After months of inconclusive sparring, TransCanada PipeLinesLtd. and its shippers have reached a truce by agreeing to negotiaterather than fight over ways to adapt to the onset of competition inCanadian natural-gas transportation.

As a key part of a settlement that temporarily resolvedimmediate tolling and service disputes, TransCanada pledged topresent an adaptation plan by the end of August. The pipelinepromised “a specific business and regulatory model for the futurethat will allow it to compete effectively for market demand and gassupplies.” The settlement’s schedule calls for negotiations tostart by Sept. 17. A target of Feb. 28, 2002, has been set forcompletion of an agreement. While the negotiations proceed,TransCanada and its shippers agreed to follow a two-year settlementcovering services and pricing on its long-distance Canadianmainline.

TransCanada president Doug Baldwin said “the settlement providesthe foundation for further discussions to ensure the Canadianmainline system continues to compete effectively for market demandand natural gas supplies.” While Baldwin is due to retire this yearand an executive search for a replacement is under way, thepipeline’s transportation specialists are understood to be wellalong in devising at least a wish list.

The two-year agreement covers TransCanada’s revenue requirement,payment for delivery capacity booked but not used each year,cost-control incentives and detailed terms for various classes oftransportation services. Only cost-of-capital debates amongcorporate accountants and economists were left out of thesettlement, to be referred to the National Energy Board forhearings later this year. After a one-month reprieve duringJanuary, shippers are already paying a 12% increase in TransCanadatolls to C$1.13 (US$78 cents) per gigajoule that was approved as aninterim measure by the NEB following a short, sharp feud withdissenters. The hike was supported – as the lesser of two evils onthe horizon – by a majority including the Canadian Industrial GasUsers Association, Enbridge Consumers Gas, Union Gas Ltd., theCanadian Association of Petroleum Producers, BP Canada Energy andImperial Oil.

The shippers agreed that if the NEB did eventually find that thepipeline deserved the raise, it spelled an even stiffer hike if itall had to be collected in the last few months of this year. A”rate shock” was forecast, with tolls potentially rising 30-50% toC$1.30-$1.50 (US$0.90-$1.03).

The complex regulatory cases and negotiations center on howservices and tolls should be adjusted to permit competitivebehavior to regain traffic lost as a result of additions to thelong-distance gas delivery grid since 1998, including expansions byTransCanada and affiliated Foothills Pipe Lines Ltd. as well ascompletion of the new Alliance Pipeline to Chicago and VectorPipeline from there to southern Ontario. TransCanada has borne thebrunt of a glut of excess pipeline capacity estimated at 1-2 Bcf/d.

Baldwin has suggested that TransCanada should be allowed todevelop a service menu that includes a pipeline counterpart tohotel or airline discounts for frequent customers, with gasshippers earning savings on tolls by taking out long transportationcontracts. TransCanada has also sought – unsuccessfully, so far, ina hard-fought case before the NEB -a new right to vary minimumcharges for interruptible delivery services depending on itsreading of gas and transportation market conditions. Shippers,especially trading houses and independent power generators, haveresisted changes they read as liable to pass on anything buttemporary, reasonable shares of TransCanada revenue losses due topipeline competition.

Gordon Jaremko, Calgary

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