This story has been updated.
Trans Mountain Corporation’s attempt to minimize costs for its pipeline customers could force the Canada Energy Regulator (CER) to choose between undermining its own core mandate as a regulator or increasing the cost of shipping oil sands crude out of Alberta by about $11 per barrel, a new analysis concludes.
In its June 1 application, federally-owned Trans Mountain asked the CER to approve an interim version of the tolls it will charge its oil sands industry customers when the expanded pipeline goes into operation. The company projected the pipeline will open in the first three months of 2024, and requested a decision on its toll proposal by September 14.
In her June 1 letter to the CER, Trans Mountain’s vice president, regulatory, Dorothy Golosinski, acknowledged a series of technical issues with the application and stated that the proposed tolls “are not final. They will be adjusted and trued-up following the completion of the Expansion Project when as-built costs and expenses for the Expansion Project are finalized.”
That caveat applies to a financially precarious project whose estimated completion cost has already ballooned from C$7.4 billion to about $31 billion, prompting critics to predict a “taxpayer-funded loss” approaching $25 billion.
The new analysis was shared with The Energy Mix by West Coast Environmental Law staff lawyer Eugene Kung, acting on behalf of səlilwətaɬ (Tsleil-Waututh Nation). TWN territory is ground zero for the expansion project and related infrastructure, including the Westridge Marine Terminal and the controversial and potentially calamitous Burnaby Mountain Tank Farm.
“TMX directly affects TWN’s rights and title, culture, and identity, and traditional and contemporary economies,” wrote [pdf] Gabriel George, the Nation’s director of treaty lands and resources, in a technically detailed, 17-page letter of interest to the CER. And now, he said, the Trans Mountain (TMX) toll application shows a shift in the cost-benefit calculations used to justify those impacts.
When they approved the Trans Mountain expansion project, regulators “balanced the economic benefits with the burdens of TMX, including the infringement of TWN and other First Nations’ rights, the risk of oil spills on land and water, the climate impacts, and impacts on endangered species, and found that the benefits justified the burdens,” George wrote. But the tolling application “confirms that the economic benefits and viability as previously claimed no longer exist, and Trans Mountain (and its owners, the Canadian public) are responsible for $16.2 billion in project costs based on the application of this tolling methodology. The losses to Trans Mountain, and by extension the Canadian public, arising from the portion of Trans Mountain’s expansion costs not captured in proposed tolls is much larger.”
From that starting point, the Nation urged the CER to reject a set of interim tolls that “violate the principles of ratemaking” and fail to meet the legislated standard of being “just and reasonable”, since they cover less than half of the project’s current projected cost.
“This severely compromises Trans Mountain’s ability to continue as a going concern, or to fund adequate maintenance to uphold the integrity and safety of the Trans Mountain pipeline system,” George told the regulator.
“The applied for tolls violate well established principles of rate design, including cost-of-service recovery; fair return; revenue sufficiency; efficiency; and transparency,” he added. So approving TMX’s request would “further distort the market that the CER is meant to be protecting.”
In an interview earlier this month, Kung explained that Trans Mountain received regulatory approval for its tolling methodology in 2013, before nearly a decade of cost overruns and tectonic changes in energy markets undercut the economic case for the project. The tolling application marks the first time the company has attached actual prices to the formulas.
Those numbers “effectively represent a 52% subsidy,” Kung told The Mix. “The feds have been silent on this question, probably for political reasons,” but “at some point they will have to do something about it, especially if they want to sell it to the private sector as they’re saying.” That’s what Ottawa would ultimately be doing if an Indigenous buyer turned to private investors for financing, he explained.
In a report for West Coast Environmental Law last fall, independent economist Robyn Allan estimated that taxpayers would be on the hook for $17 billion once Trans Mountain is complete, Kung recalled. The $16.2-billion shortfall in the tolling application “more or less tracks with this.”
After nationalizing the pipeline by buying it from Houston-based Kinder Morgan several years ago, Ottawa could accept that financial liability “with the stroke of a pen,” he added. “I think it will cause political pain, but of course as long as they can control the timing, you can count on this happening on the Friday of a long weekend.”
To illustrate the impact of TMX’s toll plan on the financial integrity of Canada’s pipeline system, Kung compared the behaviour of the Crown-owned pipeliner with its privately-held competitor, Calgary-based Enbridge Inc. “Imagine if Enbridge did this,” he said. “They would have a shareholder revolt, and secondly, the CER would never allow it.”
Which means that approving the toll application could raise questions about CER’s “core function” of “mimicking competition where natural monopolies exist,” Kung added. “By locking in this essentially half-price toll, the CER would set a potentially dangerous precedent that would not just distort but pervert the marketplace.”
That distortion, in turn, could “cause harm to the other pipeline companies they regulate.”
With stakes so high, Kung said it’s curious that Enbridge hasn’t signed up to respond to its competitor’s toll application. In an email this week, Gina Sutherland, Enbridge’s senior advisor, corporate communications and media relations, said the company “does not plan to comment or intervene as we are not a crude oil producer and will not be transporting product on the Trans Mountain expansion.”
The intervenors on the CER’s list include familiar faces like Suncor Energy, Cenovus Energy, Canadian Natural Resources Ltd., MEG Energy, ConocoPhillips Canada, Imperial Oil, Marathon Energy, PetroChina Canada, TotalÉnergies Canada, Parkland Refining, BP Products North America, the Vancouver Fraser Port Authority, the Alberta Department of Energy, and the Canadian Association of Petroleum Producers. Comments on the application closed June 17.
But prodding Trans Mountain toward a more accurate toll schedule would create a different kind of challenge. Doubling the toll would add about $11 to the cost of a barrel of oil transported through the Trans Mountain system, Kung told The Mix.
“That essentially renders [the pipeline] immediately useless, and in fact a liability to the oil companies who have signed these guaranteed contracts,” he said. At that point, a fallback option for Trans Mountain’s customers would be break their contracts with TMX and try to sign up with Enbridge’s Mainline pipeline. [Or they could, y’know, start scaling back production and embrace the forthcoming federal cap on oil and gas emissions, rather than lobbying against it—Ed.]
When the CER convenes its hearing on the toll application, Kung said commissioners will face an “unprecedented situation in which the regulator is not the same regulator and the owner is not the same owner,” after Ottawa bought the pipeline from Kinder Morgan and built the CER on the ashes of its predecessor, the National Energy Board. The estimated cost of the project has increased seven-fold since it was first proposed, so “it’s not the same project and it’s not even the same world,” as climate change impacts become ever more obvious and energy modellers including the CER embrace net-zero scenarios.
With all of those changes hovering over the CER’s deliberations, “it’s kind of untangling the knot that they themselves have made,” he said. “Their own studies show there are going to be increased cost pressures on the industry because of climate impacts, and those were not even imagined” when the Trans Mountain expansion was first proposed and approved.
A CER spokesperson said all tolls charged by companies that operate the pipelines it regulates “have to be just and reasonable, a test that can give rise to many factors and considerations.”
While Trans Mountain asked for a decision by September 14, “the timelines for toll decisions vary depending on whether a hearing is held, which still needs to be decided,” the spokesperson added in an email. The application and incoming stakeholder comments are still under review, after which the CER will either issue a decision or “establish further processes such as a hearing”.