A whopper of a service cost hike is built into TransCanada Corp.’s effort to salvage its foundering natural gas Mainline from Alberta to central Canada and the United States, the National Energy Board (NEB) has been told.

The “comprehensive restructuring,” filed with the NEB on Sept. 1 (see NGI, Sept. 6), spells an annual increase of C$513 million (U.S. dollar at par) in charges on the Western Canadian supply side of TransCanada’s international pipeline network, said the Canadian Association of Petroleum Producers (CAPP).

A CAPP letter to the board calls the proposal “the most important and most complex tolls and toll design set of applications the NEB has ever had to consider since it began regulating pipeline tolls” nearly a half-century ago. “The TransCanada Mainline is by many accounts in a traditional [pipeline] death spiral: where ‘death spiral’ is defined as the traditional cost of service-based toll significantly exceeding what the market can support,” said the producer group, whose members account for more than 90% of Canadian gas output.

The recovery blueprint aims to reverse an upward spiral caused by spare capacity that would more than double the current Mainline long-haul rate from C$0.86/GJ (US$0.90/MMBtu) in 2007.

Producers see higher TransCanada Mainline tolls as a threat to the marketability of Western Canadian gas in midwestern and eastern markets as shale play development offers new supply basins and shifts traditional flows of gas.

CAPP urged the NEB to refrain from proceeding further on the restructuring proposal until TransCanada submits far more detailed information on revenue requirements, market forecasts and effects on other parts of its grid across Canada and the United States.

The letter marks a turning point for marathon efforts to revive the Mainline after a 65% drop in its throughput. Shipments have fallen to 1.3 Bcf/d from 3.6 Bcf/d in 2007. Even those bleak numbers understate the erosion. At its peak in the 1990s, traffic on the Mainline was 7 Bcf/d and filled the pipeline to its maximum physical capacity.

CAPP supported previous TransCanada reform schemes. But the early Mainline rescue proposals were rooted in a five-year revenue and toll settlement with shippers that expires at the end of 2011. The initial plans were minor amendments by comparison with the new one. Cost hikes proposed on the western supply side of the network were modest because revenue increases were also levied on the eastern consumer end, as added charges for short-haul services.

The new TransCanada scheme promises a 32% cut in the Mainline’s benchmark eastern zone toll, down to C$1.41/gigajoule (GJ) (US$1.48/MMBtu) from C$2.08/GJ (US$2.18/MMBtu). But the reduction is achieved by expanding the official scope or definition of TransCanada’s Nova gas-gathering grid to include all service west of Ontario in Manitoba, Saskatchewan and British Columbia (BC) as well as Alberta.

The redefinition of the western trading hub — known as NIT, short for Nova inventory transfer — is accompanied by a proposal to increase its toll. A 38% increase is sought in the benchmark NIT rate to C$0.22/GJ (US$0.23/MMBtu) from C$0.16 (US$0.17).

The restructuring proposal directly affects service on Foothills Pipe Lines as well as the Mainline and the Nova grid. CAPP’s queries include whether there are indirect effects on other arms of TransCanada’s international pipeline empire. “The application is silent on the many competing interests that TransCanada has with its ownership of U.S. pipelines: Iroquois, ANR Great Lakes, Northern Border, Bison and GTN,” CAPP points out. “TransCanada’s comprehensive restructuring proposal invites an examination that includes a good understanding of its various competing interests and the incentives that are explicit or implicit in the proposed changes.”

The Canadian producers recite numerous examples of potential conflicts of interest, led by short-haul deliveries of U.S.-sourced gas via U.S. lines in the TransCanada portfolio that compete for sales with Mainline shipments.

CAPP also points to claims in the restructuring proposal’s financial chapter, which seeks to justify a strong rate of return on TransCanada Canadian pipeline services, as raising big unanswered questions. “Nor does one see any analysis that demonstrates the Mainline will be viable over the longer term given all the risks described in the fair return evidence. In other words, there is no evidence that the restructuring will work,” CAPP said.

The Mainline’s trauma is attributed to natural output declines in aging Alberta gas fields, rising Alberta consumption by growing thermal oilsands production projects, and competition on two fronts: the 12-year-old rival Alliance Pipeline between Chicago and northern Alberta and BC, and increasing supplies of U.S. shale gas.

“These dramatic changes are having a profound impact on the Mainline. Canadian producers have also been impacted significantly by these same market forces and face a difficult business environment,” CAPP said.

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