TransCanada's Interim Tolls Proposal Signals Potential for Major Change

January 2011

• An application in December by TransCanada to the National Energy Board for interim tolls for its Mainline effective January 1 included significant changes in tolling methods.
• The NEB did not approve the specific interim tolls proposed by TransCanada. Instead the NEB decided to make the 2010 tolls interim as of January 1.
• TransCanada's application for interim tolls signalled the potential for major change in the way tolls for the Canadian Mainline are determined.
• Among the potential impacts of TransCanada's proposal was a significant increase in "short haul" tolls that would affect the cost of services used by many large gas buyers and power generators.

In December, TransCanada PipeLines filed an application with the National Energy Board seeking approval of interim tolls for 2011 for its Canadian Mainline system and its Alberta system. The NEB did not approve the specific interim tolls proposed by TransCanada for the Mainline, deciding instead to make the 2010 tolls interim as of January 1. Although TransCanada's preferred option for interim tolls was rejected by the regulator, the application signals the potential for major change in the way TransCanada determines its Mainline tolls.

For a number of years, decreases in firm contract levels and declining throughput on the TransCanada Mainline have been the main drivers for sharp increases in long-haul tolls. In 2007, a shipper using long-haul capacity to move gas to the Eastern Zone paid about $1.03/GJ. In 2010, that same shipper paid almost $1.64/GJ. TransCanada's interim application indicated that a continuation of the status quo would produce a toll to the Eastern Zone of approximately $2.91/GJ. Business factors contributing to the reduction in throughput include new sources of supply available to markets traditionally served by the Mainline, declines in production from the Western Canadian basin, and the impact of the recession in the last two years on natural gas demand.

TransCanada and its stakeholders have been discussing measures for controlling rising long-haul tolls and improving the competitiveness of the Mainline. TransCanada's interim application presented a proposed 3-year agreement that was supported by only some of TransCanada's stakeholders. Elements of the multi-year plan represent a significant departure from established tolling methodologies. TransCanada had hoped to have the tolls resulting from the agreement go into effect on an interim basis while an application for final tolls, also based on the agreement, was being examined by the National Energy Board. Although this was not the outcome, the components of the interim filing provide information on the types and direction of the changes that are being put forward. Highlights of some of the more significant elements that were proposed are:

• A number of items are contemplated for the establishment of the Mainline revenue requirement for each of the next three years, which would reduce the revenue requirement from what it would be otherwise by deferring costs to later years.
• The current toll zones used for designing tolls for long-haul domestic service would be eliminated. Instead, tolls for long-haul domestic service would be based on the distance to the "load centre" of the individual delivery areas. This means for example, there would be one toll for firm transportation service from Empress to Enbridge CDA ($1.3544/GJ) and another for service to the Union CDA ($1.3326/GJ) rather than the current situation where the Eastern Zone toll would apply to both.
• The entire revenue requirement would be classified as a fixed cost and so the commodity component of tolls would be eliminated. In addition, the basis for allocating the costs to the various long-haul and short-haul paths would be modified. The impact generally is a larger percentage increase in the short haul tolls (see the table below).
• It is proposed that there be an open season for existing capacity for transportation service under the Firm Transportation (FT) and FT-Short Notice toll schedules. The open season is intended to apply only to service from the Emerson receipt point or any receipt point upstream of Emerson and only for terms of 3 or 5 years beginning November 1, 2011 and December 31, 2014.

There are many very specific, detailed components to the proposed agreement. The table below is intended to illustrate representative impacts on TransCanada Mainline tolls. The general direction of tolls under the proposed agreement compared to tolls for 2010 would see long-haul tolls decreasing and short-haul tolls increasing.

	100% Load Factor Tolls ($/GJ)
	Long-Haul Eastern Zone	Short-Haul Dawn to Union EDA**	Short-Haul Dawn to Enbridge CDA**
2010 Final	1.6381	0.3168	0.1860
Proposed Interim 2011 per Agreement	1.35440 *	0.3703	0.2589
2011 per Existing Toll Design as Filed Dec ‘10	2.9055	0.5703	0.3320

Reflects Empress to Enbridge CDA since Eastern Toll Zone to be eliminated under proposed plan

* Excludes Union Dawn Receipt Point Surcharge

On January 25, TransCanada filed an application for revised interim tolls for 2011. The revised application is based on the tolling methodology established in the 2007-2011 settlement between TransCanada and its customers, but with updated costs. The proposed Eastern Zone toll is $2.24/GJ.

TransCanada must still file for final tolls for 2011. Whether that application is exactly the same as the first interim filing or a modified version of it as a result of continued discussions with stakeholders remains to be seen. What seems reasonably certain is that there will be a new approach proposed for managing costs, allocating costs, and designing long-haul and short-haul tolls for the Mainline.

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