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Excess Canadian Capacity Adds Up to a Hot IT Market

Excess Canadian Capacity Adds Up to a Hot IT Market

Competition has arrived in Canadian gas transportation, but only a case that is escalating into a big one before the National Energy Board will tell who gets what out of the changed pipeline grid. The battle --- now heating up on paper, to be followed by hearings beginning Jan. 18 --- is over a proposal to establish minimum, "reserve" or floor prices for excess capacity on TransCanada PipeLines Ltd. Round one has already been won by the pipeline's customers. After receiving strongly-worded protests, the NEB rejected an appeal by TransCanada to adopt floor prices effective Nov. 1 or the start of the new gas contract year and heating season.

TransCanada's action followed the first in an anticipated series of "decontracting" actions by customers. As of Nov. 1, shippers dropped about 600MMcf/d or about 7% of capacity on the TransCanada system. Another batch of long-term service contracts come up for renewal in about five months.

The reserve-bid proposal calls for surplus capacity to trade in a range of 65% to 125% of tolls for long-term firm transportation. TransCanada would set the minimum or reserve bids depending on its reading of the market for delivery service. As an alternative, not formally proposed but mentioned as a possibility, TransCanada suggests it could seek rights to hold capacity off the market.

TransCanada acknowledges it has long tolerated a regime of auctioning off surplus capacity on an electronic bulletin board that accepts bids as low as 50% of firm-service rates. But the pipeline stresses that times have changed drastically since the old regime emerged. Until this fall, surplus capacity was rare, temporary and only available for interruptible service year-round on Canadian pipelines. The Foothills-Northern Border expansion, when added to previous additions to TransCanada and the Alberta Natural-Pacific Gas system, began changing the scene. Completion of 1.3 Bcf/d Alliance Pipeline, and the allied Vector project, spell lasting change.

TransCanada has told the NEB "all of the available market indicators point to there being excess capacity on a sustained basis well into the future." As a result of the Nov. 1 decontracting, "it is clear that.....interruptible service will be highly reliable. Up to the non-renewal level (about 600 MMcf/d), interruptible service will be essentially firm, since the system has been designed and built to accommodate that level of throughput on a year-round basis."

TransCanada predicts there could be a "wholesale migration" over to this new version of only nominally interruptible service because more holders of firm capacity will drop their contracts to go into the short-term transportation market. That, the NEB is being told, poses risks of saddling anyone who keeps firm service contracts with unfair, downright "discriminatory" extra costs and cross-subsidization of bargain hunters.

Shippers, however, are not about to give up easily on reaping any advantages emerging from the new era of Canadian pipeline competition. The TransCanada proposal has drawn out interests ranging from the supply side of the market to Ontario distributors and the Industrial Gas Users Association of Canada.

The Canadian Association of Petroleum Producers, accounting for about 95% of the nation's gas output, is reminding the NEB that pipeline competition is still limited. TransCanada remains "the largest pipeline carrying western Canadian natural gas and is the only connection between the Western Canadian Sedimentary Basin and major markets in the East." And the mainline is also only part of a huge corporate family that also now includes 100% ownership of the Nova gas grid in Alberta and the Alberta Natural inlet into the Pacific Gas system, plus 50% of Foothills.

CAPP calls TransCanada's proposal "a fundamental and a new change in principle." Under the floor-price proposal, the pipeline "seeks to be given the power to set prices for its services" as a radical departure from its traditional obligation to provide transportation if capacity is available at fair prices reflecting service costs. CAPP observes that the carefully-worded proposal for floor prices does not call for relating them directly to costs. "Rather, TransCanada will decide the 'desirable' value for the service," and "apparently believes it should have unlimited discretion."

The producers say any bidding for TransCanada services must be "based on a floor price that reflects sound economics," and the old 50% minimum was right for its time. CAPP suggests there could be an adjustment, but any new floor should reflect factors not entirely in TransCanada's control, such as the cost of gas used for compressor fuel.

Setting a tough tone for the forthcoming hearings, CAPP urged the NEB to uphold Canadian utility law stipulating that a pipeline "may not act as a 'discriminating monopolist' by unilaterally managing its prices to achieve . . . the 'optimal' tradeoff between price for service and quantity of service provided. For example, if the pipeline found that it could triple its tolls and still maintain one-half the volumes on the system then this, from a discriminating monopolist's perspective, would be more profitable and the pipeline could drive half the volumes off the system by raising prices while increasing its revenues."

Gordon Jaremko, Calgary

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