While still new in Canada, competition has escalated in naturalgas transportation to the point where some big shippers say theyface a “rate shock” of steep toll increases later this year. TheCanadian Industrial Gas Users Association says “disruptive” hikesare coming unless TransCanada PipeLines Ltd. is immediately bailedout with an “interim” raise to spread its losses from the rivalrythinner over all of 2001.

IGUA delivered the warning to the National Energy Board as theboard considered next steps to take on a foiled plan by TransCanadafor a 12% interim toll increase to C$1.13 (US$78 cents) pergigajoule effective Jan. 1. The NEB had approved the raise, butthen cancelled it as a result of objections by PG&E EnergyTrading Canada, El Paso Merchant Energy Canada and operators ofgas-fired power stations organized as the Ontario Non-UtilityGenerators. The NUGs include TransAlta Energy, Westcoast Power,Tractabel Power, Lake Superior Power, Cardinal Power of Canada andWhitby Cogeneration.

The industrial shippers predict TransCanada’s toll increasecould come out as 30-50%, to C$1.30-$1.50 (US90 cents-$1.03), if ithas to wait until the last part of the year to make up its revenueshortfalls for 2001. “That kind of rate shock would be verydisruptive for industrial gas users,” IGUA says.

But the energy trading houses and NUGS are urging the NEB not togrant TransCanada any favors that help its odds of winning a muchbigger toll case expected to develop by spring. The proposedinterim hike would, as a matter of principle, perpetuate a systemthat Canadian gas pipelines must start learning to do withoutimmediately, say the critics. The toll cases center on effects ofadditions to the long-distance gas transportation grid since 1998including expansions by TransCanada and affiliated Foothills PipeLines, as well as completion of the new Alliance and VectorPipelines. The result is a glut of excess delivery capacityestimated at one to 2 Bcf/d.

Much of the excess is on TransCanada. Of the space on its lineswhich is being used, an increasing share is being booked with short”interruptible” service contracts priced at discounts, following aflood of cancellations of long “firm” commitments in 1999 and 2000.Canadian policy traditionally lets pipelines compensate for losttraffic or revenues by raising tolls charged to customers leftholding firm service contracts.

The NUGS urge the NEB not to treat the spare delivery capacityor TransCanada’s problems as just a passing glitch that willdisappear when western gas production catches up to the pipelineadditions. “There have been fundamental changes to the gastransportation marketplace,” the power projects say in a writtensubmission to the board. “TransCanada no longer operates as amonopoly in some regions. “Changes have created a natural gastransportation market with price and service competition,particularly in southern Ontario. TransCanada can no longer expectto retain shippers if it does not provide a competitive package ofservices at competitive prices….. competition also means a newrelationship with shippers — one that shares risk and rewardsloyalty, innovation and efficiency.”

In an interview last year, TransCanada president Doug Baldwinmade it plain the company is acutely aware of the issues andintends to offer new arrangements to keep customers. But he alsomaintained that time will be needed to come up with a morecompetitive approach in negotiations, and in the meantime thepipeline must stay in sound financial shape.

The NUGS suggest the alternative to devising new ways to competeis bleak. They calculate that about 2.6 Bcf/d in long shippingcontracts on TransCanada will expire by 2010. That means aboutone-third of the system’s capacity could become vacant if shippersdo not renew. The result would be a series of increases in tollsuntil they nearly double to C$1.95 (US$1.35) as early as 2004, theNUGs warn. They urge the NEB to follow precedents set by U.S.regulators in mid-1990s cases involving the Transwestern, El Pasoand Natural Gas Pipeline systems, where shippers bore as little as35% of costs owed to contract terminations and only for limitedperiods.

North of the border, an industry majority, from Torontodistributor Enbridge Consumers Gas to the Canadian Association ofPetroleum Producers, is playing it safe by supporting TransCanada’srequest for at least an interim period — but only as a stopgap tolimit the potential shock. BP Canada Energy Co., one of thenation’s top gas producers, voiced the industry consensus in anutshell. The support for emergency help for TransCanada is”without prejudice….. many toll-related issues with respect to2001 remain uncertain and will be resolved through eithernegotiation or litigation.”

Gordon Jaremko, Calgary

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