TransCanada PipeLines Ltd. said it has started discussions with its customers regarding possible changes in depreciation or ownership of a 20% portion of its mainline stretching from Winnipeg, MB, east to points north of Toronto. One extreme option would be to shut down that part of the system entirely, but the company said that would not occur for many years and would only happen after all else failed.

A rate ruling last month by the National Energy Board (see NGI, July 1) cut TransCanada’s requested rates on the eastern mainline significantly as regulators apparently weren’t persuaded that greater competition and risk warranted a sharp increase in the pipe’s return. The board, saving gas shippers from added costs measured in hundreds of millions of dollars, rejected TransCanada’s request for a thorough overhaul of its finances.

It aborted plans that called for a C$265 million/year (US$175 million) raise for TransCanada — a C$0.13/gigajoule (US$0.09), or 12% increase in the system’s benchmark “eastern zone” or long-distance toll, to about C$1.26/gigajoule (US$0.80 per MMBtu). The NEB instead granted TransCanada about one-eighth of its request: a 2% raise for its rate of return, achieved with a technical adjustment, projected to be worth C$30 million (US$20 million) a year. The NEB held the pipeline’s allowed rate of return down to 9.61% for 2001 and 9.53% for this year, levels set by a 1990s formula established after lengthy review and negotiations with shippers.

“If you look at most other pipeline companies in North America, the rates of return range from 12-14%,” said TransCanada spokesman Glenn Herchak. He said the company was disappointed in the NEB’s decision. “It didn’t recognize the long-term business risks of the Canadian mainline and particularly the portion of the system that moves gas east from Winnipeg to southern Ontario because of the possibility of transporting gas through other alternatives, particularly through Great Lakes and Northern Border, and the fact that we need to operate that portion of our system for at least 30 more years in order to recover the equity that we’ve invested and repay the associated debt.

“We are concerned that western Canadian gas may not flow to markets that are served by that portion of the Canadian mainline for [another 30 years],” he added, expressing some doubts about western Canadian production growth over the long term.

Herchak said one way the company might reduce its risk would be to obtain alternative financing through partnerships or alternative means of ownership. “There are alternate methods of transporting gas through that area as I’ve already mentioned, particularly on Great Lakes,” he said. Herchak said the company already has begun discussions with customers on potentially accelerating the depreciation of the line. “We will file 2003 tolls in September, at which point we will be in a position to address this,” he added.

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