TransCanada Corp. is offering a 32% cut in tolls next year on its Mainline from Alberta to central Canada and the United States through a “comprehensive restructuring” to revive traffic on the beleaguered, half-century-old natural gas conduit.

The recovery blueprint, newly filed with the National Energy Board (NEB), aims to reverse an upward spiral driven by growing spare capacity that has more than doubled Mainline tolls to C$2.08/gigajoule (GJ) (US$2.18/MMBtu) this year from C$0.86/GJ (US$0.90/MMBtu) in 2007 (see Daily GPI, Aug. 1).

The new package promises to cut the benchmark rate to C$1.41/GJ (US$1.48/MMBtu) in 2012. The formula’s key ingredient is an effective shortening of the Mainline, and corresponding reductions in its costs and charges, by expanding the trading and storage grid known as NIT (Nova inventory transfer) beyond Alberta to cover all western Canada from British Columbia (BC) east to the Manitoba boundary.

The expanded supply collection and trading network will be implemented by incorporating western portions of the Mainline and TransCanada’s subsidiary Foothills Pipe Lines.

The change is forecast to result in a surcharge on the western NIT supply grid of $0.06/GJ (US$0.063/MMBtu). The increase will chiefly be felt in Alberta as the source of four-fifths of the gas flowing in the system.

Evidence filed in previous, aborted attempts to begin the restructuring in stages has indicated that the NIT increase is acceptable to gas suppliers represented by the Canadian Association of Petroleum Producers. The Alberta government has also previously accepted the idea, in the interests of reviving sagging gas drilling and development which in turn affect provincial royalty revenues.

The added charge is expected to be offset by a combination of deductions against the Alberta government’s gas royalties, plus modestly but noticeably rising commodity prices. TransCanada forecasts that annual average NIT prices will increase by C$0.13/GJ (US$0.14/MMBtu) during 2012-2017.

The NIT surcharge is also regarded by most suppliers in the Canadian West as a reasonable price to pay for reduced Mainline tolls that will restore the region’s ability to compete with surging U.S. shale gas.

Since 2007, long-haul contracts for Mainline service have fallen by 65% to 1.3 Bcf/d from 3.6 Bcf/d. The deterioration continued a trend that started in the 1990s, when the rival Alliance Pipeline was built to Chicago from northern BC and Alberta. The decline of the Mainline is attributed to the pipeline bypass, erosion of aging conventional western gas supplies and rising industrial demand by Alberta oil sands thermal extraction projects.

Other elements of the TransCanada recovery package include reduced depreciation charges, a voluntary C$25-million (U.S. dollar at par) reduction of the Mainline’s regulated revenue requirement, cost deferral accounts and adjustments to the pipeline’s allowed return on equity.

From the Canadian perspective, TransCanada’s new NEB filing says, “Recent and dramatic changes in the business environment of natural gas supply, demand and transportation in North America have raised significant issues that impact the long-term economic viability of existing pipeline infrastructure and supply basins.”

As an international gas transportation operation, TransCanada also affirms that it intends to pick up a piece of the action fueled by shale gas development in the U.S., especially in the Northeast.

The new filing alludes to a parallel application, currently before the NEB, for new facilities to carry U.S.-sourced gas north into the Toronto region from Pennsylvania and New York State. TransCanada discloses that recent open season auctions of the proposed capacity additions generated firm service commitments for about 360 MMcf/d of gas from the Marcellus shale development region.

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