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TransCanada, Shippers Reach Settlement on 2005 Toll Structure

TransCanada has reached a settlement agreement with its shippers on its 2005 Canadian mainline transportation toll structure. The new tolls, which still must be filed at the National Energy Board (NEB) and approved, contain no major surprises. They include a similar level of operation and maintenance expenses and depreciation costs as in 2004, and a 9.56% return on equity -- as set by the NEB.

"I'm reading this as [TransCanada] turning the corner on establishing a better relationship with their shippers," said Greg Stringham, vice president at the Canadian Association of Petroleum Producers. "From our perspective, it's actually quite encouraging that we're able to do a settlement with them. As you know we've been in hearing battles with them over the last several years annually."

Stringham noted that this settlement is a short-term accomplishment and some important long-term issues will have to be decided this year, including what to do with capacity TransCanada holds on Great Lakes Gas Transmission.

The biggest outstanding issue for this year's tolls is the pipeline's cost of capital and rate of return equity thickness. Those were subject to a recent hearing at the NEB. Once those components have been set, final 2005 tolls can be set. "Our anticipation is that [tolls for 2005] will end up slightly down from where they are right now from what we've heard so far and what we settled on," said Stringham.

"The settlement represents a balance of interests, and demonstrates our commitment to develop mutually-beneficial solutions with our customers," said TransCanada CEO Hal Kvisle.

The settlement establishes the Canadian mainline's fixed operating, maintenance and administration (OM&A) costs for 2005 at C$169.5 million, which is comparable to OM&A costs in 2004. Any variance will accrue to TransCanada. All other costs in TransCanada's 2005 revenue requirement will be treated on a flow through basis.

The negotiating parties agreed the return on equity capital for 2005 will be the product of a rate of return on equity (ROE) of 9.46% and the deemed common equity in the Canadian mainline's capitalization resulting from an ongoing proceeding at the NEB (Proceeding RH-2-2004, Phase II). There was no change in depreciation rates and methodology from 2004 to 2005. Depreciation costs for 2005 are expected to be C$406 million.

Interim tolls will continue to be charged for transportation service on the Canadian mainline until final tolls can be established upon the ultimate resolution of Phase II of the RH-2-2004 proceeding. The decision of the NEB in this proceeding is expected in the second quarter of 2005.

Stringham noted that some important issues going forward will be what TransCanada does with the capacity it holds on the Great Lakes system and what its plans are for converting part of its gas pipeline to transport heavy crude oil.

Because TransCanada has excess mainline capacity, the company has contemplated not renewing its Great Lakes Gas Transmission capacity, which it holds on behalf of its shippers, and just moving gas across the unused space on its own system north of the Great Lakes. For the short-term it has decided to renew the Great Lakes capacity.

Stringham said it's too early for shippers to be too concerned about TransCanada's plan to convert one of its six parallel pipelines to flow heavy oil from oilsands producing fields in northern Alberta to markets in the Midwest.

"With the growth in the oilsands that we see happening in Canada right now there is going to be another million barrels a day that come out of the Fort McMurray/northern Canada area and we are definitely going to need new capacity for oil," Stringham said. "The big question that our guys are looking at right now is what this might mean for the amount of gas transportation capacity.

"Certainly with the turning on of Mackenzie gas, eventually the coming on of Alaska gas over the next decade, we want to make sure that there is sufficient takeaway capacity to be able to handle those volumes as well. We know from the 1990s what it means to have more gas than you have pipeline capacity. They have told us initially that won't be a problem but we are looking at it and just want to be sure it won't be a problem before they move ahead with any future plans."

TransCanada has said previously that it plans to add new pipeline capacity to handle the additional volumes moving south from Alaska. Much of the production from the Mackenzie Delta is expected to be used by the oilsands producers so southern Canadian pipeline capacity may not be an issue.

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