TransCanada Tolls to Increase Dramatically

November 2009

• The mainline tolls for TransCanada Pipelines are set to rise on January 1, 2010, with the cost for firm transportation to Eastern Canada increasing by 38% to almost $1.64/GJ from the current $1.19.
• TransCanada's tolls still require the approval of the National Energy Board.
• A 38% rise in tolls will increase the operating costs for end users already trying to manage the very difficult impacts of the economic recession.

The mainline tolls for TransCanada Pipelines are set to rise quite dramatically on January 1, 2010, with the cost for firm transportation to Eastern Canada increasing to almost $1.64/GJ from the current $1.19.

On November 19, TransCanada posted a notice on its website indicating the company and a group of industry stakeholders, who meet regularly on tolls and tariff matters, had concluded their discussions on final tolls for the upcoming year. The outcome of the discussions is a 38% increase to about $1.64/GJ in the cost of transporting gas to the company's Eastern Zone. The final toll level compares to an earlier estimate that the 2010 toll would be in the range of $1.65 to $1.90/GJ. Transportation tolls to zones and other points on the mainline system will increase by a comparable percentage.

TransCanada's 2010 tolls still require the approval of the National Energy Board, and the request for approval was filed with the regulator on November 23. The proposed tolls reflect a "2010 Adjustment Charge" as a measure to reduce tolls with the related amount being a credit to TransCanada's cost of service of $85 million. The filing indicates the adjustment will be recovered in future periods.

In an October notice in which TransCanada stakeholders were advised of the expected range for next year's rates, the pipeline company attributed part of the significant rise in tolls to an anticipated reduction in receipts into the western end of the pipeline of some 400 million cubic feet (about 425,000 GJ) per day compared to 2009. The company says the decrease in receipts is a result of a decline in supply from the Western Canadian Sedimentary Basin, as well as other market dynamics. One key market feature, which has evolved over the past several years, is that some natural gas users in Eastern Canada have met their firm delivery obligations to their local distributor with firm arrangements to purchase delivered gas in the distributor's delivery area, rather than relying solely on arrangements involving Alberta supply combined with long-term, long-haul firm transportation on the TransCanada mainline.

A November 4, 2009 article in the Globe and Mail discussed the relationship between the increase in TransCanada's tolls and the decline in Alberta's natural gas production. The article emphasized the negative impact of the higher tolls on Alberta's gas producers, highlighting that the "higher costs come as the latest in a long series of punches to the bottom line for Alberta's suffering gas sector." The article points out that the fall in gas prices, the emergence of new competition in US shale gas reservoirs, and changes to Alberta's system of royalties all contributed to a decline in production last year.

What was most noticeably downplayed in the article was the effect of the toll increase on end users - and there will be an impact. Although the cost of transportation may represent a smaller component of an end user's total supply cost than the cost of the commodity itself, it is still an important element in the supply portfolio of gas consumers. A 38% rise in tolls will increase the operating costs for end users already trying to manage the very difficult impacts of the economic recession - be they residential, industrial or commercial end users or other consumers such as municipalities, hospitals, schools, colleges, and universities.

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