Uncertainty Surrounding TransCanada Continues

October 2013

• Certain anticipated impacts of the National Energy Board decision on the Mainline tolls and services for TransCanada have been borne out by activity in the gas market.
• Other developments – most notably involving TransCanada and Enbridge, Union and Gaz Metro – highlight that the marketplace is still in a state of flux and it will likely remain this way for some time.
• This means that end-users will need to be vigilant in their contracting decisions and ensure they have multiple gas suppliers if they wish to remain successful in this uncertain market.

Aegent has considered the impacts of the National Energy Board (NEB) decision on the Mainline tolls and services for TransCanada PipeLines on end-users and on the eastern gas commodity market.

It was clear to Aegent that a major objective of the NEB’s decision was to incent shippers to contract for more firm transportation capacity as a means of optimizing their transportation costs. Since July when the decision was implemented, contracted Firm Transportation (FT) capacity on TransCanada has increased, particularly for paths from Empress to eastern delivery areas. To date, 2014 contracted capacity to the eastern delivery areas is expected to be near 2.8 petajoules per day (PJ/d), up from approximately 1.8 PJ/d in 2013. So the incentive seems to be working. The Prairie and Northern Ontario sections are also expected to see higher contract levels of 2.5 PJ/d and 2.2 PJ/d, respectively, up from 1.5 PJ/d in both cases.

Changes to interruptible transportation (IT) and Short Term Firm Transportation (STFT) pricing has been the main driver for shippers contracting for additional FT capacity. With IT tolls ranging from 160% to 450% of the FT toll and STFT tolls as high as 1200 % of the FT toll, shippers have had little choice but to contract for more FT capacity in order to meet their peak day requirements. In considering the impacts of the NEB decision, Aegent anticipated that marketers could have difficulty obtaining transportation resources in the secondary market that would be used to provide services to end-users. We determined that there could be times when some marketers would be unable to sell or buy gas at certain delivery points or if they were able to, the resulting prices would reflect the reduced liquidity. Recently, Aegent experienced a situation where an end-user was looking to purchase gas at an eastern delivery point for a five-year term ending in 2018. Some suppliers were unwilling to provide pricing for this term, citing the uncertainty in future tolls as the reason. For those suppliers who were willing to provide pricing, the variation in prices was as much as 10 cents per gigajoule; a clear indicator of an illiquid market. This once again emphasized the need for end-users to have a portfolio of suppliers to ensure they will be able to obtain supply to serve their plant or market and also achieve competitive pricing. Some end-users employ a risk management strategy of contracting different levels of gas supply over a number of future years, commonly referred to as a “hedging ladder”. If the end-user has only one supplier and that supplier is unwilling to provide pricing for gas beyond 2014, then the end-user’s risk management strategy is in jeopardy. Since the NEB’s decision in March 2013, TransCanada and the three eastern natural gas utilities (Enbridge Gas Distribution, Union Gas and Gaz Metropolitan) have been at odds over the construction of new facilities to provide much needed short-haul capacity from Dawn to eastern delivery points. After a series of complaints and applications filed with the NEB plus a claim filed by TransCanada with the Ontario Superior Court of Justice, the parties entered into negotiations that ultimately led in early September, to terms for an agreement. The term sheet includes changes to tolling and contracting which could fundamentally reshape the functioning of the eastern Canadian segment of the TransCanada system.  Further explanation is needed before we are able to assess the implications for end-users, but some of the key terms are:

• TransCanada’s Mainline will be segmented so that the rate base of the Eastern Ontario Triangle (EOT), the area east of a line joining North Bay and Toronto, will be separated from the Northern Ontario Line (NOL) and the Prairies.
• Capital expansions in the EOT will be pursued promptly to meet the market’s need for additional short-haul capacity.
• The TransCanada tolls that took effect July 1, 2013 will remain in place until December 31, 2014.
• New average fixed tolls will be determined for the period of the settlement (2015 to 2020), but could be adjusted after 3 years and set again for the next 3 years.
• Tolls for the EOT segment will be based on an EOT cost of service.
• A temporary transitional contribution that ensures TransCanada recovers all of its annual costs (adjusted accordingly to reflect TransCanada’s contribution) is made by all shippers and payable for the term of the settlement.
• At the end of the settlement period, the Prairies and NOL will be tolled independently of the EOT.

The parties are currently working towards turning the term sheet into a final settlement document. Once completed, we can expect TransCanada to make another application to the NEB. With tolls after 2014 expected to change, uncertainty in the marketplace has gone up once again. Having said that, on October 10, 2013 the NEB provided a bit of clarity with the release of its decision on TransCanada’s application to amend its transportation tariff. TransCanada was requesting modifications to the renewal right provisions and to the provisions applicable to diversions, specifically to eliminate downstream diversions. The NEB decided to deny the proposed amendments in respect of diversions. For renewal provisions, the NEB decided to amend the tariff to require contract holders to provide TransCanada with two years notice of their intention to renew and to require a renewal term of one or more full years. The amended renewal provisions are in effect immediately with a transition mechanism as follows. For existing contracts that expire between April 11, 2014 and July 30, 2014, the shipper has the option of extending the term of the contract for a period of one or more full years as long as the shipper provides TransCanada six months notice of its intention to renew the contract before the contract termination date. If the new termination date falls between July 31, 2014 and December 31, 2015, the shipper has an additional opportunity to extend the term of the contract for a period of one or more full years provided the shipper notifies TransCanada of its intention by January 31, 2014. If an existing contract is set to expire between July 31, 2014 and December 31, 2015, then the shipper has the option of extending the term of the contract for a period of one or more full years provided the shipper notifies TransCanada of its intention by January 31, 2014. The marketplace is still in a state of flux and it will likely remain this way for some time. End-users will need to be vigilant in their contracting decisions and ensure they have multiple gas suppliers if they wish to remain successful in this uncertain market.

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