MARKET ACITIVITY/TRADING NOTES FOR DAY ENDING MONDAY, APRIL 6, 1998 (5)
PIPELINES
NOVA Gas Transmission Ltd. (NGT) today filed with the Alberta Energy Utilities Board (EUB) a more flexible portfolio of transportation services for customers to select from, and a new pricing design that better reflects the cost of transportation on its Alberta natural gas pipeline system. The new pricing model will replace the current postage-stamp pricing regime.
Today's filing follows consultation with a multi-party industry task force, which began in early 1997 and wrapped up in January 1998. Based on these discussions, NGT refined its approach throughout February and March, and filed its application today. NGT and the Canadian Association of Petroleum Producers have agreed to reconvene the industry task force in April to continue the consultation process, with a view to resolving industry issues.
''Our customer base is very diverse -- including large producers, small producers, marketers, aggregators and end-users -- and these groups have varying, sometimes conflicting, transportation needs,'' said NGT president Bruce Simpson. ''In the coming months, in addition to working with industry to build understanding for the proposal, we'll be working with individual customers to enable them to customize gas transportation portfolios that best meet their specific needs.''
The proposal will require regulatory approval by the EUB. It marks the introduction of service level differentiation by NGT, and of related distance and pipeline-diameter sensitive prices. These differentials recognize the relative costs of short versus long haul transportation, and the economies of transporting gas in larger diameter pipe versus smaller diameter pipe.
Transportation pricing for gas delivered inside Alberta (under the Basic Service option), will range from $0.04 to $0.27 per thousand cubic feet (Mcf) -- compared with the current single price of about $0.13 per Mcf. For gas delivered outside Alberta, pricing under the Basic Service option will range rom about $0.17 to $0.40 per Mcf -- versus the current single price of about $0.26 per Mcf. The new approach will neither enhance nor reduce NGT's EUB-approved revenues as specified under the existing incentive agreement with customers.
The new pricing design is a departure from nearly two decades of the postage stamp tolling method. Introduced by the Government of Alberta in 1980, the postage-stamp tolling method dictates the same unit price for natural gas transmission, regardless of how far the gas is transported.
''NOVA has developed a new suite of service options to provide customers more choice based on their individual needs. And we've revised our pricing to reflect these services, the location of the gas, and the facilities used to ship the gas,'' said Simpson.
''Customers are looking for pricing that includes greater accountability for costs created on the NOVA system, and our new approach sends the right economic signals about the value of transportation. This is a natural step in the right direction.''
Among the changes recommended by NOVA:
- Four new firm receipt-service options have been created for customers to choose from. These services are differentiated by how much upstream and downstream flexibility they offer, and are priced accordingly. This gives customers flexibility as to the level of service they require and the related transportation price for that service.
- To increase cost-accountability, NGT will employ incremental tolling on new receipt and delivery lateral expansions. This will also enable open competition on the laterals, with pricing signals that will encourage prudent investment decisions.
- The minimum contract length for renewable receipt and delivery firm service rises from one year to five years, with lower prices offered at some receipt locations for longer-term commitments. In a more competitive environment, this change will enable NOVA to continue to ensure appropriate capital spending.
A wholly owned subsidiary of NOVA Corporation, NGT is the largest volume carrier of natural gas in North America, moving 4.5 trillion cubic feet of gas in 1997. NGT's 22,200-kilometre system transports natural gas for use within Alberta and to provincial boundary points for connection with pipelines serving markets elsewhere in Canada and the United States. The system moves approximately 18 per cent of the natural gas produced annually in North America.
NOVA Corporation is a worldwide natural gas services and petrochemical company. Its trading symbol on the Alberta, Toronto, Montreal and New York exchanges is ''NVA''.
Nova Gets With The Program
Globe & Mail
Although the subject in question arguably died some time ago, yesterday was funeral day in Alberta. As with many funerals involving a controversial figure, there are those who will secretly (or not so secretly) rejoice at the passing and others who will likely gnash their teeth.
The deceased had a formal name -- "rolled-in tolling" -- but was more popularly known as the "postage stamp." Nova Corp. , the pipeline giant whose fate for the past 15 years has been inextricably linked with the concept, started the burial process yesterday with a proposal it filed with the provincial energy regulator, the Alberta Energy and Utilities Board.
Postage stamp is the term for the flat-rate pricing that Calgary-based Nova, until recently, employed on its gas pipeline system. Producers were charged the same rate to ship their gas to various export points regardless of where their wells were located, with all costs "rolled in" to that rate.
Yesterday, Nova Gas Transmission president Bruce Simpson announced a brave new world of pricing -- one he said that responds to the new era of competition and is designed to meet customers' needs. Of course, it's also designed to be "revenue neutral" to Nova, meaning the former monopoly doesn't intend to cut into its substantial profit margins just because of a little competition.
