Buying up Trans Mountain isn't ideal, but it's the right call, right now

Temporary federal ownership IS a credible way to overcome the unique political and regulatory risks created by B.C.

Temporary federal ownership a credible way to overcome unique political and regulatory risks created by B.C.

Alberta Premier Rachel Notley is applauded by her colleagues at a press conference after speaking about the Kinder Morgan pipeline project in Edmonton on Tuesday. (Jason Franson/The Canadian Press)

The Trans Mountain Pipeline expansion is "in the national interest" and "will be built," the federal government is fond of saying.

They weren't kidding. They just bought it for $4.5 billion.

Alberta Premier Rachel Notley — instrumental in getting us to this point, and deftly forcing the federal government's hand along the way — says the crisis around the project is passed.

But not all are so pleased.

To some, the deal smacks of socialism. Conservative MP Michelle Rempel, for example, asked on Twitter: "Are we so socialist now that the only way to consider getting revenue from natural resources is by nationalizing industry?"

To others, it exposes taxpayers to great risk. Aaron Wudrick of the Canadian Taxpayers Federation calls it "a massive, unnecessary financial burden on Canadian taxpayers."

Both perspectives are exaggerated.

Public ownership isn't ideal, but given where we are, and the cards we're currently holding, this was the right call. When the choice is between temporary public ownership or no pipeline at all, the choice is clear.

How we got here

For years, Kinder Morgan navigated opposition to the pipeline.

From former British Columbia premier Christy Clark's "five conditions" to B.C.'s current coalition government threatening to use "every tool in the toolbox" to block the pipe, it's been a difficult road for the company.

In this 2016 photo, B.C. Premier Christy Clark responds to federal approval of the Trans Mountain pipeline project during a news conference in Vancouver. Clark had set out five conditions to be met before she would support the project. (Darryl Dyck/The Canadian Press)

Costs were rising and delays were mounting. Shareholders looking for a return on investment were increasingly uncertain about the future.

By last month, they had had enough.

"A company cannot resolve differences between governments," said CEO Steve Kean.

They needed the financial risks removed or they'd walk.

The government buying the project outright was not a certainty. Providing indemnities, offering loan guarantees, or making other insurance arrangements was possible. But, if the company wanted out for other reasons, and it seems that they did, then this was their opportunity.

They took it.

This put the federal government in a tough spot. It couldn't see the pipeline fail. So it bought it, but not for keeps.

If they can't find a new owner in the short term (and I'm skeptical one will be forthcoming) the feds will finish the pipeline themselves and find a new owner after.

And that's OK. The benefits of the project far exceed the costs.

Socialism run amok?

Whether one agrees philosophically with the idea or not, this isn't socialism. Not even close.

Governments tend to be less efficient operators and builders than the private sector, sure. But sometimes there are good reasons for public ownership. Consider public transit, lottery corporations, museums and so on.

Buying Trans Mountain serves a clear and narrow objective: it immediately overcomes the unique political and regulatory risks to the pipeline created by B.C., and gives time to make other arrangements.

This is entirely credible. And it isn't unprecedented.

There are many examples of government involvement in the oil and gas sector.

The original Trans Mountain Oil Pipe Line Company was incorporated in 1951 by a special act of Parliament, for example.

Today, Saskatchewan — hardly the bastion of socialist sentiment, at least rhetorically — owns 14,000 kilometres of pipe through TransGas Pipeline, including lines in Montana and North Dakota.

SaskEnergy made a profit of $70 million in its last fiscal year. (CBC News)

And there is a long history of government financial involvement in energy projects, from Hibernia to Syncrude.

Liberal and Conservative federal governments — and provincial governments of all stripes — have been involved in business initiatives when they deem them in the broader public interest.

Governments own hundreds of business enterprises with total assets on the order of $1 trillion spread throughout the economy (and that's not counting government pension or CPP assets). There's a productive and valuable debate to be had over the merits of state-owned businesses.

I generally think they're a bad idea. But temporarily owning a single infrastructure project is not the same as permanently owning railways or banks.

Buying Trans Mountain isn't a subsidy

Buying Kinder Morgan's Trans Mountain assets is not a subsidy. And drawing parallels with cash grants or tax breaks for Bombardier or General Motors is a stretch. Propping up private companies in the face of market risk and their competitors is one thing; buying assets is quite another.

The assets, after all, have real value. The current Trans Mountain pipeline project earns nearly $300 million per year and profit sufficient for a return on equity of 9.5 per cent last year.

Pipelines are regulated assets, like many utilities, with their tolls set by government. So the operator is essentially guaranteed to earn a modest profit. It's the ability to earn this return that gives the assets their value.

A aerial view of Kinder Morgan's Trans Mountain marine terminal filling a oil tanker in Burnaby, B.C., on Tuesday. (Jonathan Hayward/The Canadian Press)

And judging by movements in Kinder Morgan's stock price in both Canada and the United States, the $4.5-billion price tag looks just about right.

By closing bell, Kinder Morgan's stock was up barely one per cent in the U.S., while Kinder Morgan Canada's was down nearly three per cent.

If the deal was a windfall for Kinder Morgan, their stock prices would have jumped. They didn't.

Risks to Taxpayers

To be sure, there are risks.

The pipeline expansion still needs to be built, and construction costs are never certain. The best case scenario is they find another private buyer in the meantime, one reassured by the federal indemnity and insurance that's promised.

But even if government has to build it, that doesn't necessarily come at taxpayer expense.

The expansion will cost money up front, yes, but creates an asset that will have value in the future. It nearly triples the current 300,000-barrel-per-day capacity to 890,000. So annual revenue will nearly triple as well.

Kinder Morgan was willing to incur construction costs estimated at $7.4 billion for that extra capacity because there's a strong business case for it.

Prime Minister Justin Trudeau arrives for an early morning cabinet meeting on Parliament Hill in Ottawa on Tuesday. (Sean Kilpatrick/The Canadian Press)

If the government can complete the project with similar costs and similar timelines, that business case still exists. Upon completion, a private buyer will likely be found.

The largest concern for taxpayers is not who completes it, but not completing it at all.

Pipeline capacity means oil producers receive more on each barrel sold, since pipelines are cheaper than rail. And since higher earnings of oil producers means higher royalty revenue for government, losing Trans Mountain means either higher debt, lower spending, or higher taxes than otherwise. The broader Canadian economy would also suffer.

It's unfortunate we got to this point, yes, but since Kinder Morgan clearly wanted out, it's not clear what other choice the government had.

New tools and selling stakes

Ownership also gives the federal government tools that it didn't have before to smooth some of the opposition.

Selling stakes in the project, for example, to Indigenous groups is one option that some, such as the Cheam First Nation, are now suggesting we consider. Selling stakes to the general public is also an option.

While the immediate crisis for the project now seems over, there is much left to do. Some court cases are still unresolved, opposition from B.C. Premier John Horgan remains, and protests on the ground during construction will not be easy to overcome.

But with the federal government as owner, completing the pipeline is now more certain than ever.

This column is an opinion. For more information about our commentary section, please read this editor's blog and our FAQ.

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Trevor Tombe is a professor of economics at the University of Calgary and a research fellow at the School of Public Policy.