Competition has arrived in Canadian gas transportation, but onlya case that is escalating into a big one before the National EnergyBoard will tell who gets what out of the changed pipeline grid.The battle — now heating up on paper, to be followed by hearingsbeginning Jan. 18 — is over a proposal to establish minimum,”reserve” or floor prices for excess deliveries by TransCanadaPipeLines Ltd.Round one has already been won by the pipeline’scustomers. After receiving strongly-worded protests, the NEBrejected an appeal by TransCanada to adopt floor prices effectiveNov. 1 or the start of the new gas contract year and heatingseason.

TransCanada’s action followed the first in an anticipated seriesof “decontracting” actions by customers. As of Nov. 1, shippersdropped about 600MMcf/d or about 7% of capacity on the TransCanadasystem. Another batch of long-term service contracts come up forrenewal in about five months.

The reserve-bid proposal calls for surplus capacity to trade ina range of 65% to 125% of tolls for long-term firm transportation.TransCanada would set the minimum or reserve bids depending on itsreading of the market for delivery service. As an alternative, notformally proposed but mentioned as a possibility, TransCanadasuggests it could seek rights to hold capacity off the market.

TransCanada acknowledges it has long tolerated a regime ofauctioning off surplus capacity on an electronic bulletin boardthat accepts bids as low as 50% of firm rates. But the pipelinestresses that times have changed drastically. Until this fall,surplus capacity was rare, temporary and only available forinterruptible service year-round on Canadian pipelines. TheFoothills-Northern Border expansion, when added to previousadditions to TransCanada and the Alberta Natural-Pacific Gassystem, began changing the scene. Completion of 1.3 Bcf/d AlliancePipeline, and the allied Vector project, spell lasting change.

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

TransCanada predicts there could be a “wholesale migration” overto this new version of only nominally interruptible service becausemore holders of firm capacity will drop their contracts to go intothe short-term transportation market. That, the NEB is being told,poses risks of saddling anyone who keeps firm service contractswith unfair, downright “discriminatory” extra costs andcross-subsidization of bargain hunters.

Shippers, however, are not about to give up easily on reapingany advantages emerging from the new era of Canadian pipelinecompetition. The TransCanada proposal has drawn out interestsranging from the supply side of the market to Ontario distributorsand the Industrial Gas Users Association of Canada.

The Canadian Association of Petroleum Producers, accounting forabout 95% of the nation’s gas output, is reminding the NEB thatpipeline competition is still limited. TransCanada remains “thelargest pipeline carrying western Canadian natural gas and is theonly connection between the Western Canadian Sedimentary Basin andmajor markets in the East.” And the mainline is also only part of ahuge corporate family that also now includes 100% ownership of theNova gas grid in Alberta and the Alberta Natural inlet into thePacific Gas system, plus 50% of Foothills.

CAPP calls TransCanada’s proposal “a fundamental and a newchange in principle.” Under the floor-price proposal, the pipeline”seeks to be given the power to set prices for its services” as aradical departure from its traditional obligation to providetransportation if capacity is available at fair prices reflectingservice costs.CAPP observes that the carefully-worded proposalfor floor prices does not call for relating them directly to costs.”Rather, TransCanada will decide the ‘desirable’ value for theservice,” and “apparently believes it should have unlimiteddiscretion.”

The producers say any bidding for TransCanada services must be”based on a floor price that reflects sound economics,” and the old50% minimum was right for its time. CAPP suggests there could be anadjustment, but any new floor should reflect factors not entirelyin TransCanada’s control, such as the cost of gas used forcompressor fuel.

Setting a tough tone for the forthcoming hearings, CAPP urgedthe NEB to uphold Canadian utility law stipulating that a pipeline”may not act as a ‘discriminating monopolist’ by unilaterallymanaging its prices to achieve . . . .. the ‘optimal’ tradeoffbetween price for service and quantity of service provided. Forexample, if the pipeline found that it could triple its tolls andstill maintain one-half the volumes on the system then this, from adiscriminating monopolist’s perspective, would be more profitableand the pipeline could drive half the volumes off the system byraising prices while increasing its revenues.”

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