UPDATE 2-TransCanada sees sharp increase in mainline tolls

* Increase in 2010 tolls would offset 2009 shortfall

* Reduction in supply cut this year's collection

* New shale gas supply seen lowering tolls

* TransCanada shares rise 0.3 pct to C$32.66 (Adds details and comments, updates shares)

CALGARY, Alberta, Nov 18 (Reuters) - TransCanada Corp (TRP.TO), the country's largest pipeline company, said on Wednesday it expects to increase tolls sharply next year on its main natural gas system from Western Canada.

The company said it needs to boost the tolls paid by shippers on its mainline system to compensate for a shortfall in expected revenue in 2009 brought about by declining supplies and shipments from Western Canada's gas fields.

"It's not unexpected, it's just straight long division," said Greg Stringham, vice-president at the Canadian Association of Petroleum Producers, an industry lobby group. "Their costs haven't changed and our volumes have gone down."

Many producers in Western Canada, including EnCana Corp (ECA.TO), the largest gas producer, restricted production and cut back on drilling after prices plunged when the recession cut demand and new U.S. fields boosted supply.

"We've seen supply decline and a demand increase in Alberta, which has left less (natural gas) available for export in 2009," Russ Girling, TransCanada's chief operating officer, said on a webcast of a Toronto investor presentation. "That drop was sharper than we anticipated so we had an under collection."

Girling said the tolls that were not collected from customers this year would be added to next year's levy on the pipeline's customers.

"That, in combination with the declining volumes has resulted in a fairly sharp increase in our 2010 tolls," he said.

TransCanada is talking to Canadian producers and other customers on the line about ways to soften the blow. Hal Kvisle, the company's chief executive, said in an interview that the company may be able to reduce the depreciation rate on its mainly system, which would slow the need to recover its costs.

"That's the main flexible thing we have to offer," he said. "But I don' think this issue should be overblown. It's a short-term thing."

New supplies of shale and unconventional gas are eventually expected from the Horn River and Montney regions of northeastern British Columbia. That new supply would help lower tolls for customers.

"The real long-term answer is more volume," Stringham said. "It's a short-term hurt, for sure, but the supply potential of the shale gas in B.C. is so strong that having the pipeline capacity will serve us in the future.

TransCanada's mainline system transports as much as 9.5 billion cubic feet of natural gas a day from Alberta to markets in Central Canada and the eastern United States.

The cost of shipping gas on the 14,100 km (8,740 mile) system is set by Canadian regulators. The tolls cover the cost of shipping and provide a return on TransCanada's investment in the lines, and the set amount is spread among the company's customers.

Producers rely on the mainline, the largest conduit for Western Canadian natural gas, to get the fuel to large industrial users, local distribution companies and others. A higher toll could cut the profit they make on their gas production or raise costs for end uses.

TransCanada shares rose 11 Canadian cents to C$32.66 on Wednesday on the Toronto Stock Exchange.

($1=$1.05 Canadian) (Reporting by Scott Haggett; editing by Rob Wilson)