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Shippers Protest TransCanada Conversion

The proposed business restructuring of TransCanada Corp.'s shaky natural gas Mainline is a thinly disguised bailout of the company that will cost its customers C$3.2 billion, said an Alberta government watchdog agency (see related story).

Over its eight-year lifespan from 2012 through early 2020 the scheme will heap an annual average of C$400 million in extra costs on users of the TransCanada network's western-most subsidiary, said the Alberta Office of the Utilities Consumer Advocate (AUCA). The agency calls for rejection of the planned mammoth surcharge in a final argument submitted to hearings on TransCanada's proposal by the National Energy Board. AUCA presented the bluntest case among opponents of the restructuring proposal, which also include the Alberta Department of Energy, the British Columbia government, the Canadian Association of Petroleum Producers (CAPP) and the Industrial Gas Consumers Association of Alberta (IGCAA).

The thin disguise seen by TransCanada's critics is a byproduct of its revival program for its half-empty Mainline to Ontario and connections into Quebec and the northeastern United States called the ASE, short for Alberta System Expansion. The title refers to Nova Gas Transmission Ltd., (NGTL) a supply gathering, delivery and trading grid that spreads across all of Alberta with 24,373 kilometers (15,145 miles) of pipelines and is building extensions into northern BC.

TransCanada bought Nova 14 years ago for C$14 billion with declared intentions of improving efficiency and controlling or lowering costs by increasing traffic on the Alberta grid, by making it a southern stretch of the then-live plan to hook up arctic gas fields in Alaska and on the Mackenzie Delta. In its ASE form the TransCanada plan does not add facilities or shipping facilities. Instead, the scheme shuffles costs, and most of them land unfairly in Alberta, said the AUCA.

The plan grew out of the reversal of industry fortunes since the advent of shale gas development replaced expectations of supply shortages and rising prices with harsh realities -- grim on the supply side of the market -- of surpluses and chronically low prices.

The ASE is a cornerstone of TransCanada efforts to revive traffic on its Mainline, which has fallen to about one-half of its ability to carry 7 Bcf/d. While partly blamed on natural depletion of aging Alberta wells, the change is also owed to sales competition from U.S. shale supplies and pipelines that has propelled U.S. exports to central Canada into a record range approaching 1 Tcf per year or 2.7 Bcf/d. The result of the North America-wide market turnaround has been a plague of excess capacity that since 2007 has more than doubled Mainline tolls from C$1.03/gigajoule (GJ) (US$1.08/MMBtu) to C$2.24/GJ (US$2.35/MMBtu). The result has been described by Alberta gas shippers as a Mainline "death spiral," with toll hikes causing traffic declines that bring on more hikes that in turn erode deliveries farther.

The ASE is intended to stop the bleeding, sharply lower tolls and revive traffic with strokes of the pen. The scheme cuts costs of the Mainline by redrawing the pipeline map to shorten it.

"People are concerned about the high tolls on the Mainline, but you have to understand...they're still tolls on the basis of this older model where we have very high load factor, long-haul transportation from Alberta to the East," Karl Johannson, TransCanada president of natural gas pipelines, told financial analysts during the company's investor day in Toronto Wednesday. He added that the development of eastern supply basins, particularly the Marcellus Shale, "came upon us so quickly" (see related story).

Under the contested TransCanada restructuring program, the inlet to the Mainline moves east from Alberta to Manitoba. On paper, NGTL fills in the gap by expanding to reach from BC's western-most gas fields across Alberta and Saskatchewan to Manitoba. The stretches of pipe added to NGTL by the ASE also include a TransCanada western export subsidiary, Foothills Pipe Lines. Cost transfers accompany the redrawing of the map. Alberta gas producers are far from the only sources of added revenue that the ASE places in TransCanada's sights, said the AUCA. "This cost shift will impact residential, farm and small commercial gas users in Alberta," said the provincial utilities watchdog. "These costs are enormous." NGTL "is not simply a division of an integrated TCPL system," the provincial utilities watchdog agency emphasizes.

As a web built up since the 1950s between Alberta gas fields and all long transmission lines and local distribution grids served by the province's production, "NGTL has had, and should continue to have, a long life as an independent system that was only recently acquired by TCPL," said the AUCA. "Most importantly NGTL has its own customers, the large majority of whom look to it to provide services that are in no way related to TCPL's Mainline services."

Along with small-volume users, NGTL customers include expanding thermal oilsands projects that use mammoth amounts of gas to make steam injections into bitumen deposits, which are too deep for open-pit mining. Since 1998, the internal Alberta market for the province's own gas has grown from 50% of production to 70% this year, the AUCA said.

The watchdog agency, echoing Alberta producers and industrial gas users, said, "The relationship between the eastern [Canadian and U.S.] market and gas sourced in the Western Canada Sedimentary Basin has fundamentally changed. The changes are structural and the ASE cannot be expected to solve them. Furthermore, there is a serious risk that the ASE may effectively cover up these problems by putting off the day when the fundamental issues must be dealt with on their merits."

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