While producers and end users were marshalling their argumentsagainst plans by TransCanada Pipelines Ltd. for long-term ratedesign changes to adapt to the budding era of competition, thepipeline opened up a second front, calling for an 11% hike in itscurrent rates effective Jan. 1.

The twin actions are part of pipeline moves to stop a revenuehemorrhage as a result of new transportation competition fromCanada to the United States.

The new hike would raise TransCanada’s benchmark “eastern zone”rate, for deliveries from western to central Canada, to C$1.009(US$70 cents) per gigajoule from the 1999 average of C$0.906(US$0.62). About one-fifth of the proposed general increase isattributed to potential for further non-renewals in 2000 oflong-term, firm transportation contracts. More than half of therequested hike is blamed on actual contract changes that havealready occurred, thanks largely to expansions of the establishedCanadian pipeline grid plus forthcoming completion of yet moreadded capacity by the Alliance and Vector projects.

As of last Nov. 1, shippers dropped 580 MMcf/d or about 8% oflong-term firm capacity on the system.TransCanada has told theNEB that about 1.8 Bcf/d of capacity could be relinquished inNovember of 2000. The pipeline has also told the board that itssystem stands to lose C$170 million (US$117 million) by December of2000 just from the initial round of firm-service contractreductions.

TransCanada’s warnings also say that without strongcounter-measures, firm-service tolls could rise by more than 50% toC$1.56 (US$1.07) per gigajoule by 2004. By 2007, the fearedstampede away from firm service is projected to have potential todrive tolls for its few remaining users to C$3.25 (US$2.24).

To compete in the long term TransCanada wants to set floorsunder rates for interruptible transportation (IT) while introducingdiscounts for short-term firm transportation (STFT). But theproposal has generated strong opposition from both ends of the pipe— from the Canadian Industrial Gas Users Association and theCanadian Association of Petroleum Producers. The odd alliancesurfaced in new evidence sent to the National Energy Board, inpreparation for hearings it has scheduled to start Jan. 18 onTransCanada’s rate design plans.

TransCanada maintains the incentive to switch comes from itslong-standing practice of pricing interruptible transportation at50% of firm service rates. New room on the Canadian pipeline gridmakes interruptible service a realistic alternative because itsusers are no longer likely to be squeezed off the system in periodsof strong demand, the NEB has been told.

TransCanada’s plans call for flexibility to set “reserve” orfloor prices for daily auctions of interruptible capacity, within arange between 65% of firm-service tolls in summer and 125% inwinter. Freedom to discount firm capacity is also sought.

On the buying side of the Canadian market, Ottawa-based,industrial group IGUA maintains that the old delivery servicerelationships should be retained because raising rates will preventbig consumers from buying as much gas as they could. IGUA predictscentral Canadian distributors Union Gas and Gaz Metropolitain wouldrefuse to buy spare capacity on TransCanada during periods of peakdemand, curtailing supplies to interruptible industrial customersrather than taking chances on increasing transportation expenses.

IGUA says “in a period of excess pipeline capacity, it is anunderstatement to say that this would be an undesirable result foreveryone concerned. This is because gas producers lose theopportunity to make additional sales, TransCanada’s shippers losethe benefit of the credits of the IT and STFT revenues to the costof service, Gaz Metropolitain and Union lose their incrementaldelivery revenue, and the industrials affected will experience theinconvenience and cost of having to switch to alternative fuelsduring the period of interruption.”

On the supply side, CAPP suggests TransCanada’s proposal is onlythe first step in trying to take advantage of limited pipelinecompetition to win a free hand for having all short-termtransportation services priced at negotiated rather than regulatedrates. “What TransCanada seeks today undoubtedly will be followedby a new proposal tomorrow.” The Canadian producers – throughexpert witness Andrew Safir, of Recon Research Corp. in Los Angeles- maintain that TransCanada is nowhere near losing the market powerthat has kept it under regulatory supervision for its first halfcentury. Safir, a prominent expert witness before Canadian as wellas U.S. economic agencies, calculates that TransCanada ranks highon the accepted scale of corporate power, the HHI orHerschman-Herfindahl Index. TransCanada’s interests include 100%ownership of the Nova gathering grid in Alberta, 100% ownership ofthe Alberta Natural inlet into the California pipeline of PacificGas Transmission and 70% ownership of the Foothills route. Evenexcluding the Nova grid, which handles four-fifths of Canadianproduction, the TransCanada family owns 12 Bcf/d in capacity out ofthe principal western gas fields in Alberta. Even if the affiliatesare considered to be separate, 7.14 Bcf TransCanada still scoreshigh on the HHI scale.

Gordon Jaremko, Calgary

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