TransCanada Toll Issues Critical

While still new in Canada, competition has escalated in natural gas transportation to the point where some big shippers say they face a "rate shock" of steep toll increases later this year. The Canadian Industrial Gas Users Association says "disruptive" hikes are coming unless TransCanada PipeLines Ltd. is immediately bailed out with an "interim" raise to spread its losses from the rivalry thinner over all of 2001.

IGUA delivered the warning to the National Energy Board as the board considered next steps to take on a foiled plan by TransCanada for a 12% interim toll increase to C$1.13 (US$78 cents) per gigajoule effective Jan. 1. The NEB had approved the raise, but then cancelled it as a result of objections by PG&E Energy Trading Canada, El Paso Merchant Energy Canada and operators of gas-fired power stations organized as the Ontario Non-Utility Generators. The NUGs include TransAlta Energy, Westcoast Power, Tractabel Power, Lake Superior Power, Cardinal Power of Canada and Whitby Cogeneration.

The industrial shippers predict TransCanada's toll increase could come out as 30-50%, to C$1.30-$1.50 (US90 cents-$1.03), if it has to wait until the last part of the year to make up its revenue shortfalls for 2001. "That kind of rate shock would be very disruptive for industrial gas users," IGUA says.

But the energy trading houses and NUGS are urging the NEB not to grant TransCanada any favors that help its odds of winning a much bigger toll case expected to develop by spring. The proposed interim hike would, as a matter of principle, perpetuate a system that Canadian gas pipelines must start learning to do without immediately, say the critics. The toll cases center on effects of additions to the long-distance gas transportation grid since 1998 including expansions by TransCanada and affiliated Foothills Pipe Lines, as well as completion of the new Alliance and Vector Pipelines. The result is a glut of excess delivery capacity estimated at one to 2 Bcf/d.

Much of the excess is on TransCanada. Of the space on its lines which is being used, an increasing share is being booked with short "interruptible" service contracts priced at discounts, following a flood of cancellations of long "firm" commitments in 1999 and 2000. Canadian policy traditionally lets pipelines compensate for lost traffic or revenues by raising tolls charged to customers left holding firm service contracts.

The NUGS urge the NEB not to treat the spare delivery capacity or TransCanada's problems as just a passing glitch that will disappear when western gas production catches up to the pipeline additions. "There have been fundamental changes to the gas transportation marketplace," the power projects say in a written submission to the board. "TransCanada no longer operates as a monopoly in some regions. "Changes have created a natural gas transportation market with price and service competition, particularly in southern Ontario. TransCanada can no longer expect to retain shippers if it does not provide a competitive package of services at competitive prices..... competition also means a new relationship with shippers --- one that shares risk and rewards loyalty, innovation and efficiency."

In an interview last year, TransCanada president Doug Baldwin made it plain the company is acutely aware of the issues and intends to offer new arrangements to keep customers. But he also maintained that time will be needed to come up with a more competitive approach in negotiations, and in the meantime the pipeline must stay in sound financial shape.

The NUGS suggest the alternative to devising new ways to compete is bleak. They calculate that about 2.6 Bcf/d in long shipping contracts on TransCanada will expire by 2010. That means about one-third of the system's capacity could become vacant if shippers do not renew. The result would be a series of increases in tolls until they nearly double to C$1.95 (US$1.35) as early as 2004, the NUGs warn. They urge the NEB to follow precedents set by U.S. regulators in mid-1990s cases involving the Transwestern, El Paso and Natural Gas Pipeline systems, where shippers bore as little as 35% of costs owed to contract terminations and only for limited periods.

North of the border, an industry majority, from Toronto distributor Enbridge Consumers Gas to the Canadian Association of Petroleum Producers, is playing it safe by supporting TransCanada's request for at least an interim period --- but only as a stopgap to limit the potential shock. BP Canada Energy Co., one of the nation's top gas producers, voiced the industry consensus in a nutshell. The support for emergency help for TransCanada is "without prejudice..... many toll-related issues with respect to 2001 remain uncertain and will be resolved through either negotiation or litigation."

Gordon Jaremko, Calgary

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