Gas traders and independent power producers won an early roundin a long, many-sided contest developing before the National EnergyBoard over costs of excess capacity created by the Canadianpipeline expansion wave.

PG&E Energy Trading Canada, El Paso Merchant Energy Canadaand the Ontario Non-Utility Generators persuaded the NEB to cancela 12% toll increase granted in December and effective this month,to TransCanada PipeLines Ltd. TransCanada sought the increase —to C$1.13 per gigajoule (US$82 cents per MMBtu in its benchmark”eastern-zone” toll for long-distance deliveries to central Canadaand export points) — as an interim step while a much largerfiling for an overhaul of the rates is prepared.

PG&E, El Paso and the NUGs told the NEB they were left outof a quick vote on the issue held by TransCanada and a permanentshipper group collectively known as the TTF or tolls task force,which the board relies upon for negotiated settlements. The NEBsaid year-2000 tolls would continue to apply at least for thismonth while further review is done.

In a joint statement, the trading houses told the board “theinterim tolls are higher than they should be and tend to reflectacceptance of the applicant’s (TransCanada’s) case concerning oneof the most contentious issues in upcoming rate proceedings —namely, whether the pipeline should be insulated against the costconsequences of competitive risk.”

The NUGs agreed that the toll hike was “unacceptable,” and saidthey too were “concerned by the proposition that all contractnon-renewals be borne by remaining firm shippers.” The protesterswere referring a headache that developed last year on TransCanadaas a result of expansion of its system and its part-ownedFoothills-Northern Border export route, as well as completion ofthe 1.3 Bcf/d Alliance Pipeline. Shippers dropped about 1.7 Bcf/din firm transportation contracts on TransCanada as of last Nov. 1.

In an interview, TransCanada president Doug Baldwin saiddiscussions on ways to cover lost revenues were under way and hehoped for a cooperative settlement with shippers. But he made itplain he did not expect a negotiated resolution soon, and thatthere will be no surrender without a fight to the traders’long-range objective.

The traders would like to see the excess delivery capacity usedto create a wide-open market in pipeline space akin to commodityexchanges for gas. At PG&E Canada, for instance, tradingdirector Todd Lines asked “why not?” He pointed out there alreadyis a yardstick of value for pipeline capacity, the “basisdifferential” or difference between prices fetched by gas deliveredto trading points in Canada and the United States. It currentlyruns in a range of US30-40 cents per gigajoule, or about half thetoll for long-distance deliveries via TransCanada to markets in themiddle of the continent.

Baldwin said he could not conceive of the NEB scrapping thecornerstone of Canadian policy on pipelines since the industrybegan to build them. That remains a system of regulation crafted tomake sure tolls recover costs of the investments, including profitsdeemed to be fair in light of current economic and financialconditions. Baldwin said TransCanada aims to work out a system incooperation with shippers that will cover costs of the pipeline yetalso let it be competitive, especially when the next expansionopportunities arise.

He described TransCanada’s objective as pricing pipelineservices like hotel rooms, with users earning savings by makinglong-term commitments. Baldwin predicted that TransCanada’s excesscapacity this winter will average about 1 Bcf/d. Industry analysts,including the Canadian Energy Research Institute, project capacityexcesses in the range of 1.5-2 Bcf/d until gas producers catch upwith the added delivery capacity.

The wrangling is expected to spread to TransCanada’s Novagathering grid in Alberta, which handles about four-fifths ofCanadian production. It too has experienced “decontracting” as aresult of new options created by the expanded pipeline grid, andhas filed for interim toll increases with the Alberta Energy andUtilities Board.

Gordon Jaremko, Calgary

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