TransCanada Corp. has been ordered to cut tolls on its troubled natural gas Mainline for long delivery contracts but granted offsetting rights to charge as much as markets for transportation services will bear for short capacity bookings.

In a landmark ruling Thursday on TransCanada restructuring proposals, the National Energy Board (NEB) set the benchmark rate for long-term firm service on the Mainline from its inlet at Empress in southeastern Alberta to the Dawn storage and trading hub in southwestern Ontario at C$1.42/gigajoule (GJ) (US$1.49/MMBtu).

The new toll inaugurates a new era of fixed rates for multi-year delivery contracts that is intended to make stable service arrangements attractive to shippers as gas markets recover from current supply gluts and price lows. Continuing business as usual, with the Mainline hiking long firm service tolls to cover shrinking volumes moving under bookings for a year or more, was forecast to hike the benchmark to C$2.58/GJ (US$2.71/MMBtu) this year.

To offset revenues lost due to fixed rates at reduced levels for long contracts, the NEB followed a pattern set by the U.S. Federal Energy Regulatory Commission to encourage open, competitive markets for transportation services among U.S. pipelines.

“The National Energy Board has approved some of TransCanada’s proposals related to Mainline tolls and has denied a number of the fundamental concepts we put forward to improve competitiveness and recover costs,” TransCanada said of the ruling. “The board has also introduced several new elements that were not part of our application, including fixing tolls outside the time frame applied for. This is a long and complex decision, and we will need time to complete a full analysis before we can comment any further on how this decision will impact TransCanada.”

Late last year, a TransCanada executive expressed optimism that NEB would allow it to get its Mainline “properly restructured” (see NGI, Nov. 19, 2012). The new Canadian rule will apply to two categories of TransCanada service: short-term firm transportation (STFT) and interruptible transportation IT. The company’s restructuring proposal sought rights to charge tolls for the short bookings of up to 160% of long firm rates, as a premium that past experience shows to be a reasonable expectation during periods of peak demand and prices for gas.

As of July 1, the NEB said, “We see fit to give TransCanada full discretion to determine the bid floors for IT and STFT services at any level with one exception. TransCanada will have the discretion to set bid floors for STFT only at 100% of the corresponding FT rate or higher. It is up to TransCanada to determine bid floors that better maximize system revenues.

“We recognize that giving TransCanada the flexibility to increase and decrease bid floors may give it the opportunity to charge very high tolls in certain markets and at certain times, for example, during significant weather events. We are of the view, however, that it is important to provide TransCanada with the necessary tools to capture market opportunities, if and when they arise, and to recover costs associated with its system from those who use it.”

The board pointed out that TransCanada has already started out on a new business course of offering flexible delivery options and charges by using a highly competitive service model for short-haul transportation at the eastern end of its system. A suite of options has been developed to attract growing volumes of imports of U.S.-sourced shale gas, especially from the Marcellus production region, into Ontario and Quebec.

Lowered revenue due to reduced tolls for long firm service on the Mainline will be offset by a deferral scheme proposed by the Canadian Association of Petroleum Producers (CAPP). Titled LTAA, short for long-term adjustment account, the bookkeeping device will keep score on shortfalls from TransCanada’s annual revenue requirements for recovery in future years as gas and transportation service markets recover.

CAPP and the Alberta government also won a major victory by defeating an attempt by TransCanada to cover Mainline costs by redrawing the pipeline map to increase tolls on the western supply side of the market. The NEB rejected an idea that TransCanada called the Alberta System Extension (ASE). The scheme called for spreading the service territory of the company’s Nova Gas Transmission grid in Alberta out across Saskatchewan and Alberta as well.

The ASE would have effectively added Canadian legs in western export subsidiaries of TransCanada — the Foothills routes to the Midwestern U.S. and California — to Nova and increased its rates. Alberta and CAPP put up a vigorous fight against the scheme because it would have raised total annual Nova tolls by C$467 million, or 36%, for users of the Alberta grid, affecting all shippers regardless whether they used the Foothills system.

In rejecting the ASE scheme the NEB said, “the Extension violates acceptable tolling principles. Its effect is to unduly cross-subsidize the Mainline to enhance its competitiveness. We view the Extension as inappropriate cost shifting among affiliate companies that is contrary to sound tolling principles.”

The NEB also agreed with a case that TransCanada’s western customers made against a cherished doctrine that the pipeline calls the Canadian “regulatory compact.” The theory says that in return for building a delivery service that benefits suppliers and buyers alike during ups on gas market cycles, the pipeline should be able to make shippers support constant revenue requirements by paying toll increases to cover costs of vacant capacity during periods when changed economic conditions cut traffic.

The NEB said TransCanada, as a long-distance pipeline, differs from local distribution companies, where the compact theory originated as a legal support for maintaining essential services. “The Mainline does not have a franchise area and TransCanada is not compelled by statute to provide service to customers in any area,” the board said. “Certificates [NEB project approvals] confer a right on TransCanada, not an obligation, to construct facilities for gas transportation service.”

The NEB said its ruling “enables TransCanada to meet market forces with market solutions. It is TransCanada’s responsibility to ensure that the Mainline is economically viable, and continues to be an important asset, to connect the Western Canada Sedimentary Basin to markets in the east. TransCanada must not look to regulation to shield the Mainline from its fundamental business risk. It must address the underlying competitive reality in which the Mainline operates.”

Clear and lasting trends highlight the need for competitive behavior by TransCanada, the NEB said. Shrinking demand for Mainline service has nearly tripled tolls since the long-haul benchmark was about C95 cents/GJ (US$1/MMBtu) in the late 1990s by spreading constant costs thicker over shrinking traffic volumes.

Evidence before the board showed that annual average traffic on the Mainline has fallen to 2.4 Bcf/d from 6.8 Bcf/d in 2000. The Mainline share of the market for transportation service for western Canadian production — as opposed to other routes, notably the Alliance Pipeline, which started up in 1999 — has fallen from to 18% from 42% in 2000. In the late 1990s, TransCanada’s Mainline had firm service contracts for its full capacity for 7.2 Bcf/d. The volume moving under long bookings has dropped to 1.2 Bcf/d. IT has jumped to 40% of Mainline gas movements from 1% in 1998, while STFT has grown to account for 15% of deliveries from 1%.

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