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CAPP, TransCanada Agree on New Nova Tolling System

CAPP, TransCanada Agree on New Nova Tolling System

A new gas tolling agreement between TransCanada PipeLines and the Canadian Association of Petroleum Producers (CAPP) soon may replace Nova Gas Transmission's 19-year-old, postage-stamp pricing system with a formula based on distance- and the diameter of the pipe used for transportation. A memorandum of understanding (MOU), signed by CAPP and TransCanada, marks the culmination of a settlement process started when the Canadian gas industry signed a peace accord last April, which also assured construction of the Alliance Pipeline and approval of the TransCanada-Nova merger.

"This has been a long but cooperative process, which has required give-and-take on all sides," said TransCanada CEO George Watson. "The end result is a new pricing structure that will promote a competitive environment and greater customer choice in the Western Canadian Sedimentary Basin (WCSB)."

TransCanada expects to file the new pricing structure proposal with the Alberta Energy Utilities Board in the next few weeks. The proposal would replace Nova's previous distance-sensitive tolling plan (filed last April), which was designed prior to the merger with TransCanada. The new rate structure would be implemented after AEUB approval later this year and would be phased in over four years.

"This MOU marks the end of a long, broad and collective process to restructure gas transportation in Alberta," said Norm McIntyre, past chairman at CAPP and executive vice-president of Petro-Canada. "The stage is now set for the industry to move forward to the regulator and then to implementation."

The agreement calls for the replacement of the postage-stamp tolling method, which dictates the same unit price for transmission regardless of how far the gas is transported, with a 16-cent range of prices from about 20 cents/Mcf to about 36 cents based on distance of transportation and economies of scale/diameter of pipe utilized.

"We agreed to a narrower floor and ceiling, so a narrower range of tolls," said CAAP's Greg Stringham, vice president of markets and fiscal policy. "They had proposed rates that would change from an average of about 26 cents/Mcf, which meant a low of 17 cents and a high of 45 cents - a fairly wide dispersion of tolls. But we've narrowed it down to a 16-cent range, with is the average toll plus or minus 8 cents.

"We'll phase this in over four years. The rates go down faster because [Nova has] some bypass threats at the lower end of their rate schedule; then they go up. They go up about 8 cents over four years [on the high end of the rate structure], but go down 8 cents over only two years, and that leads to some revenue shortfalls because the rates are going down faster than they are going up. But at the end of the [period] there's no revenue deficiency." TransCanada is contributing $50 million to help with the transition phase.

Stringham said CAPP's 170 producer members agreed to the proposal. "But it doesn't preclude any one party from taking a [different] position but it does put a strong settlement before the regulators."

The new proposal also offers customers a new contract terms for the same service they currently receive. "This proposal meets our customers' desire for increased choice and greater contractual flexibility," said Ron Turner, president of TransCanada's Alberta system. "At the same time, it encourages TransCanada to be innovative in meeting customer needs."

The tolling agreement also includes, but is not limited to, the following changes:

  • Nova will provide term-linked receipt tolls.
  • TransCanada may receive a maximum loss or gain of $5 million as a result of the premium or discounts on one-, three- and five-year contracts and 50% of the IT and short-term firm service premiums.
  • Costs and revenues of new services are at TransCanada's risk and reward subject to appropriate cost accountability.
  • TransCanada shareholders no longer must pay 25% of the shortfall from posted prices related to the Palliser Pipeline discounted rate agreement but must pay 25% of the shortfall from posted prices related to any future discount deals.
  • Nova no longer will build extension laterals within its regulated business and roll the costs into its regulated rate base.
  • Nova will contribute $25 million/year over the first two years during a transition period to the new toll structure, while shippers will contribute up to $20 million from CEIS savings.

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