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Pipelines, Producers United on Competitive Nova Rates

Pipelines, Producers United on Competitive Nova Rates

TransCanada PipeLines subsidiary Nova Gas Transmission and two groups of Canadian producers are on their way to a whole new competitive pricing structure aimed at "[taking] on the real competition, which are the U.S. basins."

This is "great for the [Western Canadian Sedimentary] Basin and good for us," TransCanada President George Watson said last week. "Let's get on and deal with those guys out of Houston."

Watson's remarks came in a phone conference after TransCanada and Nova Gas had joined with the Canadian Association of Petroleum Producers (CAPP) and the Small Explorers and Producers Association of Canada (SEPAC) in unveiling an agreement that promotes receipt-point pricing for gas transportation along the Nova system. This would replace the decades-old postage-stamp pricing regime. TransCanada officials stressed this was still a work in progress, and that they hoped to hold discussions with other stakeholders - such as marketers and aggregators - during the next several weeks. They said they expect to file an industry-wide settlement with the Alberta Energy and Utilities Board by the end of the year.

"...This is very much a step along the direction of the accord that we did back in [April]...And hopefully you'll see more things coming out of this," Watson said. Specifically, TransCanada hopes that "some of this progress would roll off to our discussions that...will eventually come up on the Canadian mainline." Those talks would be aimed at trying to make TransCanada's mainline and other more established pipelines, which are tied to traditional regulatory regimes, competitive with pipeline newcomers, such as the Alliance Pipeline project.

Aside from virtually assuring construction of the producer-spawned Alliance Pipeline and approval of the merger between TransCanada and Nova Corp., the April accord laid the groundwork for reaching an industry-wide settlement on a new rate regime on Nova's Alberta gathering grid.

With the agreement with producers, TransCanada and Nova "[are] aligning our interests with those of our customers and [are] taking on the real competition, which are the U.S. basins," Watson said.

Under the proposed framework, TransCanada and Nova contend that receipt-point pricing would provide customers with rates that are mileage sensitive. Nova customers would pay a price range of 18-34 cents/Mcf depending on the receipt points at which they are contracted. The current postage-stamp rate is a uniform 26 cents/Mcf.

There will be a four-year transition period with tolls allowed to move only between agreed floors and ceilings: C22-28 cents (US15.7-20 cents) in 1999; C18-30 cents (US12.8-21.4 cents) in 2000; C18-32 cents (US12.8-22.8 cents) in 2001; and C18-34 cents (US12.8-24.2 cents) in 2002.

Rate increases would be phased in over the four years to give customers the chance to adapt, while shippers that are in line for toll reductions would gain them in two years. The "people...that will pay more [than they currently do] go to that higher price over four years. People that pay less come to that lesser price in two years...," Watson said.

In addition to phased transition to the new rate design, producers that would move to a lower cost structure and Nova-TransCanada would contribute "some additional initial benefits back to those people whose tariffs will be going up," said Ron Turner, Nova Gas president. These actions combined, he believes, will help to mitigate the impact of the transition costs on Nova customers.

Watson estimated that Nova-TransCanada will contribute C$25 million (US$17.8 million) pre-tax annually over the next two years to mitigate transition costs, while producer-shippers will contribute C$20 million (US$14) under the cost-efficiency agreement. "We did pay a little bit of [a] price to buy peace in the valley," he told reporters.

He said he doubted that the new receipt-point pricing method would cause producers to be more interested in drilling further south on Nova's system. That's because the rates shippers pay won't solely be determined by location on the Nova gathering system but also would take into consideration other factors - such as efficiency of pipeline receipt points. As a result, some shippers at the end of long, small-diameter pipeline links in southern regions could face increased tolls while others served by big, efficient high-volume connections farther north would fare well.

"I think what's going to be a natural outcome of this [is that you will see] a lot less pipe being built within the regulatory framework, and much more pipe being built on a contractual basis," Watson said. In short, he believes future connections for new gas fields will increasingly be built outside the customary system of regulated tolls, under service contracts negotiated with producers.

Also, he dismissed any suggestions that the new pricing structure could affect Nova's on-going discussions with Alliance about it possibly using Nova's laterals for some of its transportation requirements. "No. It wouldn't make any difference [one way or another]," Watson said.

Susan Parker, Washington, D.C.; Gordon Jaremko, Calgary

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