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Urgency Grows Over TransCanada Tolls

Irate natural gas shippers are trying to light a fire under a forthcoming review of TransCanada Corp.'s eastbound mainline (TCPL) from Alberta, calling for accelerated work on a restructuring of sharply increased tolls.

"Severe rate shock" is at hand, the National Energy Board (NEB) has been told in a new filing by Alberta Northeast Gas Ltd., a supply procurement consortium of 16 local distribution companies in New England, New York and New Jersey. "The situation on TCPL is urgent and deteriorating and needs immediate attention."

Alberta Northeast calls for TransCanada to be given a deadline of July 1 to submit proposals for an overhaul of its finances and tolls. A rate application filed April 29 set a looser target date of Oct. 31.

Alberta Northeast warns that "Unless TCPL costs are dramatically reduced shippers will seek out competitiveness bypass alternatives or exercise economic bypass by avoiding Canadian transportation altogether in structuring their future gas supply and transportation alternatives."

Benchmark rates sought by the April 29 filing are an "eastern zone" toll of C$2.45 per gigajoule (GJ) (US$2.57/MMBtu) for deliveries from Alberta to central Canada; and a "southwest zone" rate of C$2.07/GJ (US$2.17) for shorter hauls to trading hubs in southern Ontario. (The Canadian and U.S. currencies are currently about par, but an MMBtu is 5% more than a GJ).

Like the interim rates set in February after a fight with shippers, the proposed final 2011 tolls are up by 49% from the TransCanada mainline's 2010 eastern zone rate of C$1.64/GJ (US$1.72/MMBtu) and 52% from the 2010 southwest zone rate of C$1.36 (US1.43/MMBtu).

The driver of the increases continues to be shrinking traffic that spreads costs thicker on mainline shipments. The reduced flows are attributed to declining western Canadian production, rising industrial consumption by thermal oilsands projects in northern Alberta, competition from 11-year-old rival Alliance Pipeline, and especially growth in U.S. shale gas supplies closer to markets in central Canada as well as the U.S. Midwest and Atlantic seaboard.

Other factors identified by TransCanada in its NEB filing include new U.S. pipelines for shale gas production, persistently reduced demand due to a prolonged weak economy and shifts in shipper contracting practices toward short-term and interruptible service.

If the NEB approves the new benchmark rates sought by TransCanada, mainline rates for at least the rest of this year will be more than double their 2006 levels, which were an eastern zone toll of C$0.94/GJ and a southwestern zone toll of C$0.80/GJ (see Daily GPI, May 2).

The Ontario Ministry of Energy, echoing Alberta Northeast's call for early action by TransCanada, said the mainline toll hikes "will have a significant impact on residential, commercial and industrial natural gas consumers. The ministry likewise maintains that "a comprehensive change of TransCanada's mainline business model is required."

The supply side of the market also wants action.

The Canadian Association of Petroleum Producers said its members, which account for more than 90% of the nation's output, are "very concerned about the level and volatility of tolls on the mainline. It is imperative that issues relating to the long-term competitiveness of the mainline be dealt with as quickly as possible."

A new NEB filing from the Alberta Department of Energy agreed with gas shippers that "a toll application for 2012 and beyond will need to include a comprehensive suite of business model, toll design and service changes. Alberta continues to be concerned about the long-term viability of the mainline to commercially connect Canadian natural gas to markets."

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