Private ownership of pipelines – safer or not? Part 1

In many countries, pipelines are owned and operated by the state, while here in Canada, they are owned and operated by private companies. People sometimes wonder why that is, and whether it’s a good thing.

One of the questions we often hear is:

Wouldn’t pipelines be subject to stricter safety controls if they were publicly owned rather than private?

That’s a good question, and in this two-part series, we’re going to take a look at why Canada’s pipelines are privately owned, and the implications for safety and sustainability.

Glenn BoothTo learn more about the difference between public and private ownership, we spoke with Glenn Booth, principal of Veracity Plus Consulting. Glenn is a former chief economist and business leader with the National Energy Board, and an independent consultant focusing on energy market issues, regulatory issues surrounding pipelines and corporate communications.

Q: What would be the argument for public ownership of pipelines?

Glenn: The usual reasons for public ownership are:

  • The service provided is an essential public good, such as water, electricity or heat.
  • It is unlikely that the private sector will provide the service because it requires really high up-front investment and the risks are too great for private investors.
  • It is unlikely that the private sector will provide the service to everyone and will only serve the most profitable customers.
  • National security issues such as those related to nuclear power and uranium enrichment.

Pipelines do meet some of these criteria as they deliver essential energy, and they also require a huge up-front investment of billions of dollars, which can only be recovered over a very long time period, usually at least 20 years. That may not be attractive for private investors.

Q: So why are pipelines privately owned in Canada?

Glenn: In most western democracies we tend to believe that the private sector is more efficient, and generally default to private ownership unless there are really good reasons for public ownership. Publicly owned companies tend not to be efficient because they respond to political influences rather than sound economics.

Private ownership of pipelines with a strong regulatory framework makes sense in Canada because private companies can assume the economic risks involved in building and operating pipelines, thereby relieving a public agency from the need to do this.

Q: But what about the high up-front investment for private companies?

Glenn: Regulators have ensured that pipelines have been able to recover their costs over time by regulating rates, and by also ensuring that pipelines earn a fair rate of return on their capital invested.  Throughout the latter half of the 20th century, this was informally recognized as a ‘Regulatory Compact’. Simply put, it requires operators to provide non-discriminatory service to all customers and, in return, the regulator ensures that they earn a fair rate of return on investment.

More recently, regulators have encouraged negotiated settlements between pipelines and their shippers, which reduce regulatory costs and encourage good business relations between pipeline operators and their customers. Smart regulation can help reduce the economic risks to pipelines, and keep rates down for shippers and energy consumers.

Stay tuned for more next week

So that’s why pipelines in Canada are private. Next week we’ll explore how regulation and legislation work when it comes to private enterprise, and whether public ownership would have any advantages.

 

The Canadian Energy Pipeline Association represents Canada’s transmission pipeline companies who operate approximately 117,000 kilometres of pipelines in Canada. In 2014, these energy highways moved approximately 1.2 billion barrels of liquid petroleum products and 5.4 trillion cubic feet of natural gas. Our members transport 97 per cent of Canada’s daily natural gas and onshore crude oil from producing regions to markets throughout North America.