NERA's Role in TransCanada Ltd.'s 2011–2012 Restructuring Case

The Situation

On 28 March 2013, Canada's National Energy Board (NEB) issued an important decision in the restructuring case of TransCanada Ltd, Canada's (and North America's) largest gas pipeline. The case was unusual not only for the issues involved but because it was the first time that the three major gas distributors in Eastern Canada acted collectively to oppose major moves proposed by TransCanada.

TransCanada was constructed in the late 1950s primarily to transport gas from Alberta to Canada's eastern provinces. But that role has changed lately, as the abundant shale gas from the giant Marcellus shale field in the eastern United States -- one-fourth the distance to those distributors than Alberta -- has displaced those traditional Alberta supplies. Such shifting supply patterns have idled much of the capacity on TransCanada's multi-pipeline Mainline. Until 2011, TransCanada had been allowed by the NEB to raise Mainline tolls to recoup its cost of service over smaller Alberta-based volumes. But with an increasing substitution of Marcellus volumes for those in Canada, it has been clear that that practice could not continue. TransCanada's restructuring case involved many costing and toll-making issues emanating from this shift in the sources of gas for eastern Canada.

NERA's Role

Gaz Métro (serving Quebec), and Union Gas Ltd and Enbridge Gas Distribution (serving Ontario) retained NERA Senior Vice President Dr. Jeff D. Makholm as a witnesses to represent them on a specific costing and toll design issues. Vice President Kurt Strunk served as consulting expert.

TransCanada had asked the NEB for authority to shift much of the book costs for the idled Mainline capacity to components of the pipeline system that the eastern Canadian distributors would use for short-haul services for Marcellus gas, and also to make other changes to toll design that would shift costs to Québec users that formerly were part of an integrated mileagebased toll design for all of TransCanada's costs. NERA opposed such changes as unduly discriminatory for the over three million gas consumers in eastern Canada and also contrary to the way in which the FERC had dealt with the issue years before when US interstate pipeline restructuring had idled certain segments of capacity between Texas and Southern California. The NEB agreed with NERA on these issues, rejecting TransCanada's proposed changes.

The Result

While the NEB permitted TransCanada to implement a number of tariff design changes meant to make its service offering more flexible, it rejected the company's requests meant to shield it from the competitive shift in the supply of gas. According to the NEB, "TransCanada must not look to regulation to shield the Mainline from its fundamental business risk." As a result, it capped long haul representative tolls from Alberta to Ontario at $1.42/gigajoule (GJ), down from the existing $2.58/GJ, to remain in effect until 2017.

Ultimately, while the NEB permitted TransCanada some flexibility in toll design and cost deferrals, it declined to insulate the company from the broader effects of gas supply competition.