A business and government alliance is emerging to back TransCanada Corp.’s contested plan to increase Ontario natural gas pipeline service, confirming western producer fear that the scheme caters to eastern consumer desire to shop for U.S. gas supplies.

Distributor Union Gas Ltd., merchant Statoil Natural Gas LLC and the Ontario Ministry of Energy stand behind TransCanada’s C$130 million (US$ at par) proposal to add facilities for up to 446 MMcf/d of imports from the United States.

The supporters stepped forward to urge the National Energy Board (NEB) to reject demands by the Canadian Association of Petroleum Producers (CAPP) and the Alberta Department of Energy for a pause and expansion in the regulatory review of TransCanada’s project.

Ontario, Quebec and northeastern U.S. markets would support new facilities for about 1 Bcf/d, estimates Union, which owns and operates a southern Ontario leg in the TransCanada network including a trading and storage hub near Toronto at Dawn. In an NEB filing, the distributor discloses work is under way on plans to expand its own system.

TransCanada’s plan is linked to a U.S. pipeline proposal by National Fuel Gas Supply Corp. called the Northern Access Project, Statoil said in an NEB filing. Now in the application stage before the Federal Energy Regulatory Commission, Northern Access aims to give National Fuel capability to relay Marcellus Shale gas production that it takes off Tennessee Gas Pipeline in Pennsylvania north across New York State to a connection to TransCanada’s system at Niagara Falls.

Statoil disclosed that as a shale gas supplier, it has committed more than US$250 million to a 20-year service agreement with National Fuel. The proposed Marcellus Shale export link, scheduled to go into service in September 2012, would provide the central Canadian market with “access to competitively priced natural gas, delivered directly to end-use consumers at critical city gate locations,” Statoil said.

The TransCanada additions “are needed and are a natural evolution of the existing transmission system,” the Ontario energy ministry said in an NEB filing. The project “will increase the liquidity of natural gas markets within Ontario such as Dawn, as well as provide the province with an increase in both security and diversity of supply,” the ministry said.

Until TransCanada is allowed to build its proposed Canadian import capacity, “pipeline capacity…is currently suboptimal and is constraining the efficient flow of natural gas within Ontario as well as to destinations to the east including Quebec and markets in the U.S. Northeast,” the Ontario ministry said.

TransCanada’s backers emerged after CAPP called on the NEB to go slow in reviewing the Ontario facilities application because it amounts to a “historic change” disguised as a routine construction program. The plan amounts to reversing Niagara’s half-century-old role as a major export point for Canadian gas to reach markets in the U.S. Midwest and Northeast, CAPP told the NEB.

The western Canadian producers demanded disclosure of factors driving the TransCanada scheme — and especially projections about its likely effects on the TransCanada mainline between Alberta and Ontario.

The benchmark mainline eastern zone toll jumped by 36% this year alone, to C$2.24/gigajoule (GJ) (US$2.35/MMBtu), in order to satisfy TransCanada’s regulated revenue requirement (see Daily GPI, Aug. 1).

Canadian pipeline regulation imposes such increases virtually automatically when shipping volumes decline, effectively raising costs per GJ transported. Mainline deliveries have been shrinking due to rising gas consumption by Alberta thermal oil sands projects and natural production declines in aging western gas fields.

Alberta’s energy department, in an NEB filing, echoed CAPP’s demand for complete explanations before TransCanada is allowed to go any farther with its Ontario facilities expansion plan. Alberta said the Ontario program “has the potential for significant cross-subsidy by Western Canadian Sedimentary Basin long-haul shippers to shippers accessing market area short-haul service.”

The cross-subsidy danger grows out of the Canadian pipeline regulatory regime’s long-standing routine of rolled-in tolls, Alberta warned. The practice adds costs of all local or long-distance facilities additions into overall pipeline revenue requirements and tolls, effectively making all shippers pay regardless of whether they use the additions.

TransCanada has pledged to submit new business and toll plans to the NEB by Sept. 1, and has asked the board to consider potential effects of the proposed new Ontario facilities as part of the financial and rate case that will follow. No commitment has been made to disclose the factors driving the Ontario additions fully.

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