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

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

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

  2. 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

  3. 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

  4. 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

  5. Details of TransCanada PipeLines Services & Pricing Settlementfor 2001 & 2002

  6. 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

  7. 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)

  8. 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)

  9. 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

  10. 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

  11. 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

  12. 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)

  13. 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

  14. 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

  15. Contract Demand • Variance between forecast and actual deferred and recovered in following year through a deferral account

  16. 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

  17. 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

  18. 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”

  19. 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

  20. 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

  21. 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

  22. 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

  23. 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”

  24. 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

  25. Eastern Zone Toll ($/GJ) • 2000 $1.01 • 2001 Interim $1.13 • 2001 Settlement $1.103 * (* based on current cost of capital under NEB Formula)

  26. 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

  27. Ending Slide - TransCanada Logo

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