Pipelines, Producers United on Competitive Nova Rates
TransCanada PipeLines subsidiary Nova Gas Transmission and two
groups of Canadian producers are on their way to a whole new
competitive pricing structure aimed at "[taking] on the real
competition, which are the U.S. basins."
This is "great for the [Western Canadian Sedimentary] Basin and
good for us," TransCanada President George Watson said last week.
"Let's get on and deal with those guys out of Houston."
Watson's remarks came in a phone conference after TransCanada
and Nova Gas had joined with the Canadian Association of Petroleum
Producers (CAPP) and the Small Explorers and Producers Association
of Canada (SEPAC) in unveiling an agreement that promotes
receipt-point pricing for gas transportation along the Nova system.
This would replace the decades-old postage-stamp pricing regime.
TransCanada officials stressed this was still a work in progress,
and that they hoped to hold discussions with other stakeholders -
such as marketers and aggregators - during the next several weeks.
They said they expect to file an industry-wide settlement with the
Alberta Energy and Utilities Board by the end of the year.
"...This is very much a step along the direction of the accord
that we did back in [April]...And hopefully you'll see more things
coming out of this," Watson said. Specifically, TransCanada hopes
that "some of this progress would roll off to our discussions
that...will eventually come up on the Canadian mainline." Those
talks would be aimed at trying to make TransCanada's mainline and
other more established pipelines, which are tied to traditional
regulatory regimes, competitive with pipeline newcomers, such as
the Alliance Pipeline project.
Aside from virtually assuring construction of the
producer-spawned Alliance Pipeline and approval of the merger
between TransCanada and Nova Corp., the April accord laid the
groundwork for reaching an industry-wide settlement on a new rate
regime on Nova's Alberta gathering grid.
With the agreement with producers, TransCanada and Nova "[are]
aligning our interests with those of our customers and [are] taking
on the real competition, which are the U.S. basins," Watson said.
Under the proposed framework, TransCanada and Nova contend that
receipt-point pricing would provide customers with rates that are
mileage sensitive. Nova customers would pay a price range of 18-34
cents/Mcf depending on the receipt points at which they are
contracted. The current postage-stamp rate is a uniform 26
There will be a four-year transition period with tolls allowed
to move only between agreed floors and ceilings: C22-28 cents
(US15.7-20 cents) in 1999; C18-30 cents (US12.8-21.4 cents) in
2000; C18-32 cents (US12.8-22.8 cents) in 2001; and C18-34 cents
(US12.8-24.2 cents) in 2002.
Rate increases would be phased in over the four years to give
customers the chance to adapt, while shippers that are in line for
toll reductions would gain them in two years. The "people...that
will pay more [than they currently do] go to that higher price over
four years. People that pay less come to that lesser price in two
years...," Watson said.
In addition to phased transition to the new rate design,
producers that would move to a lower cost structure and
Nova-TransCanada would contribute "some additional initial benefits
back to those people whose tariffs will be going up," said Ron
Turner, Nova Gas president. These actions combined, he believes,
will help to mitigate the impact of the transition costs on Nova
Watson estimated that Nova-TransCanada will contribute C$25
million (US$17.8 million) pre-tax annually over the next two years
to mitigate transition costs, while producer-shippers will
contribute C$20 million (US$14) under the cost-efficiency
agreement. "We did pay a little bit of [a] price to buy peace in
the valley," he told reporters.
He said he doubted that the new receipt-point pricing method
would cause producers to be more interested in drilling further
south on Nova's system. That's because the rates shippers pay won't
solely be determined by location on the Nova gathering system but
also would take into consideration other factors - such as
efficiency of pipeline receipt points. As a result, some shippers
at the end of long, small-diameter pipeline links in southern
regions could face increased tolls while others served by big,
efficient high-volume connections farther north would fare well.
"I think what's going to be a natural outcome of this [is that
you will see] a lot less pipe being built within the regulatory
framework, and much more pipe being built on a contractual basis,"
Watson said. In short, he believes future connections for new gas
fields will increasingly be built outside the customary system of
regulated tolls, under service contracts negotiated with producers.
Also, he dismissed any suggestions that the new pricing
structure could affect Nova's on-going discussions with Alliance
about it possibly using Nova's laterals for some of its
transportation requirements. "No. It wouldn't make any difference
[one way or another]," Watson said.
Susan Parker, Washington, D.C.; Gordon Jaremko, Calgary