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TransCanada Wins One, Loses One

TransCanada Wins One, Loses One

TransCanada PipeLines Ltd. won a reprieve from a feared revenue hemorrhage but lost a battle for rights to administer strong medicine of its own making against recurrences of the threat. In a ruling on lengthy, hard-fought winter hearings, the National Energy Board authorized TransCanada to raise floor prices for interruptible delivery service on excess capacity to 80% of rates for firm service from 50%, effective May 1. But the NEB rejected pleas by the pipeline to decide independently on setting variable minimum charges on leftover space depending on its reading of market conditions.

It was a landmark decision on how much freedom TransCanada will be granted from traditional cost-of-service regulation to counter new competition, chiefly from Alliance Pipeline after its completion in October. The NEB ruling sided with natural gas shippers and producers in maintaining regulatory supervision of tolls and in setting the discount allowed for selling spare capacity.

TransCanada sought flexibility to set reserve bids or floor prices for daily auctions of interruptible capacity in a range between 65 % of firm-service tolls in summer and 125% in winter. The pipeline's marketing affiliate --- TransCanada Gas Services --- also unsuccessfully suggested that its parent should be allowed to create an "access charge" that would minimize the revenue damage from shippers dropping long, firm-service contracts.

TransCanada requested the changes after shippers dropped 580 MMcf/d in firm-service contracts as of last Nov. 1. The loss was blamed on the emergence of excess capacity in the Canadian pipeline system which is widely rated as likely to reach 2 Bcf/d in the months following Alliance's completion and stay there until drilling activity can catch up with the transportation grid's expansions. TransCanada predicted the "decontracting" could reach 1.8 Bcf/d as of this November or about 25% of its capacity, potentially resulting in toll hikes exceeding 50% to CDN$1.56 per (US$1.08) per gigajoule by 2004 for remaining holders of firm service.

The new 80% floor was recommended by key holders of firm capacity on TransCanada, chiefly central Canadian local distributors that require the traditional arrangements to underpin commitments to serve "core" markets of small-volume, space-heating customers in their franchise areas. Other shippers, and especially the Canadian Association of Petroleum Producers, opposed letting TransCanada control prices of spare capacity on its own and indicated willingness to let the floor rise to the extent it could be justified by costs of service. Some increase was generally conceded to be reasonable, in light of strengthening Canadian prices that have raised the cost of gas used for pipeline compressor fuel.

Throughout the case, industry sources described it as only the first round in a long process ahead of adapting transportation services and regulatory oversight to the budding new era of pipeline competition in Canada. TransCanada has repeatedly promised to try to negotiate new arrangements to let it compete effectively, and the fight over floor prices for spare capacity only developed when prolonged discussions broke down late last fall.

The NEB ruled that a combination of an increased floor price on spare capacity and continued restrictions on varying it remain appropriate under current Canadian conditions.

TransCanada's critics vehemently pointed out that it continues to own by far the dominant share in the transportation-services market, even excluding its subsidiary Nova gathering grid in the principal Canadian gas fields in Alberta. While Alliance has 1.325 Bcf/d in firm bookings and expects to carry 1.5 Bcf on average out of British Columbia as well as Alberta when it enters service, the main TransCanada system alone has about 7.2 Bcf/d of capacity. TransCanada's exit capacity from Alberta adds up to 12Bcf/d counting its 100% ownership of the Alberta Natural Gas inlet to Pacific Gas Transmission and 70% of the Foothills Pipe Lines gateway into the Northern Border system.

Gordon Jaremko, Calgary

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