TransCanada PipeLines’ fast action last week in replacing its support for Millennium Pipeline — for the time being at least — with a less environmentally challenged new export route to the northeastern United States is just the latest action in the pipeline company’s campaign to drum up increased traffic or raise its rates to cover what it calls the costs of competition.

The Northwinds Pipeline, co-sponsored by National Fuel Gas, would tap Canadian supplies at the Dawn, ON, hub, traveling 215 miles southeast to the multi-pipeline Leidy junction in Pennsylvania (see separate story, this issue). This latest proposal avoids a major environmental hazard that has stonewalled the Millennium project for years; Northwinds would travel established utility routes and will not attempt to deliver gas into the highly populated eastern portion of New York state.

The announcement of the Northwinds plan followed fresh disclosures about pressures developing on TransCanada to fill up its Canadian facilities rather than drive away customers by making up for lost shipping contracts with toll hikes.

TransCanada, pressed for explanations by customers, disclosed the outlook for its rates as a result of two cases before the National Energy Board (NEB). Benchmark eastern zone tolls, to ship gas to central Canada and export points there, will rise to C$1.25 (US87 cents/MMBtu) for 2001 then go up again to C$1.285 (US90 cents) in 2002, TransCanada estimated in evidence presented to the NEB this summer. Compared to the mid-2000 rate of C$1.009 (US71 cents), the new tolls represent a 25% increase for this year and 28% for 2002.

TransCanada said the new levels will be reached if it wins approval for two major proposals it laid before the NEB since spring. One seeks ratification of a deal on service terms, which was originally billed as a “settlement” with shippers but was contested to the point where the board called hearings rather than continue a 1990s practice of ratifying negotiated agreements. The second seeks a financial overhaul that TransCanada titles a “fair return application.” The bottom line to the complex proposal is an effective increase in the pipeline’s allowed rate of return to 12.5% from 9.6%.

Written evidence piling up before the NEB includes an admission by TransCanada that the service settlement with shippers is far from complete. Only 65% have signed the deal, while 13% have declared opposition and the rest were considering their options. TransCanada says it needs the changes to compensate for increased risks created by a new element of competition in the Canadian gas transportation business, chiefly the completion last winter of Alliance Pipeline between northeastern British Columbia and Chicago.

The pressure for toll increases is described as the result of dropping traffic on TransCanada, thanks to non-renewals of long-term transportation contracts by shippers that prefer to shop around for pipeline services and now have a chance to do so for the first time in the Canadian industry’s history. Although TransCanada still controls about four-fifths of the grid’s total capacity directly or through partnerships, the pipeline giant has told the NEB it believes the old days of transportation monopolies are gone for good.

“TransCanada does not consider any of its customers to be captive in the long term.” TransCanada’s most vigorous opponents are chiefly a pair of shipper coalitions: PG&E Energy Trading Canada Corp. and El Paso Merchant Energy Canada Inc., as well as the Cogenerators Alliance of Tractabel Power Inc., TransAlta Energy Corp., Lake Superior Power LP and Cardinal Power of Canada LP. Declared but less active critics of TransCanada’s strategy include Brooklyn Navy Yard Cogeneration Partners LP, the Manitoba Government, distributor Centra Gas Manitoba Inc., the Canadian Industrial Gas Users Assn., the Consumers Assn. of Canada and the Ottawa-based Public Interest Advocacy Centre.

Amid the hostilities, a reminder surfaced during the first week of September that negotiated settlements continue to be possible, as Sempra Energy Trading Corp. withdrew a major intervention against TransCanada’s settlement proposal. A new agreement allowed the trading house to convert a novel contract for winter delivery services into a standard transportation agreement, a change that made possible some toll savings.

But TransCanada and its other critics remain sharply divided over the central questions raised by the case. Who should pick up the tab for revenue losses owed to excess capacity? Who should take the financial risks created by competition? TransCanada has told the NEB that within five years, two-thirds of its mainline capacity for 7.5 Bcf/d will be sold the same way as most of the gas in its lines — on short contracts.

By the end of 2000, the former monopoly for east-bound gas shipping says it lost 1.7 Bcf/d in long transportation contracts because old customers did now renew them. “Over the next five years, an additional 3.2 Bcf/d of contracted capacity will come up for renewal, with the likely result that an additional 44% of the system long-haul capacity will no longer be held under contracts longer than one year in duration.”

TransCanada’s critics are asking the NEB to adopt a risk-sharing system that would be a Canadian variation on themes crafted by FERC in U.S. pipeline competition and stranded-cost cases. On behalf of the PG&E-El Paso team, expert witness Richard DeWolf, vice-president of Ziff Energy Group, has proposed a 50-50 system where TransCanada and shippers would share equally in the consequences of changing traffic patterns. The system would work both ways. When traffic falls, tolls would go up and TransCanada’s profits would fall. When traffic increases, tolls would drop and TransCanada’s profits would rise.

Under current market conditions, DeWolf has estimated the system would lop C7.7 cents per gigajoule (US5.4 cents per MMBtu) off the toll hikes sought by TransCanada by making it accept an 8%, C$160 million (US$106 million) reduction in its annual revenue target of C$1.997 billion (US$1.33 billion).

TransCanada’s critics are also calling on the NEB to rule as soon as possible on a risk-sharing policy, to help in making decisions on transportation contracts by giving all sides a clearer idea of what tolls to expect as competition develops in the Canadian pipeline sector.

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