NEB's TransCanada Decision Will Have Broad Impacts for End Users

April 2013

• The National Energy Board’s recent decision on TransCanada’s tolls and tariff reduced the mainline tolls and sought to stabilize them for a five-year period.
• There were other notable elements, many of which will have implications for end users who hold long-haul firm transportation. They will need to re-examine their transportation arrangements to re-optimize their portfolio.
• The NEB’s decision is likely to have a significant impact on how shippers’ use of the system and their costs of that use evolve over time.

The recent decision of the National Energy Board on the tolls and tariff for TransCanada’s mainline was a much anticipated event. The dramatic increase in TransCanada’s tolls in recent years, the result mainly of declining throughput but also a cause of that decline, pointed clearly to the need for things to change on the mainline. In its application, TransCanada proposed its version of change, which the Board only partially accepted. However, the Board’s decision will indeed lead to some significant changes.

What got the most attention when the NEB’s findings were released was that the decision reduced TransCanada’s tolls significantly and sought to stabilize them for a five-year period. The benchmark 100% load factor toll from Empress, Alberta to Dawn in southwestern Ontario was reduced to $1.42/GJ from a 2013 toll of $2.58/GJ determined using TransCanada’s existing toll methodology.

One of the key objectives of the decision was to promote the contracting of more firm transportation services, and it seems likely the changes will succeed in doing that. However, it is also likely the decision will have a broader impact on how end-users contract for and use transportation services on TransCanada, and the cost of doing so. End users who are shippers will need to re-examine their transportation arrangements carefully to re-optimize their transportation portfolio.

Aside from the decrease in long-haul tolls, there were some other notable elements to the decision:

• A change to TransCanada’s cost allocation methodology will shift some costs from long-haul routes (typically routes from western Canada to the east) and onto short-haul routes (typically routes from Dawn to points near the GTA or eastern Ontario).
• The Risk Alleviation Mechanism or “RAM credit” was eliminated. This was a mechanism that allowed firm shippers to get credits for unutilized firm transportation that they could apply against the incremental cost of Interruptible Transportation (IT) in the same month.
• TransCanada will be permitted discretion to set the minimum toll for services such as IT or Short Term Firm Transportation (STFT), with the likely result that the cost to obtain these services will increase in higher demand winter months, or in areas of the pipeline network that are more tightly supplied.
• The Eastern Zone, which previously applied a uniform toll from Alberta to virtually all delivery points from Southern Ontario to Eastern Ontario and Quebec will now be broken up into discrete Distributor Delivery Areas, each with its own toll.
• The former two-part demand and commodity toll structure is replaced with a demand-only toll.

We see some likely implications for end users who are dependent on long-haul TransCanada firm transportation:

1. Shippers will need to review how much long-haul FT is the optimum amount to hold, and likely will want to contract for more capacity. The cost of using IT as a means to meet demand above the shipper’s FT contract demand will increase when the shipper no longer has RAM credits to apply to offset that cost. Since this IT would cost more, shippers will want to use less of it. This is particularly so in areas where IT or STFT could be priced at a premium by TCPL, given their new discretion to do so. It should be no surprise that the decision incents contracting for more FT, as that was the clear objective.
2. Because shippers will have more FT than before, their average FT load factor will be lower than before. This poorer utilization of FT means a shipper’s average unit cost of transportation on TransCanada will not decline as much as the “headline number” on the toll reduction may have led some to expect. The new toll at 70% load factor would be just over $2/GJ, for example.
3. The elimination of the RAM credits will make it harder for shippers to monetize the value of unutilized firm capacity. In the RAM days, unutilized FT automatically generated RAM credits that could be accumulated and used later the same month (either to offset the cost of IT, or simply turned into cash by buying gas at point A, selling it downstream at point B, and using RAM credits to pay for the transportation from A to B). In the new world, shippers will have to make use of their available capacity each day (for example, by diverting gas to a secondary market), or lose the value of that capacity. The volumes available on any given day might be small, the market opportunities won’t always be there, and most end users don’t have the time or resources to chase these opportunities every day. The result will be that more capacity will go unused, at an opportunity cost to shippers.

TransCanada’s application in this case led to a contentious and complex debate in the proceeding, and there was a sense among participants and observers that this was the kind of proceeding that comes along once in a generation. Some may perceive that the Board’s decision was not as momentous as some thought it would be, but our sense is that it will in fact have a significant impact on how shippers’ use of the system – and their costs of using the system – evolve over time.

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