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Canadian Utilities Seek Pause in TransCanada Rate Overhaul

Canada's three biggest natural gas distribution companies are calling for a timeout to be imposed on TransCanada Corp.'s C$13.5 billion (US$12 billion) grand design for an overhaul of the national pipeline network.

Union Gas Ltd. (Spectra Energy), Enbridge Gas Distribution Inc. and Gaz Metro LP -- partnered under a group called the Eastern LDCs -- say the pause is needed to solve a mystery created by TransCanada: the big plan's effect on gas supplies, delivery service and costs for their 1.8 million customers in Ontario and Quebec.

In a request to the National Energy Board (NEB) for the investigation, the trio observes that the puzzle gets only two of 30,000 pages in applications for the projects: the C$12 billion (US$10.7 billion) Energy East partial conversion of TransCanada's Mainline to oil service, the C$1.5 billion (US$1.3 billion) Eastern Mainline proposal for a new conduit to replace lost gas capacity, and an associated asset transfer.

In the Ontario and Quebec region known as TransCanada's Eastern Triangle service area, "markets are suffering from lack of access to [gas transportation] capacity," say the Eastern LDCs. "It is imperative that an accurate assessment of those market needs, and those of any other potential markets, be included up front as part of the applications."

The distributors say a timeout order is also essential under regulatory reforms enacted by the federal Conservative government, an avid supporter of projects to send growing Alberta oil sands production beyond North America onto overseas markets.

The 2012 legislation set a 15-month limit on pipeline approval cases. In addition to the oil conversion, Energy East includes an extension of the TransCanada network across Quebec and New Brunswick to tanker docks on the St. Lawrence Seaway and the Atlantic coast.

In months of private discussions before the applications were filed on Oct. 30, the Eastern LDCs say they made it known that they "firmly believed that TransCanada was materially underestimating the demand for Eastern Triangle firm transportation capacity."

Union, Enbridge and Gaz Metro say, "Moreover, TransCanada simply ignores those concerns, failing to let the market speak through an unbiased, transparent canvass of intended future use of the Eastern Triangle facilities. In the circumstances, TransCanada's failure to obtain and provide that information should not be tolerated."

The Eastern LDCs say TransCanada's project applications rely on results of an open-season auction of firm gas delivery capacity for the Eastern Triangle that was held last winter, when only a sketchy outline of the Energy East project was disclosed.

Bookings were discouraged by tacking on liabilities for costs of the Eastern Mainline gas service replacement project, say the distributors: up to C$59 million (US$53 million) for Union, C$540 million (US$486 million) for Enbridge, and C$484 million (US$436 million) for Gaz Metro.

As currently proposed the Eastern Mainline replacement conduit would carry 600 million cubic feet of gas per day. The Eastern LDCs' estimates of gas service that the Energy East oil conversion would take away are twice as big, at 1.2 Bcf/d.

Even the proposed, undersized, C$1.5 billion) (US$1.3 billion) replacement gas line would more than double the cost of facilities that Ontario and Quebec distribution companies and their customers have to bear as toll-payers, says the request to the NEB for an investigation. The current book value of the aging eastern gas line slated for oil conversion is estimated to be C$450 million (US$405 million).

Union, Enbridge and Gaz Metro do not say how long TransCanada's eastern pipeline megaproject should be put on pause. But the Eastern LDCs suggest enough time should be allowed for a market solution -- a fresh open season auction of gas pipeline capacity, this time with prospective purchasers of service contracts able to act on greatly improved knowledge of the Energy East project.

Markets already anticipate severe service shortages during forthcoming periods of peak demand for gas, say the distributors. They cite an inflated price "basis differential" for winter supplies between the regional trading hubs -- Dawn in western Ontario and Iroquois near the Quebec border -- that is currently nine times the delivery cost between the two points.

Union, Enbridge and Gaz Metro say they are "aware of current customers and third party suppliers that do not have firm TransCanada contracts -- or contracts with renewal rights beyond 2017 -- that would either participate directly in a new open season or request the Eastern LDCs to contract with TransCanada on their behalf."

While TransCanada digested the gas distributors' 38-page call for a new stage in eastern pipeline development and prepared a response, an early intervention emerged on a second front. Quebec's environment ministry confirmed the Calgary firm has been sent an early warning to expect provincial demands for conditions to be tacked onto federal approval of the projects.

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