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TransCanada is engulfed in a fight with customers in Ontario and Quebec over tariffs and contracting provisions.

TransCanada Corp. has a blunt message for natural gas customers worried about losing pipeline capacity to its proposed Energy East oil project: If you want service, make long-term commitments and be prepared to pay more.

The Calgary-based pipeline company is engulfed in a fight with its gas customers in Ontario and Quebec over tariffs and contracting provisions on its west-to-east gas pipeline system, with a group of industrial users and utilities – including Quebec's Gaz Métro and a unit of rival Enbridge Inc. – complaining to the National Energy Board that TransCanada is abusing its market power.

TransCanada says it is willing to guarantee service to its gas customers in Ontario and Quebec, but not under past practices in which the majority of volume was contracted by shippers who signed up under one-year contracts, often for interruptible service.

"If those people are willing to step up and make firm commitments and commit to use and pay for gas transmission capacity, we'll make sure it's there," Steve Clark, the company's senior vice-president for TransCanada's gas pipelines, said in an interview. "But they have to make a reciprocal commitment to pay for the system. They can't have capacity set aside for them without a commitment to pay for the costs associated with that capacity. That's not a viable business model for us."

The skirmishes between TransCanada and its gas customers – which will move to hearings before the NEB next month – could become a major impediment to TransCanada's Energy East proposal even after the $12-billion plan won endorsements from federal, Alberta and New Brunswick governments.

Under the plan, the Calgary-based pipeline company would convert a portion of its main gas pipeline to carry crude oil from Alberta to eastern Ontario, and then build a new line through Quebec and New Brunswick. Premiers in Ontario and Quebec have yet to weigh in on the pipeline-conversion plan, and may balk at a proposal that would deprive key markets of access to competitively priced natural gas.

The dispute reflects the dramatically changing market for natural gas in North America. With western Canadian producers losing markets in the eastern United States and consumers in Ontario and Quebec steadily gaining access to American gas, volumes along TransCanada's mainline have plummeted – at least from Alberta to northeastern Ontario. But the Eastern Ontario portion is well-used, and is a key leg of the "Ontario Triangle" that provides both western and American gas to consumers in that province and in Quebec.

In a submission made to the NEB, a group of distribution companies and industrial users argue TransCanada is violating its responsibility to maintain flexible service on the mainline by forcing users off the line to accommodate its Energy East oil customers, who are willing to sign a contract for 15 years and more of service.

"TransCanada is abusing its market power by not allowing shippers to access natural gas at their preferred supply source on reasonable terms," said the market area shippers, a group that also includes Union Gas from southwestern Ontario and the Industrial Gas Users Association.

The NEB set the stage for the current round with a decision last March that refused TransCanada's request to increase long-term tariffs but gave the company more flexibility to provide market solutions on short-term and interruptible service. The company now wants the board to endorse its requirement that shippers sign up for at least 10 years for long-haul service from Alberta, and 15 years if they are importing gas from the U.S.

Mr. Clark said TransCanada is committed to the mainline conversion. But if enough gas users opt to switch to long-term contracts, it will find a way to accommodate them with new service – though they will have to pay the development costs.

Eastern customers say the company's new tariff and contracting provisions would leave them locked into an uncompetitive gas market at a time when all energy users are looking for maximum flexibility.

"What the market is asking for is choice," said Mark Isherwood, vice-president for market development at Union Gas. "We're supportive of TransCanada's efforts to bring western oil to new markets. But it just can't be done at the detriment of the natural gas market."

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