TransCanada Corp. is predicting that a plan for reversing the upward spiral in long-distance tolls on its natural gas mainline will emerge by the end of the year.

Results of a lengthy "mainline competitiveness initiative" will turn up in a filing with Canada's National Energy Board (NEB), forecasts a new investor presentation by TransCanada.

Talks between the pipeline and industry factions, through a permanent standing "tolls task force," have been under way throughout the long rise in costs of using the half-century-old gas delivery service from western to central and eastern Canada and the United States.

Since mid-2008 TransCanada's benchmark long-distance toll -- from the Empress starting point of the mainline in southeastern Alberta to Parkway in southern Ontario -- has climbed by 59% to C$1.64/gigajoule (GJ) (US$1.70/MMBtu) from C$1.03/GJ (US$1.07/MMBtu).

From industry offices in the Calgary capital of the Canadian gas industry to public arenas such as a local distribution company forum in Toronto last week, the increases have ignited an outpouring of complaints from producers, marketers and consumers.

The toll spiral is fueled by a combination of declining Alberta supplies available for out-of-province sales and especially a changing pattern of gas trading. Canadian regulation generates virtually automatic toll increases when gas traffic slows by guaranteeing that pipelines can charge enough to recover the "revenue requirement" needed to support their costs and a rate of return deemed to be reasonable.

At the same time as natural depletion of aging Alberta gas fields gradually reduces their output, domestic industrial consumption is on the rise at thermal oilsands extraction projects. The squeeze on traditional supplies has made TransCanada a keen supporter of the Mackenzie Gas Project as well as the most enthusiastic, consistent contender to build the proposed Alaska gas pipeline. In both cases, TransCanada's plans call for new northern production to refill its mainline.

While the Arctic schemes remain long-range plans, a dramatic change in gas trading that erodes use of the TransCanada mainline is well entrenched.

Since 1998 the company reports that long-haul delivery contracts have fallen by more than 50%, from about 7 Bcf/d to 3 Bcf/d. Over the same period, short-haul contracts have multiplied more than four-fold to about 3.7 Bcf/d from less than 1 Bcf/d.

The changing contract mix reflects the development new U.S. gas sources and an array of associated pipeline connections that have generated trading in an international blend of supplies centered on the Dawn transportation and storage hub in southwestern Ontario.

Although tolls task force discussions are confidential, TransCanada has made its objective for the competitiveness initiative well known: "Improve toll stability and certainty."

Company forecasts, delivered in financial and regulatory arenas, show tolls hitting their peak this year then going into a long but steady drop over the next 10 years -- not all the way down to their late-1990s starting point, but about two-thirds of the way back toward about C$1/GJ (US$1.04/MMBtu).

The mainline competitiveness exercise is intended to reduce and reform the revenue requirement by introducing a variety of flexible transportation services and new rate design, service and business model concepts. A table of potential toll reductions, distributed to the industry, suggests that long-distance tolls could drop by C28 cents/GJ (US29 cents/MMBtu) to C50 cents/GJ (US 52 cents/MMBtu), depending on the extent of the overhaul that eventually emerges from the tolls task force and the forthcoming NEB rate case.

A series of negotiated settlements and service adjustments already reduced the mainline annual revenue requirement by 23% to C$1.72 billion (US$1.7 billion) for 2010 from C$2.2 billion (US$2.17 billion) in 2000, TransCanada points out.

Proposed new services include added capacity for international trade in new supplies from the vast Marcellus Shale gas deposits under development in the northeastern United States and possibly eastern Canada. The plans call for capacity additions to the TransCanada, Union Gas, Empire and Tennessee pipeline systems in 2011, 2012 and 2013 that would enable further increases in traffic through Union's Dawn hub near border crossings in the Niagara Falls region. The projects began a series of open season capacity auctions this year.

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