Ugh, this claim is making the rounds again due to a new study by IEEFA.
It's wrong, Trans-Mountain is most certainly NOT operating at a loss. I can forgive the IEEFA authors for getting this wrong though.
Settle in for a Pipeline Regulation Thread.
It's wrong, Trans-Mountain is most certainly NOT operating at a loss. I can forgive the IEEFA authors for getting this wrong though.
Settle in for a Pipeline Regulation Thread.
First off, corporate accounting for regulated assets is more complex than normal corporate accounting (which is already pretty complex). 
The important distinction here is between "Trans Mountain" as a Regulated Asset and "Trans Mountain as a Corporation."
Trans Mountain as a regulated asset is not running a loss. It basically can't as it is a regional monopoly, with excess demand. But it faces regulated tolls.
Trans Mountain as a regulated asset is not running a loss. It basically can't as it is a regional monopoly, with excess demand. But it faces regulated tolls.
The distinction here is important since the federal government bought "Trans Mountain as a Corporation" not just "Trans Mountain as a regulated asset."
The distinction is probably best explained by the back and forth between Robyn Allen:
apps.cer-rec.gc.ca/REGDOCS/File/D…
The distinction is probably best explained by the back and forth between Robyn Allen:
apps.cer-rec.gc.ca/REGDOCS/File/D…
Simplifying a bit (but only a bit). The Regulated part of Trans Mountain (the existing pipeline, excluding the Westridge marine terminal etc.) charges tolls (price per barrel to ship) based on the Cost-of-Service standard.
Every year the pipeline, its shippers, the CER, AND anyone with an opinion (including Robyn Allen in this last 2019 round) do three things:
A) work out the cost to run the pipe (call this "C")
B) work out the undepreciated capital costs of the pipe (Call this "K")
and
A) work out the cost to run the pipe (call this "C")
B) work out the undepreciated capital costs of the pipe (Call this "K")
and
C) agree to a "reasonable return" on the invested capital (call this "r")
Then, this adds up to the "revenue requirement": RR
RR= C + rK
Tolls are then set to recover this amount from the shippers. i.e.-
Toll = RR / Quantity Shipped
Then, this adds up to the "revenue requirement": RR
RR= C + rK
Tolls are then set to recover this amount from the shippers. i.e.-
Toll = RR / Quantity Shipped
The misunderstanding/error/disagreement here comes from what should actually be included in "K."
As stated in the above excerpt from the CER decision letter:
The regulation enforced by the CER requires "K" include only the undepreciated capital associated with the EXISTING pipe.
As stated in the above excerpt from the CER decision letter:
The regulation enforced by the CER requires "K" include only the undepreciated capital associated with the EXISTING pipe.
Trans Mountain as a company is not able to charge anyone for the cost incurred in developing the expansion. Furthermore the GOC's purchase price for the company is irrelivent in toll setting. The expansion is not in service yet, when it is, the tolls will account for it's costs.
So, most of the "loss" identified by the IEEFA is actually the ongoing cost of getting the expansion in place. Negative cash flow for the COMPANY perhaps, but not for the existing pipeline.
The other issue they outline is that the government "charges" Trans-Mountain less interest on debt. But, since the government owns trans mountain, they are just charging themselves interest.
I'm not 100% sure how this debt charge affects the tolls, but my hunch is that it doesn't. So basically, tolls stay the same, debt cost is lower (cause the government borrows at lower rates than private firms) meaning the financial position of the pipe & owner is better here.
