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Mainline Service and Pricing Settlement Presentation to the TTF April 6, 2001

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Mainline Service and Pricing Settlement Presentation to the TTF April 6, 2001. Background. April 2000 Five year price cap proposal TransCanada shares in non-renewal risk Discretion on pricing & term July 2000 Five year price cap with some flow through Asymmetrical risk sharing

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Presentation Transcript
slide1
Mainline Service and Pricing Settlement

Presentation to the TTF

April 6, 2001

background
Background
  • April 2000
    • Five year price cap proposal
    • TransCanada shares in non-renewal risk
    • Discretion on pricing & term
  • July 2000
    • Five year price cap with some flow through
    • Asymmetrical risk sharing
    • Discretion on short term pricing
  • August/December 2000
    • Continued discussions around risk and discretion
background1
Background
  • December 2000
    • Determined parties too far apart on cost of capital
    • Decision to litigate cost of capital & negotiate two year settlement that would include:
      • COS elements other than ROE and Equity
      • Billing determinants
      • IT & STFT service and pricing
      • FT enhancements
      • New services
      • Incentives
benefits of the settlement
Benefits of the Settlement
  • Evolution towards competitive environment
  • Avoid / Limit litigation
  • Incentive for TransCanada to cut costs and improve efficiency
  • Alignment on incentives for win/win
  • AOS and Make-up add value to FT
  • Migration from FT to IT may be reduced
settlement review
Settlement Review
  • Financial Components
    • John Lee
      • Revenue Requirement, Severance, Merger Benefit, Depreciation, Incentive Programs
  • Services
    • Steve Emond
      • FT Makeup, Authorized Overrun Service, IT Floor Price, New Services Expedited Approval, Turnback
net revenue requirement article 4
Net Revenue Requirement (Article 4)
  • OM&A (Article 4.3)

Amount set at:

- 2001: $223 million

- 2002: $217 million

  • Flow-Through Costs (Article 4.2)

- forecast for each year of the Settlement

- variances between actual and forecast costs flowed through subject to review (Article 17.4)

net revenue requirement continued article 4
Net Revenue Requirement Continued (Article 4)
  • Miscellaneous Revenue (Article 4.4)
    • Discretionary and Non-Discretionary Revenue forecast for each year of the Settlement

- Variances between actual and forecast revenues flowed through subject to review (Article 17.4)

severance program article 5
Severance Program (Article 5)
  • Provides TCPL with incentive to reduce costs and share in benefits achieved
  • Provides shippers with immediate savings during the term through the sharing mechanism and sustained savings beyond the term
  • Mechanism
    • Severance costs in 2001 and 2002 amortized over three years
    • Cost savings determined from the date of termination
    • Severance benefits equal amortized costs less savings
    • Severance benefits shared 70% TCPL: 30% Shippers
  • Illustrative example in Schedule F
merger agreement 2001 benefit article 6
Merger Agreement – 2001 Benefit (Article 6)
  • Recognition of sharing OM&A cost savings under Section 9 of the MCBA in 2001
  • Savings determination
    • If 2001 Actual OM&A (adjusted) < Actual 2000 OM&A the savings are shared 50/50 TCPL/Shippers
    • Actual 2001 OM&A adjusted for non-routine costs
    • Example shown in Schedule 13.0 of Schedule “D” Reporting Requirements
depreciation expense article 7
Depreciation Expense (Article 7)
  • Negotiated rate increases for the term as follows:

2000 Composite - 2.64%

2001: 2000 Composite Rate + .10

2002: 2001 Composite Rate + .15

incentives
Incentives
  • Revenue / Asset Management (Article 9)
  • Fuel Gas & Power Incentive (Article 10.1)
  • Foreign Exchange Management Program (Article 10.2)
  • Interest Rate Management Program (Article 10.3)
revenue asset management article 9
Revenue / Asset Management (Article 9)
  • Purpose

- minimize TBO/Storage costs

- generate incremental transportation & other revenue

  • Commission accrues to TCPL on total revenues and cost savings based on percentages defined in Article 9
  • TCPL Commission capped at $5 million in each year of term
  • Revenues and cost savings net of the cap flow back to shippers
foreign exchange interest rate programs articles 10 2 10 3
Foreign Exchange & Interest Rate Programs (Articles 10.2 & 10.3)
  • Purpose

- minimize foreign exchange and interest cost

  • Program savings/(losses) are shared 50/50
  • Continuation of programs implemented in the Incentive Settlement and carried forward in 2000
  • Details of program are unchanged and fully described in Articles 10.2 and 10.3
contract demand
Contract Demand
  • Variance between forecast and actual deferred and recovered in following year through a deferral account
services
Article 11.1: FT Make-up and AOS

Article 11.2: IT Floor Price

Article 11.3: New Service Expedited Approval Process

Article 12: Turnback Procedure

Services
ft service enhancements description
FT Service Enhancements - Description
  • FT Make-Up
    • Unutilized FT capacity
  • Authorized Overrun Service (AOS)
    • 4% of FT demand toll
  • Dollar credit to IT invoice
  • Credits expire if not used in the gas month
ft service enhancements details
FT Service Enhancements - Details
  • Start:
    • minimum of 30 days after NEB approval
    • first day of a month
  • End:
    • December 31, 2002
  • Tariff Changes in Schedule “B”
ft service enhancements benefits of it credit process
FT Service Enhancements - Benefits of IT Credit Process
  • flexibility and value:
    • use anytime during the month
    • use on any path
  • relatively quick & inexpensive to implement
  • simple to use
  • consistent with FT Make-up process on NOVA
  • no incremental toll
it floor price
IT Floor Price
  • IT is Biddable (status quo)
  • Floor Price = Proxy for marginal fuel cost

+ Contribution to fixed costs

+ FT commodity toll

  • Maximum Floor Price: 120% of FT Toll
  • Minimum Floor Price: 80% of FT Toll
it floor price fuel proxy
IT Floor Price - Fuel Proxy
  • Consistent with historical methodology…..
    • Uses long-haul IT to Parkway as basis
    • Difference between marginal fuel % and average fuel %
  • Changes from historical methodology…..
    • Revised monthly to reflect cost of gas at Empress
    • Revised seasonally to reflect changes in fuel ratios
it floor price other
IT Floor Price - other
  • contribution to fixed costs = 4% of FT Demand toll currently in effect
  • changes commence:
    • minimum of 30 days after NEB approval
    • 1st day of a month
it floor price schedules
IT Floor Price - Schedules

C-1: Tariff Amendments

C-2: Fixed Cost Contribution

C-3: Example of monthly Calculation

C-4: Seasonal redetermination Process

C-5: Format of “List of Tolls”

future business model
Future Business Model
  • TransCanada will develop new regulatory model by the end of August 2001
  • Discussions with Stakeholders

Start: by September 17, 2001

Finish: by February 28, 2002

  • File: April 2002
  • Implement: January 1, 2003
eastern zone toll gj
Eastern Zone Toll ($/GJ)
  • 2000 $1.01
  • 2001 Interim $1.13
  • 2001 Settlement $1.103 *

(* based on current cost of capital under NEB Formula)

next steps
Next Steps

Target Date

Complete MOU April

File MOU April

File Cost of Capital April

NEB Decision - MOU May - Oct. *

FT Enhancements in Effect July - Dec. *

NEB Decision: Cost of Capital Sept/Oct

& Final Tolls

*Range depends on objections by parties