TransCanada PipeLines Ltd., subsidiary Nova Gas Transmission andtwo groups of Canadian producers yesterday announced a “watershed”proposed agreement for a new pricing structure aimed at increasingthe competitiveness of the Nova system while at the same timeensuring greater rate fairness for producer-customers on thepipeline.

The Canadian Association of Petroleum Producers (CAPP) and theSmall Explorers and Producers Association of Canada (SEPAC) joinedTransCanada and Nova Gas in unveiling a proposal for receipt-pointpricing for gas transportation on Nova, which would replace thecurrent postage-stamp pricing regime that was introduced by theOntario government two decades ago.

“…This is very much a step along the direction of the accordthat we did back in May…And hopefully you’ll see more thingscoming out of this,” said George Watson, TransCanada president andCEO. With this proposal, TransCanada and Nova “[are] aligning ourinterests with those of our customers and [are] taking on the realcompetition, which are the U.S. basins.”

This is “great for the [Western Sedimentary] basin and good forus. And let’s get on and deal with those guys out of Houston,”Watson said late Monday during a teleconference with energyreporters.

Under the proposed framework, TransCanada and Nova contend thatreceipt-point pricing would provide a more distance-sensitivemethod for calculating transportation costs on the Nova system.Nova customers would pay a price range of 18-34 cents/Mcf dependingon the receipt points which are contracted. This compares to thecurrent postage-stamp tolling method under which customers pay thesame unit price for gas transmission regardless of how far the gasis transported.

The new pricing structure, if approved by the Alberta Energy andUtilities Board (AEU), would be phased in over four years toprovide customers with the opportunity to adapt, particularly tosoften the blow on producers who eventually would pay more underthis design. In addition to the phased transition, a cap will beimposed on how high transportation costs could rise on Nova, andTransCanada would contribute “some additional initial benefits backto those people whose tariffs will be going up,” said Ron Turner,Nova Gas president. He noted the pipeline hopes to file a proposalat the AEU by the end of the year.

Watson doubted that the new receipt-point pricing method wouldcause producers to be more interested in drilling further south onNova’s system, where transportation costs would be lower. However,”I think what’s going to be a natural outcome of this [is that youwill see] a lot less pipe being built within the regulatoryframework, and much more pipe being built on a contractual basis.”Also, he dismissed any suggestions that the new pricing structurecould affect Nova’s reported negotiations for an interest in theupstream portion of Alliance Pipeline. “No. It wouldn’t make anydifference [one way or another]. It makes us vastly morecompetitive.”

Watson estimated that TransCanada will contribute $25 millionpre-tax annually over the next two years to mitigate transitioncosts, while producer-shippers will contribute $20 million underthe cost-efficiency agreement. “We did pay a little bit of [a]price to buy peace in the valley,” Watson said.

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