TransCanada Toll Reform Battles Market Change
A multi-sided battle is taking shape before Canada’s National Energy Board (NEB) over plans to overhaul the finances and tolls of Canada’s principal long-distance west-to-east natural gas transporter.
The reform, proposed by TransCanada Corp. for its Mainline and supported by the Canadian Association of Petroleum Producers (CAPP) and the Alberta government, is designed to keep western gas in the running against the rapidly developing U.S. shale resources. But major industrial and power generation customers complain it will mean large hikes in the short-term transport rates they have been relying on as long-term contracts run out.
The Alberta government calls TransCanada’s plan “the only viable option” and warns that without it, “Mainline-sourced Canadian gas may not be able to connect commercially to crucial markets.”
CAPP says big matters of long-term continental gas trading patterns and market evolution are stake in the case, and not just current and near-future tolls for particular services.
“At the root of the Mainline competitiveness issue is the recent game-changing growth in U.S. gas supplies after years of decline,” the Calgary-based Canadian producer group says.
“This growth, which includes the expansion of Rockies gas east but especially growth from the new shale gas plays, is impacting several long-line pipelines in North America,” CAPP says. Calling for a speedy decision to approve TransCanada’s proposal initially as “interim” tolls for 2011, CAPP insists, “There is an immediate need for a clear signal to the market that the Mainline will be a competitive link to western Canadian supplies.”
The producer group warns that “an uncompetitive Mainline results in the disconnection of eastern markets and western Canadian supplies and a Mainline that is significantly stranded.”
Eastern U.S. and Canadian gas buyers already have shown they are ready to bolt, demonstrating a keen interest in obtaining more and lower-cost access to U.S. supplies during a 2010 market review hearing before the Ontario Energy Board, CAPP says.
The opposition to the reform includes the Canadian Industrial Gas Users Association, Alberta Northeast Gas Ltd. (ANE) and the Association of Power Producers of Ontario (APPrO). Numerous companies are also intervening before the NEB, largely in support of the associations representing their industry factions.
TransCanada announced its Mainline toll agreement with shippers earlier this month and said it had filed the agreement with NEB for approval (see Daily GPI, Dec. 10, 2010).
The dispute centers on methods of paring down revenue requirements and tolls on TransCanada’s Mainline from Alberta to Ontario and in turn across export points to northeastern U.S. markets.
TransCanada has told the NEB that deliveries secured by multi-year, long-haul contracts have dropped by 70% since 2005. The result has been a 75% jump in the benchmark Mainline toll between the system’s southeastern Alberta inlet at Empress to its eastern Ontario outlet at Toronto to C$1.64/gigajoule (GJ) (US$1.72/MMBtu) from C$0.94/GJ (US$0.99/MMBtu), caused by spreading the system’s revenue requirement thicker over the thinner gas traffic.
(The Canadian and U.S. dollars are currently at par. Currency differences for tolls arise because 1 MMBtu is 5% larger than 1 GJ.)
Another steep escalation is in store if the status quo continues, TransCanada warns. The transporter predicts that as of 2011 the benchmark Mainline toll is poised to jump to C$2.91/GJ (US$3.05/MMBtu).
The restructuring proposal calls for reducing the Mainline’s forecast 2011 revenue requirement to C$932 million from C$1.65 billion, which would cut the new year’s benchmark toll to C$1.23/GJ (US$1.29/MMBtu).
The paring would be achieved by two sets of compensating toll increases off the Mainline. One involves short-haul service in the region around the Dawn storage and trading hub in southwestern Ontario, where multiple streams of U.S. production mingle with Canadian gas from a wide range of sources including re-exports from the U.S. The second hike is a surcharge on TransCanada’s Nova gas grid inside Alberta.
Critics such as APPrO, whose members generate 95% of Ontario electricity supplies and account for one-fourth of the province’s gas consumption, predict a 75% jump in charges for short-haul service that amounts to “rate shock.” The power producers are calling for approval of Mainline revenue requirement cuts but a freeze on short-haul rates at current levels.
CAPP says its members support the Alberta surcharge, which is calculated to be C$135 million in 2011 then rise to C$185 million for each of 2012 and 2013. Effects on tolls for particular Nova services will be partially offset by corresponding reductions in provincial royalty collections, the Alberta government says.
ANE, a coalition of 17 northeastern U.S. local distribution companies, rejects the scheme as “negotiated in private excluding stakeholders that are responsible for the majority of the revenue on the Mainline and thus does not represent a fair balance of the shipper interests affected.” The buying consortium says TransCanada’s “proposed tolls are discriminatory in nature by virtue of a dramatic cost shift to burden short-haul shippers.”
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