Natural gas shippers face extra costs of C$275 million (US$172 million) per year as a result of proposals by TransCanada PipeLines, according to calculations by an irate Canadian Association of Petroleum Producers. In written preliminaries for hearings before the National Energy Board that promise to be long and hot after they start Feb. 19, CAPP calls TransCanada’s financial requests “grossly excessive.” Other protesters, while more diplomatic, are also firm — including Mirant Canada Energy Marketing Ltd.

The subsidiary of Atlanta-based Mirant Corp. became the biggest holder of capacity on TransCanada when it emerged as the number-one dealer in Canadian gas in December by taking over the pipeline’s trading affiliate, TransCanada Gas Services. CAPP calculates that the proposals spell a 14% increase in tolls compared to 2001 levels and a 36% hike compared to 1999.

Like all other aspects of the case, the interpretation is not conceded by TransCanada. The pipeline has admitted to seeking an increase in its benchmark “eastern zone” toll to C$1.285 per gigajoule (US$0.90/MMBtu) compared to C$1.009 (US$0.71) in 2000. But TransCanada has also maintained that the 28% increase is partially offset by reduced payments-in-kind of gas for compressor fuel because the system is running 15-20% below capacity.

The vacant space, owed to competition primarily from the new Alliance-Vector system, is a key factor in the case. TransCanada’s proposals center on compensation for increased business risk owed to the introduction of competition into the Canadian pipeline scene.

The complex plan, titled the “fair-return” proposal, generates new tolls by changing the method of calculating the pipeline’s allowed rate of return. TransCanada hopes to achieve a return on total capital employed in a range of 9-10%, as opposed to a current 5.8% that president Hal Kvisle has called a recipe to “leave us as the weakest pipeline company in North America.”

CAPP calculates that the proposal works out to a 15.3% rate of return on the 30% equity portion of TransCanada’s value. The gas producers maintain that the proposed new formula works out to TransCanada seeking huge premiums for itself on interest rates currently paid to borrow money. The yield on long-term Canadian bonds stands at just 5.73% for 2001 and 5.63% for 2002, leaving TransCanada with premiums of 9.58-9.68% if its plan succeeds, CAPP says.

The producers reject TransCanada’s case for compensation for heightened business risks. CAPP suggests that while the causes are different, the current pipeline space excess only continues a long history of Canadian capacity cycles which have shown that building temporary surpluses eventually pays off for all concerned.

“The excess capacity of one period became the market opportunity of the next period,” CAPP says, reviewing four decades of gas supply and pipeline development. At this stage in the industry’s evolution, the producers say “the existence and maintenance of pipeline take-away capacity that exceeds available supply is essential to the economic health of the Western Canadian Sedimentary Basin and the development of the supply. It ensures that the basin is connected to the North American competitive pricing dynamic. It also ensures that incremental production will have physical access to ex-Alberta markets without the lag associated with pipeline expansion planning, approval and construction timelines.”

While stopping short of publishing confidential results from the drilling rush by its members over the past two years, CAPP projects rising productivity. Even the last, likely out-of-date and overly pessimistic round of official forecasts indicates more gas remains to be discovered than has been produced to date in western Canada, CAPP points out. The Alberta gas surplus “bubble” of the 1980s and ’90s remains a painfully fresh memory among the exploration and production companies.

“The reverse situation — which prevailed from 1995 to 1998, where pipeline take-away capacity lagged the growth in supply — resulted in artificially low natural gas prices because supply was trapped behind a constrained pipeline system. The development of the basin was adversely affected. The opportunity cost in lost revenues to producers and the economy of western Canada was in the tens of billions of dollars.”

CAPP predicts that pipeline expansions will resume as a result of growing markets and rising supplies before Arctic gas projects can be built in six to eight years at the soonest. “The pipeline take-away capacity is adequate for now. However, as we proceed through the decade, increased capacity will be needed and, in fact, expansions are already being planned.”

Schedules laid out in separate construction proposals before the NEB indicate that TransCanada and Westcoast Energy Inc. combined, expect to add new shipping capacity for 770 MMcf/d by the end of 2003, CAPP points out. The gas producers say that “while TransCanada has experienced significant contract non-renewals, actual throughputs are higher than firm contract levels as the use of short-term services has increased. At the same time, the other pipelines exiting the basin are fully contracted and well utilized. This suggests that there is not a large amount of excess pipeline capacity.”

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