Those who do stand to lose some money in this new world are gas producers who happen to have assets concentrated in the northern end of the province, farther away from the central export points. They're the ones the postage stamp (instituted by the province in 1980) was designed to protect, essentially by having southern producers subsidize those in the north.
Mr. Simpson tried valiantly to make the case yesterday that Nova is more than happy to enter into this new age of competition, and that the former pipeline monopoly was in no way pushed, dragged or otherwise forced into this position. No doubt it was just as overjoyed at the idea as, say, Bell Canada was when long-distance competition first arrived.
The NGT head said Nova is delighted to compete, but wants the same flexibility that others -- such as the Alliance pipeline project -- have in striking deals. The postage stamp, he said, didn't allow Nova to compete. Of course, the government's cozy relationship with the former Crown company didn't allow anyone else to compete, so if the postage stamp was a set of handcuffs, they were solid gold ones.
For all Mr. Simpson's protests, Nova has been prodded, bullied and cajoled into its present position -- and as the pipeline giant admitted yesterday, there will be more pressure to come from producers before this issue is even close to being settled. Nova spent more than a year trying to hammer out an agreement on pricing with producers before giving up and proposing the current pricing scheme directly to the regulator. Now it will hear from the industry.
The catalyst for Nova's change of heart on the postage stamp was a 1996 bid by PanCanadian Petroleum, whose assets are concentrated in the south, to start its own pipeline. Nova fought the proposal in every available forum, including the back rooms of the legislature. The province, however, apparently decided it was time that Nova competed on its merits rather than relying on its prior relationship as an arm of the government.
That was the beginning of the end for the postage stamp. Nova managed to devise a pricing plan specifically for those producers who backed PanCanadian's effort, giving them a discounted rate. It quickly became obvious, however, that this was merely a stop-gap measure, and that the entire pricing structure of Nova's network had to be thrown out and reworked.
What Nova has come up with is a complex system of algorithms involving the distance from the main export points, the diameter of the pipe used (since larger pipe is cheaper to operate) and the length of contract. Information kits contained a slide-rule-like device as an aid, although a calculator that could handle quadratic equations might have been better.
The upshot for northern producers is relatively plain: they pay more. Anywhere from 1 to 14 cents for every 1,000 cubic feet more than now (the postage stamp is 26 cents), depending on whether they want to lock in their contract for five, 10 or 15 years (the standard now is one). Mr. Simpson suggested that rising gas prices will cancel out these increases.
Although Mr. Simpson said he couldn't see any link between this pricing issue and any other issue involving Nova, it defies belief that producers won't try to tie the current proposal to both the Alliance pipeline hearings and the proposed merger of Nova and TransCanada PipeLines.
In other words, if Nova wants the support of producers for the merger, it will likely be pressured by some Alliance supporters to ease up on its stonewalling of the project. Producers who feel they get the raw end of the stick with the current pricing scheme, meanwhile, will likewise be looking to get something in return for their approval of the merger.
BC Gas Pipeline Proposal Thrown Out
The Financial Post
BC Gas Inc. was dealt a regulatory blow yesterday when the British Columbia government quashed its $350-million plan to expand operations.
In a ruling released late yesterday, the B.C. Utilities Commission denied the Vancouver based energy company's proposal to build the Southern Crossing pipeline.
The 312-kilometre natural gas line would have allowed it to carry more Alberta natural gas from southeastern B.C. to the Okanagan Valley.
The line was scheduled to begin operation in November 1999.
"BC Gas had their fingers crossed," said Ron Jerome of Odlum Brown Ltd. But the Vancouver analyst said the decision was "reasonable" because the Southern Crossing proposal would duplicate an existing BC Gas line.
The immediate impact on the company will be minimal, Jerome said.
Company officials were not available for comment, but Westcoast Energy Inc., a staunch critic of Southern Crossing, applauded the decision.
"This is a good example of the regulatory process being followed," said chairman and chief executive Michael Phelps.
"The voices of all interested parties were clearly heard."
Westcoast Energy Inc. (TSE:W; NYSE:WE) said it is pleased with the decision by the British Columbia Utilities Commission (BCUC) to deny application by BC Gas for the Southern Crossing pipeline.
"This is good example of the established regulatory process being followed. The voices of all interested parties were clearly heard," said Michael Phelps, Chairman and Chief Executive Officer of Westcoast. "We are greatly encouraged that the BCUC has recognized the importance of a competitive marketplace and the benefits it brings to residential and commercial gas customers in BC".
The decision also supports using liquefied natural gas (LNG) to handle the peak shaving requirements of the Lower Mainland. Westcoast looks forward to continuing its discussions with BC Gas regarding LNG, as Westcoast strongly believes its proposed projectat McNab Creek, located 40 kilometers northwest of Vancouver, bestmeets the requirements outlined in the decision.
Westcoast Energy Inc., headquartered in Vancouver, British Columbia has assets in excess of $10 billion. The Company's interests include natural gas gathering and processing facilities, gas transportation and storage facilities, gas distribution companies as well as power generation, international and energy services businesses.
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