TransCanada Corp. has lost the second round of its years-long contest with natural gas shippers over proposed restructuring of finances and services for its shaky Mainline from Alberta to Ontario, Quebec and export routes to the Midwest and eastern United States.

Canada's largest pipeline conglomerate fired off a warning last Wednesday that the tangle may wind up in appeals courts after the National Energy Board (NEB) rejected a "review and variance" application that sought to change its March 27 ruling that laid out a different Mainline overhaul than the company sought (see NGI, April 1).

The NEB said it intends to provide reasons for the second rejection later. The board accelerated notice of the decision in order to maintain a July 1 deadline for implementation of the new regime.

TransCanada's statement warned it "is considering its future options, including potential appeal."

Resorting to legal appeals is rare in Canadian regulatory cases. Unlike counterparts in the United States, Canadian courts defer to expert agencies by not varying contents of their decisions and restricting permission to appeal to cases of alleged mistakes of law and failure to hear all sides of disputes fully.

In TransCanada's statement on the second rejection, President Russ Girling said, "We are very disappointed that the NEB rejected our review and variance application without the opportunity for a full hearing and without issuing a rationale for its rejection. Our application was specifically designed to work within the new regulatory framework established by the NEB in its March 27 decision without trying to undo it."

The TransCanada statement said, "The NEB's March 27 decision created a new model for the Mainline's tolls that is a departure from what TransCanada applied for and from the regulatory framework that has been in place for decades."

The review and variance application sought for TransCanada Corp. about C$3 billion in pipeline toll hikes and surcharges to ensure that shippers cover costs of its aging natural gas Mainline from cradle to grave.

The plan only began with a request for a C10 cent (7%) increase to a C$1.42/gigajoule (GJ) (US$1.49/MMBtu) benchmark rate that the NEB set as of July 1, 2013 for long, firm capacity bookings on the 60-year-old pipeline system.

TransCanada also sought a ruling that toll surcharges will be granted to cover all C$2.15 billion in projected abandonment costs of eventually closing down and cleaning up the Mainline at the end of its useful life. Methods of raising and saving funds to take care of the environmental liability are under review in a separate regulatory review that has been under way in phases since 2008 and includes all of Canada's federally-regulated, long-distance gas and oil pipelines.

The March restructuring decision followed a two-year regulatory process that TransCanada started in 2011, in response to rapid losses of traffic and toll increases to cover costs of excess capacity.

The Mainline's troubles are blamed on dropping shipments out of Alberta due to rising gas use by northern thermal oilsands extraction projects, natural depletion of aging reserves, and growing competition from U.S. shale supplies produced closer to big North American markets. Exports of U.S.-sourced gas hit a record 970.8 Bcf in 2012, up 3.6% from 937 Bcf in 2011, shows the latest scorecard compiled by the U.S. Department of Energy's Office of Natural Gas Regulatory Activities. The 2012 performance set the sixth consecutive annual record for U.S. gas sales into Canada. The new volume record of 970.8 Bcf is double the total 485 Bcf of U.S. northbound exports in 2007.

Shrinking demand for service on TransCanada's Mainline has nearly tripled its rates since the benchmark "eastern zone toll" was about C$0.95/GJ (US$1/MMBtu) in the late 1990s by spreading constant costs thicker over shrinking traffic volumes.

Evidence presented during the regulatory process showed that traffic on the Mainline has fallen an average to 2.4 Bcf/d from 6.8 Bcf/d in 2000. The Mainline share of the market for transportation service for western Canadian production -- as opposed to other routes, notably the Alliance Pipeline, which started up in 1999 -- has fallen from to 18% from 42% in 2000. In the late 1990s, TransCanada's Mainline had firm service contracts for its full capacity for 7.2 Bcf/d. The volume moving under long bookings has dropped to 1.2 Bcf/d. Spot or interruptible transportation (IT) service has jumped to 40% of Mainline gas movements from 1% in 1998, while short-term firm transportation (STFT) contracts lasting less than a year has grown to account for 15% of deliveries from 1%.

While the NEB's contested March decision ordered the benchmark toll cut for shipping contracts lasting more than a year on the Mainline to C$1.42/GJ, the board also granted offsetting rights for TransCanada to charge as much as markets for transportation services will bear for short capacity bookings.

The ruling also rejected an attempt by TransCanada to shift nearly C$500 million a year in Mainline costs onto western producers by moving them into tolls for its Nova and Foothills systems in Alberta, Saskatchewan and British Columbia.

Supporters of the new regime, such as the Canadian Association of Petroleum Producers, predict that the reduced rate will revive traffic over the next five years. Any revenue shortfalls will be recorded in a "deferral account," with methods of recovering the missing amounts to be worked out by the end of the period.

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