TransCanada Projects A Less-Than-Full Future

Gas suppliers and buyers got what they wanted north of the U.S. border and a truly competitive market in delivery services is at hand, TransCanada PipeLines Ltd. told the National Energy Board. TransCanada predicts that within five years, two-thirds of its long-distance capacity for 7.5 Bcf/d will be sold the same way as most of the gas in its lines, on short contracts. "The traditional regulatory compact," which kept the system reliably full on long service contracts, "has been dismantled" by allowing rivals to build new capacity.

By the end of 2000, the 50-year-old former monopoly on east-bound gas shipping said it lost 1.7 Bcf/d in long transportation contracts because old customers did not renew them. "Over the next five years, an additional 3.2 Bcf/d of contracted capacity will come up for renewal, with the likely result that an additional 44% of the system long-haul capacity will no longer be held under contracts longer than one year in duration."

TransCanada credits the landmark change to the late-1990s wave of pipeline construction allowed by federal and provincial policies favoring energy free trade and open international markets. The old mainstay of gas deliveries points to the producer-inspired Alliance and Vector systems, which opened a new route to Chicago and Ontario, as well as expansions by its own mainline and its part-owned Foothills-Northern Border system.

TransCanada highlighted its troubles in an appeal to the NEB to let it collect compensation by raising tolls on its remaining customers, at least until a new approach to regulation lets it compete to retrieve traffic. TransCanada describes its spring settlement on other aspects of its services with shippers as a "stopgap" that needs to be replaced by permanent changes still to be negotiated.

While the bargaining proceeds, TransCanada wants a sharp increase in the profits it is permitted to earn to make up for heightened business risks on the newly competitive gas transportation market. In the name of achieving a "fair return" needed to keep investors and lenders interested, TransCanada seeks a raise of about one-third.

The proposed increase would be achieved in three steps. First, a new method of calculating allowed returns would be introduced, titled ATWACC or after-tax weighted-average cost of capital. Second, the allowance would be set at 7.5%, or a premium to interest rates to reflect increased risks of the gas pipeline business. Third, an added boost would be granted, setting ATWACC at 8.24% for 2001, to cover old loans TransCanada is still repaying at higher interest rates that prevailed when it borrowed the money.

For comparison purposes, and excluding that third-stage added boost for this year, TransCanada said that by the old methods of calculation its allowed return would rise to 12.5% from 9.6%. How all the overall changes work out in new tolls will be one of the subjects at forthcoming NEB hearings on TransCanada's plans.

The proposed increase prolongs agony already suffered by shippers that are still bound by long contracts to use the old Canadian pipeline mainstay. A blunt description of this plight is included in the appeal for help getting through the transition to a fully open market, where TransCanada is allowed to offer deals that lure back customers. "As TransCanada suffers loss of firm transportation volumes, its primary means of ensuring that it will continue to recover its costs is to increase tolls for remaining firm customers. Such increases may possibly be mitigated by throughput loss (more abandonment of the system by old customers) causing increasing tolls that will exacerbate the competitive disadvantage to TransCanada, creating the potential for further volume losses, increasing tolls and deterioration of competitive positions," the pipeline company told the NEB.

"Over the past two years, TransCanada shippers have experienced an increase in tolls of approximately 25% (to C$1.24 per gigajoule or US87 cents per MMBtu) as a result of non-renewals and reduced billing determinants."

The good old days of reliably full pipelines out of western Canada are not expected to come back any time soon, if ever. TransCanada predicts that, at gas producers' current drilling success rates, it will take eight years to refill the long-distance pipeline grid. The overall Canadian space surplus this year is calculated at 1.7-2.4 Bcf/d, depending on where full use is defined to lie within a range of 95-100% of total capacity. In eight years total production from the western provinces is regarded as liable to peak and enter an era of decline because the resource endowment shows signs of being used up.

TransCanada said "there is an increased probability that the Western Canada Sedimentary Basin will approach its peak production capability within eight to 13 years." The pipeline's appeal presents the NEB with a portrait of a resource endowment and a production sector under strain. Since 1990, western Canadian output has risen 70% to 16.5 Bcf/d. The average initial productivity rate of new wells has slipped 40% to 0.32 MMcf/d. The life-index of total reserves has shrunk to nine years from 20. Annual supply growth, as of 2000, slipped to 100 MMcf/d from 600 MMcf/d. The slippage occured even though the number of new gas-well connections to the pipeline grid quadrupled to 20,500 in 2000 compared to 2,600 in 1990.

TransCanada added that the new sources being touted to keep western supplies growing - Arctic gas and coalbed methane - remain anything but sure bets, especially when it comes to setting dates for their entries into the market. The pipeline describes coal gas as "a significant forecast uncertainty" in Canada, because there is no such production yet to guide projections of economic supplies. While suggesting it is safer to anticipate gas entering the market from Alaska or the Canadian Arctic within 10 years, TransCanada says such forecasting has to be classed as optimistic because there have been no decisions on whether northern production or pipeline development will proceed, when that will happen and what route the gas will follow once it reaches the current transportation grid.

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