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TransCanada Reaches Alberta System Settlement; Battle for Alaska Pipe Continues

TransCanada PipeLines Ltd., Canada's top natural gas transporter, has put an end to prolonged conflicts with its customers by negotiating rate settlements on its principal delivery systems. The pipeline company announced a three-year agreement on Thursday on key items for establishing tolls on its Nova gas-gathering network in Alberta, source for about four-fifths of Canadian production.

The deal comes on the heels of a similar settlement for TransCanada's eastbound mainline from Alberta to central Canada and the United States. Both settlements resolved months-long regulatory duels.

TransCanada president Hal Kvisle described the settlements as "alignment of interests with our shippers." He added, "We remain committed to providing value to our customers and to exploring and developing pipeline services that benefit all stakeholders."

The deals come amid chronic surpluses of capacity on both principal TransCanada delivery systems and hot rivalry with Enbridge Inc. and Alliance Pipeline over rights to participate in the proposed Alaska gas megapipeline project. Northern growth plans are cornerstones of Kvisle's long-range strategy for refilling space left vacant in its lines since Alliance, 50%-owned by Enbridge and an affiliated investment trust, completed its bypass of Nova and the TransCanada mainline five years ago.

The Nova settlement covers the Alberta system's revenue requirements, return on equity and depreciation costs for 2005, '06 and '07. Modest increases are allowed in operating, maintenance and administration costs. They are set at C$193 million (US$155 million) for this year, C$201 million (US$161 million) for 2006 and C$207 million (US$166 million) for 2007.

In trade for the pipeline dropping complex regulatory siege warfare for improved earnings, shippers granted TransCanada the right to make gains by being efficient. The Nova system will be allowed to keep savings made by reducing operating, maintenance and administration costs below the stated levels. The Alberta system settlement also includes using a formula devised by the Alberta Energy and Utilities Board for calculating allowed returns on equity and facilities depreciation rates.

For 2005, the return on equity is being set at 9.5%. Depreciation is projected at C$304 million (US$243 million) this year, C$285 million (US$228 million) in 2006 and C$282 million (US$226 million) in 2007. Exactly how the settlement will be translated into the TransCanada-Nova grid's complex will be established by a proceeding before the AEUB. An application will be made to the provincial board by April 1.

A technical proceeding is already under way before the National Energy Board on translating TransCanada's earlier settlement on finances for its mainline into adjustments to its increasingly complex toll structure. Pending the outcome of the case, the mainline benchmark "eastern zone" toll for delivery from Alberta to central Canada remains about C$1.08/gigajoule (US$0.90/MMBtu). The settlement freezes annual operating, maintenance and administration costs on the mainline at C$169.5 million (US$136 million).

As in the case of the Alberta gas-gathering grid, TransCanada will be entitled to keep any gains achieved with efficiency measures. The long-distance line's return on equity is set at 9.46% under a formula devised by the NEB, and depreciation costs are pegged at about C$406 million (US$325 million). Receipts into the Alberta grid have been running as much as 3 Bcf/d or 20% below the network's capacity for about 14 Bcf/d. On the mainline, current traffic of about 5.7 Bcf/d is also 20% below capacity in the range of 7 Bcf/d.

Kvisle and other TransCanada executives highlighted their hopes to recruit industry support for northern growth plans at conferences held this week by the Canadian Energy Research Institute and the Canadian Institute, and at hearings before the Canadian Senate's resources committee. TransCanada campaigned for retention of the 1978 Northern Pipeline Act as the framework for building the Canadian legs in the Alaska Natural Gas Transportation System when the proposed revival of the northern mega-project comes together over the next few years.

The 27-year-old act, coupled with associated agreements between Washington and Ottawa, effectively gives TransCanada subsidiary Foothills Pipe Lines exclusive rights to build the Canadian sections. Kvisle emphasized that even if established gas fields stave off projected productivity declines longer than expected, most Alaskan gas will be able to travel on excess capacity in existing pipeline systems.

Besides the Nova grid and its own mainline, TransCanada owns Foothills as the 1980s "prebuild" of ANGTS, 30% of the Northern Border route to Chicago and the Alberta-to-California service of Gas Transmission Northwest, Kvisle pointed out.

The TransCanada family has built up rights-of-way, regulatory approvals, technical expertise community relationships and options for marketing Alaskan gas over three decades of involvement in northern development planning, Kvisle emphasized. He pledged to fight to keep the 1970s regulatory apparatus as bound to be the most efficient way to approve the international gas mega-project as Enbridge and Alliance stepped up pressure for a change.

TransCanada's rivals took out newspaper advertisements and set up an Internet site (competitivecanada.com) to campaign for abolition of the 1970s apparatus. The reincarnation of ANGTS is bound to be different, and all who are interested should be able to compete for rights to build the Canadian parts before the National Energy Board and the Canadian Environmental Assessment Agency, Enbridge and Alliance said.

"The Canadian segment of the Alaska natural gas pipeline must have a regulatory framework that has the full support of producers, shippers and end-markets . . . an approval process that is modern, well understood, open and transparent," Enbridge and Alliance said as they mounted their public campaign to scrap the old apparatus. The reincarnation of the Alaskan project will be "very different in several key respects from the one envisioned in 1978," Enbridge and Alliance predicted.

"Today's project involves significantly higher flow capacity -- almost double -- to meet current North American gas market conditions, changed routing, likely termination at Fort Saskatchewan, Alberta (a major pipeline hub near the provincial capital of Edmonton), the use of multiple existing pipeline systems -- that is, Alliance and TransCanada -- for delivery to markets, transportation of liquids in the gas stream, and changed pipe diameter, operating pressure, and number and location of compressor stations."

The Enbridge-Alliance faction's campaign included model letters for supporters to fire off to Canadian Members of Parliament. Executives hinted the companies are prepared to appeal to the courts if the politicians refuse to change the Canadian regulatory apparatus, saying the 1970s legacy prevents competition to participate in the biggest piece of business likely to come along for the country in a generation.

On TransCanada's side, Kvisle vowed to defend the legacy vigorously but stopped short of threatening to appeal to the courts if the federal government changes the Alaska pipeline enabling structure. The old apparatus is still alive and strong enough that it should not be necessary even to consider starting legal battles, he suggested. Government officials have repeatedly promised to reach conclusions within a reasonable time after reviewing the situation, but continued to set no dates and give no hints about which way the Liberal administration in Ottawa is leaning.

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