TransCanada PipeLines subsidiary Nova Gas Transmission and twogroups of Canadian producers are on their way to a whole newcompetitive pricing structure aimed at “[taking] on the realcompetition, which are the U.S. basins.”

This is “great for the [Western Canadian Sedimentary] Basin andgood 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 TransCanadaand Nova Gas had joined with the Canadian Association of PetroleumProducers (CAPP) and the Small Explorers and Producers Associationof Canada (SEPAC) in unveiling an agreement that promotesreceipt-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 theAlberta Energy and Utilities Board by the end of the year.

“…This is very much a step along the direction of the accordthat we did back in [April]…And hopefully you’ll see more thingscoming out of this,” Watson said. Specifically, TransCanada hopesthat “some of this progress would roll off to our discussionsthat…will eventually come up on the Canadian mainline.” Thosetalks would be aimed at trying to make TransCanada’s mainline andother more established pipelines, which are tied to traditionalregulatory regimes, competitive with pipeline newcomers, such asthe Alliance Pipeline project.

Aside from virtually assuring construction of theproducer-spawned Alliance Pipeline and approval of the mergerbetween TransCanada and Nova Corp., the April accord laid thegroundwork for reaching an industry-wide settlement on a new rateregime 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] takingon the real competition, which are the U.S. basins,” Watson said.

Under the proposed framework, TransCanada and Nova contend thatreceipt-point pricing would provide customers with rates that aremileage sensitive. Nova customers would pay a price range of 18-34cents/Mcf depending on the receipt points at which they arecontracted. The current postage-stamp rate is a uniform 26cents/Mcf.

There will be a four-year transition period with tolls allowedto move only between agreed floors and ceilings: C22-28 cents(US15.7-20 cents) in 1999; C18-30 cents (US12.8-21.4 cents) in2000; 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 givecustomers the chance to adapt, while shippers that are in line fortoll reductions would gain them in two years. The “people…thatwill pay more [than they currently do] go to that higher price overfour years. People that pay less come to that lesser price in twoyears…,” Watson said.

In addition to phased transition to the new rate design, producers that would move to a lower cost structure andNova-TransCanada would contribute “some additional initial benefitsback to those people whose tariffs will be going up,” said RonTurner, Nova Gas president. These actions combined, he believes,will help to mitigate the impact of the transition costs on Novacustomers.

Watson estimated that Nova-TransCanada will contribute C$25million (US$17.8 million) pre-tax annually over the next two yearsto mitigate transition costs, while producer-shippers willcontribute C$20 million (US$14) under the cost-efficiencyagreement. “We did pay a little bit of [a] price to buy peace inthe valley,” he told reporters.

He said he doubted that the new receipt-point pricing methodwould cause producers to be more interested in drilling furthersouth on Nova’s system. That’s because the rates shippers pay won’tsolely be determined by location on the Nova gathering system butalso would take into consideration other factors – such asefficiency of pipeline receipt points. As a result, some shippersat the end of long, small-diameter pipeline links in southernregions 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 thatyou will see] a lot less pipe being built within the regulatoryframework, and much more pipe being built on a contractual basis,”Watson said. In short, he believes future connections for new gasfields will increasingly be built outside the customary system ofregulated tolls, under service contracts negotiated with producers.

Also, he dismissed any suggestions that the new pricingstructure could affect Nova’s on-going discussions with Allianceabout it possibly using Nova’s laterals for some of itstransportation requirements. “No. It wouldn’t make any difference[one way or another],” Watson said.

Susan Parker, Washington, D.C.; Gordon Jaremko, Calgary

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