MANAGEMENT ’ S DISCUSSION AND ANALYSIS BC SYSTEM In 2002, the Transmission business will continue to focus on achieving additional effi- ciency improvements in all aspects of the business, by continuing its focus on operational excellence and leveraging on technological advancements to further reduce the costs of oper- ations for both TransCanada and its shippers. Transmission will also focus on continued negotiations for a new competitive business framework and discussions on possible changes in jurisdiction for parts of the Alberta System. A successful outcome of the Fair Return Application, related to cost of capital on the Canadian Mainline, would improve TransCanada’s ability to ensure future competitiveness in the financial markets. Earnings Capital Expenditures WHOLLY-OWNED PIPELINES – BUSINESS RISKS Competition 2001 ANNUAL REPORT  21 The Canadian Mainline is TransCanada’s cross-continent pipeline serving mid-western and eastern markets in Canada and the U.S. The demand for gas in TransCanada’s key eastern markets is expected to continue to increase, particularly to meet the expected growth in gas-fired power generation. TransCanada does, however, face competition for its transportation services to eastern Canadian markets and U.S. export points. The main source of this competi- tion is the combination of the newly constructed Alliance and Vector pipelines. In addition, TransCanada continues to face competition in its northeast U.S. markets where consumers can choose between additional U.S. supplies, off- shore liquefied natural gas supplies and gas from the growing supply basin off Canada’s east coast. New market growth customers and existing customers with expiring firm contracts may take advantage of these alternatives. TransCanada’s BC System is the link between the Alberta System and the PG&E Gas Transmission-Northwest pipeline to California. With increasing demand for natural gas in California, there are plans to expand this por- tion of TransCanada’s wholly-owned pipeline system. TransCanada’s Alberta System provides the major natural gas gathering and export transportation capacity for the WCSB. It does so by connecting to most of the gas processing plants in Alberta and then transporting that gas to two large mainline systems for domestic and export deliveries. The Alberta System is now facing competition from the Alliance Pipeline, a natural gas pipeline from northeast British Columbia to the Chicago area, which connects to some of the same gas plants. The maximum receipt capacity of the Alliance Pipeline is approximately 1.6 Bcf per day (Bcf/d) compared to TransCanada’s Alberta System average 2001 receipt volumes of 11.4 Bcf/d. In 2001, in southern Alberta, one bypass pipeline was completed, which connects to the Canadian Mainline and has a capacity of 190 million cubic feet per day (MMcf/d). Total capital spending for the wholly-owned pipelines business during 2001 was $227 million. Capital spending in 2002 is expected to increase by approximately $150 million from 2001, due to projects required to increase trans- mission capacity on the Alberta and BC Systems, the largest of which is an expansion to service growing markets in California and the Pacific Northwest. As a result of excess pipeline capacity out of the WCSB, it is anticipated that overall capital expenditures will continue at lower than historical levels. Based on the terms of the S&P Settlement and excluding the outcome of the Fair Return Application pro- ceedings which will determine the final tolls, net earnings from the Canadian Mainline are expected to decrease in 2002 compared to 2001. This is due primarily to a decrease in the NEB determined rate of return to 9.53 per cent from 9.61 per cent, combined with an expected decrease in average investment base. Net earnings for the Alberta System in 2002 are expected to be comparable to 2001, as the company continues to benefit from operating cost reductions. In addition, TransCanada’s transitional support of pre-tax $6.25 million per quarter for the Alberta System’s Products & Pricing Agreement ends in the first quarter of 2002. TransCanada’s 100 per cent owned natural gas transmission system extends 180 kilometres from Alberta’ western border through British Columbia to the U.S.  border serving markets  in British Columbia as well as the Pacific Northwest, California and Nevada. 