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Rolled-In Tolls for TransCanada Nova Extension Challenged

A new front has erupted in conflicts over adding facilities and covering costs across the Canadian pipeline grid -- this time over transportation of emerging shale gas supplies in northern British Columbia (BC). Salvos fired before the National Energy Board (NEB) include a warning from its former chairman, Roland Priddle, an architect of the country's avowedly deregulated regime of fostering a market-driven and competitive industry.

"The effects of this decision will be felt for decades to come," Priddle told the board as an expert witness for the opposition against the toll rule that TransCanada Corp. has proposed for a BC branch off its Nova grid called the Northwest Mainline Komie North Extension. The project aims to hook up the emerging Horn River Shale basin with Nova's Alberta shipping and trading network.

"The board's decision...is of profound importance for investor participation in pipeline development; for producer choice, for the market-driven geographical distribution of gas flows out of a region which holds an enormous resource; and for equal terms of access for competing gas buyers in British Columbia and Alberta," Priddle said.

He entered the duel as a second for Spectra Energy Transmission (formerly Westcoast Energy Inc.) when the NEB recently collected written submissions in preparation for project hearings scheduled to start in August.

The contest has escalated from a seemingly technical dispute over regulatory details into an international natural gas transportation and supply case, with customers from the United States stepping forward to defend Spectra-Westcoast's half-century-old BC grid against the invader from Alberta.

Spectra-Westcoast's declared allies include the Pacific Northwest Group, representing distributors and consumers in Washington, Oregon, Idaho, Nevada, Utah, Wyoming, Colorado and New Mexico. The group is a coalition of five gas and electric utilities plus 38 industrial users with operations in food processing, pulp and paper, wood products, aluminum, steel, chemicals, electronics and aerospace.

TransCanada stirred up the hornets' nest by proposing to cover costs of the Nova extension into BC with the "rolled-in" toll policy followed on its Alberta and eastern pipeline networks. The policy, an old mainstay of Canadian utility practices, tacks costs of new facilities onto regulated revenue requirements for established lines, thereby holding costs of growth down by spreading them thin across entire grids.

Spectra-Westcoast's BC network broke with the old regulated regime 15 years ago by adopting a version of the "incremental" or user-pay tolling approach that is more commonly employed to pay for transportation service additions in the United States.

In evidence before the NEB, Spectra-Westcoast estimates that tolls would open at C65 cents (U.S. dollar at par) if the Komie North line had to follow the user-pay, incremental approach.

The plan calls for shipping volumes to start at a modest 100 MMcf/d then, as Horn River production develops, to build to a potential 1.8 Bcf/d. For an estimated C$227.3 million, the line will be laid with jumbo pipe 36 inches in diameter that will enable traffic increases by making low-cost additions of compressor power (see Daily GPI, March 26).

Westcoast-Spectra's incremental toll estimate is more than double the rolled-in rate on the TransCanada-Nova grid, which is currently C19 cents per gigajoule (GJ) (US20 cents/MMBtu) and projected to rise to C24 cents/GJ (US25 cents/MMBtu) under a proposed but hotly contested business restructuring scheme.

"Rolled-in utility tolling...gives Nova overwhelming market power," warned Priddle. "If granted, the requested toll treatment would create a de facto gas transportation monopoly. The existing competitive market for gas services would be prevented from working by Nova's market power and by the entry barrier that power would create."

From the U.S., the Pacific Northwest Group points out its region obtains about half its gas from Canada and about 85% of the imports from BC No U.S. substitutes are available without costly additions to the U.S. pipeline network, the group said.

The TransCanada-Nova invasion of northern BC -- if fueled by rolled-in tolling -- creates a "prospect of underutilization and decontracting of Westcoast's existing facilities, thereby threatening economic access to gas supplies," the group said.

The danger of supply losses is seen as imminent and likely to worsen because a low rolled-in toll on Nova will lure new BC production eastward into Alberta, where aging wells are depleting at the same time as demand grows for gas as fuel for growing thermal oilsands extraction. A lengthening lineup of plans for Pacific Coast liquefied natural gas export terminals heightens prospects that U.S. customers will have to compete for BC production.

The current gas glut does not eliminate the danger of tightening supplies and rising prices for the Pacific Northwest region, the group said. "Low commodity prices, discovery of significant new supplies across North America and unsettled concerns regarding the safety of hydraulic fracturing practices create uncertainty regarding the extent and pace of production of new supply in northeastern BC."

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