An opening move has been made on bringing Canada’s oldest, biggest natural gas delivery service up to speed for the brisker trading patterns and pipeline competition that it sees as evolving rapidly.

The plan, in a toll application to the National Energy Board (NEB), includes built-in incentives for gas shippers to accelerate a switch to new trading patterns that TransCanada says have already penetrated central Canada (see Daily GPI, Sept. 18). MIT, short for market inventory transfer, is an eastern counterpart to the well-established NIT or Nova inventory transfer. The NIT arrangement enables anyone who can put gas into TransCanada’s Nova grid in Alberta to do transactions at any exit point. MIT would provide the same service at the Dawn storage and trading hub near Sarnia, enabling rapid transactions in gas bound for destinations across Ontario, Quebec and the eastern United States.

The NEB application calls for a 16% toll increase — to C$1.34 per gigajoule (U.S.$0.91/MMBtu) in 2003 from a current C$1.15 (U.S.$0.78) — on traditional deliveries from Alberta to TransCanada’s vast “eastern zone” drop-off region, spanning 705 miles between North Bay in western Ontario and Quebec City. But for deliveries to a new drop-off spot titled “southwest zone,” a 13-mile area around Dawn, the proposed toll would be C$1.17 per GJ (US.$0.79/MMBtu), a 13% saving for shippers who only want to reach the Ontario trading point and make other arrangements for western gas to finish the journey to eastern markets.

TransCanada observes that gas suppliers and buyers are already showing they want the new service. Between 1998 and 2001, trading at the Dawn hub about quadrupled to nearly 12 Bcf/d from 2.8 billion. The new system is not expected to accelerate Dawn activity immediately to the level on the NIT grid in Alberta, where gas changes hands at a rate of about 50 Bcf/d. At first, TransCanada says it only has capacity of 600 MMcf/d for the proposed southwestern zone. But the scale of Dawn trading is poised to take two big jumps. The first one arrives Oct. 31, 2003, when about 1.2 Bcf/d in eastern-zone delivery contracts expire. The second rolls around on Oct. 31, 2006, the expiry date for about 1.1 Bcf in long-term transportation contracts to TransCanada’s export points into the northeastern U.S. at Niagara Falls and Iroquois, ON.

TransCanada told the NEB it needs to implement the new transportation and trading system to meet competition from the alternative route east created by the Alliance-Vector pipeline system, as well as to cater to customer desires. Besides making up for the proposed bargain service with toll increases for traditional deliveries generated by proposed adjustments to its finances, TransCanada seeks hikes for a key feature of the new trading age.

For short delivery bookings that match the brisk pace of gas trading, known as “interruptible transportation,” TransCanada wants to raise the price to 110% of traditional long-term service from 80%. In effect, the new plan invents a gas counterpart to variable pricing — using volume or long-stay discounts — by retailers and hotels, with gas shippers rewarded for making lengthy bookings of pipeline capacity but allowed to keep their commitments short. TransCanada told the NEB that the new application marks the start of a complete overhaul of its services, following a lengthy start this year on negotiations with the rest of the gas industry.

Discussions are continuing. TransCanada also confirmed it refuses to abandon a plan for overall profit and toll hikes — titled the “fair return” proposal — which the NEB rejected in June after a lengthy fight between the pipeline and its customers. TransCanada filed a formal request for a review and reversal of the June ruling. The aborted proposal spelled a C$265-million-a-year (U.S.$170 million) raise for TransCanada that translated into a 12% hike in its eastern zone toll to about C$1.26 per GJ (U.S.$0.85/MMBtu).

The decision granted TransCanada about one-eighth of its request: a technical adjustment to its rate of return projected to be worth C$30 million (U.S.$19 million) a year. TransCanada said it plans to adjust its newly-proposed toll structure for 2003 to the extent that it gains any ground with the second try to hit its “fair-return” targets.

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