Regulator slows Trans Mountain proposal for higher shipping fees

Canada’s energy regulator has rejected Trans Mountain’s request to fast-track a near-threefold hike in shipping fees to energy companies, meant to help the embattled pipeline offset its ballooning costs.

Trans Mountain, a Crown corporation, had submitted an application to the Canada Energy Regulator in June that included toll rates that had increased from $4 a barrel, set in 2013, to close to $11 per barrel now. The increases are based on the latest cost estimate for the project, which has risen six-fold from around $5 billion to $30.9 billion.

While Trans Mountain wanted an answer to its interim toll application by mid-September, the regulator agreed with the energy companies’ position, which called for more time to investigate the proposed tolls.

The regulator says this can be done in a way that will not further delay the pipeline’s operational start date, which Trans Mountain estimates will be early next year.

“The Commission is of the view that the Application requires a more robust hearing process than requested by Trans Mountain,” the CER wrote in its response to Trans Mountain.

“The Commission must ensure that tolls are just and reasonable at all times,” it added in an Aug. 1 filing posted on its website.

In an email to Global News, Trans Mountain described the development as “standard practice” and said it expects any future hearings by the energy regulator to not further impede the pipeline’s start date.

However, the federal energy regulator justified its reasons for a more in-depth review, citing “the degree to which interested parties expressed concern and advocated for additional process.”

More uncertainty

The energy regulator’s latest ruling marks another moment of uncertainty for the embattled project and presents yet another hurdle for the company, which already faces vociferous opposition from environmentalists, some Indigenous groups and analysts who say the overruns have gotten out of hand.

A rejection of the hike in shipping costs would significantly impede Trans Mountain’s ability to pay off its debt.

An independent analysis by Global News, using filings from Trans Mountain and the Crown corporation that owns the pipeline company, indicates the tolls the company wants to charge energy companies – the ones they are warning are too high – would only pay for about half (48 per cent) of the pipeline’s cost – assuming the company does not find new capital to make up the massive shortfall.

It means that either the next owner – or even taxpayers – could be on the hook for 52 per cent of the cost overrun of the federally owned pipeline – and this is before the further discounts the oil shippers are seeking.

This is consistent with calculations by three other independent energy experts or economists that Global News spoke with.

But approving the proposed tolls will invite even more tension with shippers, who may turn to competing routes to deliver their products.

If the CER forces Trans Mountain to lower its prices, it could also lead to further liabilities. In a worst-case scenario, it would be the government, i.e., taxpayers, not the energy companies, who would pick up at least part of the tab.

“The oil companies have nothing to complain about,” states Robyn Allan, an independent economist who has been studying the pipeline’s finances for over a decade.

“They’ve been given a pipeline at 50 per cent of what they should be paying.”

The embattled pipeline company has been facing steep cost overruns on its new line since Ottawa purchased it in 2018 from Texas-based energy giant Kinder Morgan. In its own defence, Trans Mountain has cited a variety of unexpected challenges, from extreme weather to terrain to supply chain challenges and inflation.

Originally purchased for $4.7 billion by Ottawa, the project is now going to cost at least $30.9 billion, according to Trans Mountain’s latest estimate.

The Liberal government, in lockstep with Trans Mountain, has long maintained the project will act as a key economic driver of Canada’s landlocked energy resources.

The new line, which twins an existing line built in the 1950s, will effectively triple the amount of oil shipped from Alberta to the B.C. coast once it starts operations.

Energy giants push back

Citing an independent report produced by consulting firm Ernst & Young, a Trans Mountain spokesman told Global News in an email “that Trans Mountain’s expanded operations will contribute $17.3 billion in gross output, $9.2 billion in GDP, including $3.7 billion in wages … and $2.8 billion in tax revenue over the next 20 years.”

Three major Canadian energy companies, along with BP and PetroChina Canada, however, feel that Trans Mountain is in breach of contract and that they are being forced to absorb the project’s spiralling costs.

“(Trans Mountain’s) proposed expenses and tolls have been inflated to the point of adversely and materially impacting Canadian Natural, the competitiveness of Canada’s oil industry, and the public interest,” states a letter sent to Canada’s energy regulator by energy giant CNRL.

Similar concerns are raised by executives at least two other oil giants, Suncor and Cenovus.

Trans Mountain argues the tolling methodology was approved over a decade ago. In its own response to the energy regulator, the Crown corporation stated that any change to the toll methodology at this stage would jeopardize the financial viability of the expansion project and “could cause Trans Mountain to be unable to meet its financial obligations.”

“It would be fundamentally unfair to Trans Mountain and entirely inappropriate for the Commission to reconsider the RH-001-2012 toll methodology at this time, now that Trans Mountain has incurred billions of dollars of costs and construction of TMEP is almost complete,” Trans Mountain stated.

In June 2022, after the expansion project’s costs had soared to $21.4 billion, Canada’s parliamentary budget officer, Yves Giroux, concluded that “the Government’s 2018 decision to acquire, expand, operate, and eventually divest of the Trains Mountain assets will result in a net loss for the federal government.”

Is it in the national interest?

Kent Fellows, an economist at the University of Calgary, says the pipeline, as expensive as it is, will benefit the Canadian economy and is in the national interest. But he, like other pipeline proponents that Global News spoke with, is amazed at the amount of money that has been spent to complete the new line.

“It’s alarming to see those numbers because we’re kind of in a new world,” he tells Global News.

The federal government is backstopping the indebted project with at least $13 billion in loan guarantees. This means, theoretically, Canadian taxpayers could be left with a massive bill if Trans Mountain is not able to generate enough revenue to pay off its debt.

Global News reached out to the Finance Ministry for comment, but a spokesperson deferred any questions to Trans Mountain.

Trans Mountain’s competition

The proposed toll structure also raises questions about the competitiveness of Trans Mountain against the existing Enbridge pipeline system that ships Alberta crude to the U.S. Gulf Coast.

Martin King, an energy analyst at RBN Energy, an industry trade group, recently warned that Trans Mountain’s competitiveness could be undermined given the proposed tolls.

“The proposed toll increase is so large that it will cost a similar amount to ship heavy crude oil to tidewater on Trans Mountain as it would on the competing Enbridge system to the U.S. Gulf Coast,” King wrote.

If that ends up being the case, it would also undermine the government of Canada, Trans Mountain and the energy companies’ entire rationale for building a line to the West Coast – to open new markets beyond the United States for Canadian crude.

These setbacks, says Tom Gunton, a professor of environmental and resource management at Simon Fraser University, are reflective of a project that was poorly managed from the start by the Canadian Energy Regulator and its predecessor, the National Energy Board – and by the pipeline company itself.

“The National Energy Board … simply accepted everything that Trans Mountain had said and didn’t really look at the risks associated with (the pipeline),” Gunton said, in reference to the cost of the project, which is now clocking at $30 billion.

“I can’t think of another project in Canada,” Gunton said, “which will incur losses of this magnitude.”