansion facilities not covered by the Energy East guarantee to replace lost gas capacity, TransCanada said. Much of the new traffic would be imports of U.S. shale production into Ontario and Quebec.

In rejecting the gas customers' grievance, TransCanada insists it is not in a business of maintaining excess delivery capacity in case they might want it at some future time.

"The Mainline is a contract carrier," TransCanada said. "It is not obliged to transport volumes for which no contracts have been signed, nor is it obliged to retain capacity that is uncontracted.

"It is also to be remembered that shippers on the Mainline, including Enbridge and Union, have not through payment of Mainline tolls acquired any right to Mainline capacity for which they choose not to contract. TransCanada is free to seek to repurpose facilities that provided uncontracted capacity."

After collecting another round of replies to each other by the participants in August, the NEB said it will determine whether to hold hearings and make a decision on the dispute. Effects on the Energy East and Eastern Mainline plans remain unknown. The board has not yet accepted the project applications as complete, a step that will trigger a legislated 15-month deadline for approval decisions.

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