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TransCanada aims to cut gas shipping costs Add to ...

TransCanada Corp. is making another attempt to slash shipping costs on its troubled natural gas pipeline system, in hopes of once again filling pipes that now run half-empty.

The company is proposing a one-third cut to the cost of bringing gas across the country, relative to current rates. The company says it can cut costs through accounting changes and a number of optimistic assumptions about its natural gas pipes, which it now says will be needed for more years than expected – and see a resurgence in demand.

It will also boost the cost of shipping gas in Alberta and in some areas of Ontario.

Those measures come during a period that has seen the TransCanada Mainline system, which crosses Canada and brings western gas to eastern consumers, experience dramatic declines – and amid questions about its viability in a world of shifting energy geography. Low gas prices and increased competition from U.S. natural gas wells in places like Pennsylvania have led to a substantial decline in the quantity of gas moving on the Mainline system.

The result has been rocketing tolls, which could rise by as much as 50 per cent this year alone.

At those rates, the cost of tolls alone would add roughly 60 per cent to the current price of a thousand cubic feet of natural gas, a prospect that has provoked anger from industrial users in Ontario and political leaders in the U.S. The New York mayor’s office has even warned that high tolls threaten the viability of municipal infrastructure in that city.

Maintaining viable operations on the Mainline is an issue of significant concern to Canada’s energy balance, since without the pipe, homes in Ontario would go without heat and industrial users would be driven out of business.

But high tolls threaten that viability, and TransCanada has spent the last years attempting to redo the way it charges companies to transport natural gas in hopes of cutting those costs. An initial effort last year failed after it was unable to achieve a consensus among the natural gas producers and buyers that use the system.

Now, it’s asking the National Energy Board to approve a new set of tolls for 2012 and 2013.

“TransCanada sought to achieve a balanced solution that would benefit producers, shippers, consumers and TransCanada while adhering to established regulatory principles and a cost of service toll methodology,” TransCanada chief executive Russ Girling said in a statement.

The reduction in tolls, TransCanada said, will be accomplished by a series of accounting shifts that serve to reduce the amount of money it costs the company, on paper, to operate the Mainline. TransCanada, like many pipeline operators, charges tolls based on its operating and capital costs, which it is allowed by regulators to recoup over a certain number of years.

The company’s new plan involves slashing depreciation on certain parts of its Mainline system, which will reduce the capital costs it needs to recoup in a given year. It will do that by extending the number of years it expects parts of the Mainline to be used – to 2036 for the Prairie sections, and to 2050 for parts in eastern Canada. That will reduce its annual depreciation amount from 3.2 to 2.3 per cent, creating annual savings of about $150-million.

It’s also boosting its expectations of how much gas will flow through the Mainline, which has seen contracted volumes fall by fully 70 per cent over the past half-decade. This year, it expects to move an average of 3.3 billion cubic feet a day; it expects that to rise to 3.8 bcf in 2013, a 15 per cent increase.

By changing the way it operates the system, TransCanada believes it can “maintain and increase volumes on the system,” Greg Lohnes, the company’s president of natural gas pipelines, said in an interview.

Part of the changes also involves shifting some costs from the Mainline elsewhere by extending “the geographical footprint” of its Alberta system. In other words, the company is offering something like a name change – taking parts of the existing Mainline in Saskatchewan and British Columbia and calling them part of the Alberta system. With that name change, it shrinks the size of the Mainline, which will allow it to shrink the amount it needs to charge.

That will, however, increase the cost of shipping on the Alberta system. The cost of some short-haul gas movements in Ontario will also increase. Proposed Ontario rate increases have, in the past, caused some electrical producers there to argue that they are being forced to shoulder so much of the cost that their business is threatened.

Mr. Lohnes argued that with the changes, “all stakeholders will see benefits.”

Those who use the system say it’s too early to comment on the new toll application, which was filed Thursday.

“We have just received the application and are going through it,” said Travis Davies, spokesman for the Canadian Association of Petroleum Producers. “We’ll be actively participating in the hearing process where we will make our position on the various elements of the application known.”

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