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The NEB noted that TransCanada’s Mainline faces ‘unprecedented’ challenges. (TRANSCANADA PIPELINES)
The NEB noted that TransCanada’s Mainline faces ‘unprecedented’ challenges. (TRANSCANADA PIPELINES)

OIL AND GAS

TransCanada’s Mainline sees tolls frozen for five years Add to ...

The federal regulator has frozen the tolls TransCanada Corp. can charge on its troubled Mainline gas pipeline for five years, saying the company cannot continue to raise costs to producers and consumers on a critical piece of the country’s energy infrastructure.

The decision was welcomed by western gas companies and industrial consumers across the country, who feared TransCanada’s plan would raise pipeline fees to uncompetitive levels.

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The Mainline, which feeds gas from Western Canada to the country’s industrial heartland, has faced major challenges in recent years caused in part by the huge shifts in North American energy supply and demand. The volume of gas flowing through it has dropped dramatically, from 6 billion cubic feet per day in Alberta supply in 2007 to 2.4 billion cubic feet last year.

In response, TransCanada has been driving up its tolls to cover its costs, raising concerns about a ruinous spiral that would leave western producers and their eastern customers uncompetitive compared with cheaper gas in the United States. Eastern utilities and industrial customers were finding alternatives to the TransCanada system, including pipeline access from the United States where booming shale gas production has displaced some western Canadian gas. Meanwhile, rising industrial demand in Alberta has diverted some supply from the main west-to-east line.

In the much-anticipated ruling issued late Wednesday, the National Energy Board approved fixed, multiyear rates that it said should allow TransCanada to cover its costs and earn a reasonable rate of return, so long as it finds a way to increase the amount of gas going through the line, as it has forecast. It slashed the firm transportation toll from Alberta to southwestern Ontario to $1.42 per gigajoule; had the board not made changes to how the tolls are set, those costs would have gone up to $2.58 per gigajoule for 2013.

The board did approve several elements of TransCanada’s restructuring proposal, giving the company more flexibility in how it allocates costs on the line and increasing the rate of return it could earn should it achieve its forecast of higher volumes.

The regulator noted that TransCanada’s Mainline faces “unprecedented” challenges. Its “tolls cannot continue to increase each year in response to throughput decline,” the NEB said in its decision. “If this were to continue, the Mainline’s competitiveness would further erode and exacerbate the root cause of the throughput declines.”

It said this decision will put greater onus on the company to manage its business risks.

“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,” the board concluded.

The company said late Wednesday that it must study the lengthy and complex ruling, which “has denied a number of the fundamental concepts we put forward to improve competitiveness and recover costs.”

Gas producers and consumers welcomed the ruling.

“TransCanada has to stabilize its tolls and needs to move to giving customers certainty as to what price they are going to get charged for tolls over a multiyear period,” said Nick Schultz, vice-president for pipeline regulation at the Canadian Association of Petroleum Producers.

Mr. Schultz also welcomed the board’s rejection of TransCanada’s proposal to transfer costs and risks from the mainline on to its wholly owned subsidiary in Alberta.

“We viewed that as completely inappropriate and contrary to regulatory principle and the board has agreed,” he said.

The regulatory ruling carried major ramifications for Canada’s natural gas producers, who have been hammered by depressed prices, but also for major industries that rely on the fuel and face fierce competition from American rivals who have easier access to booming supplies of low-cost shale gas.

“The board did a remarkable job of balancing all the interests,” said Shahrzad Rahbar, president of the Industrial Gas Users Association, which includes giant such as Rio Tinto Alcan, E.I du Pont Canada Co., and several Ontario– and Quebec-based forestry companies.

“This was not an easy hearing and the range of opinions were pretty diverse … and we welcome the lowering the tolls and fixing them for multiyear. It provides the stability that industrial users need to plan their businesses.”

Ms. Rahbar said rising pipeline costs threatened to undermine the competitiveness of major industrial users in central Canada.

“The way the tolls were going, without some assurance that there would be some stability, would be detrimental to many of our businesses,” she said.

Follow on Twitter: @smccarthy55

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