Pipeline deal an undersea fast ferries

By Les Leyne
Times Colonist (Victoria)
27-Sep-2006

A quiet little scandal that's been lurking on the government books for years made brief appearance in the most recent budget update.

The Vancouver Island Gas Pipeline Agreement is the innocuous name for one of the biggest government subsidy blunders in B.C. history.

Its most recent appearance was in a paragraph of boilerplate explanation about the possible need to spend another $36 million over the next three years on the pipeline deal.

That explanation has surfaced practically every year for the past decade.

Every time it shows up it represents tens of millions of dollars more in costs to taxpayers.

When it comes to expensive mistakes, everybody dwells on the fast ferries debacle. That's because they were big, sexy, high-profile vessels that came with brash and ultimately worthless promises about price and performance.

But when it comes to spending money for nothing, the Island pipeline is a strong runner-up as governmental disaster.

The fast ferries came and went in the space of a few years. The costs doubled, the ships didn't work, the NDP wrote off a billion-dollar debt and the Liberals gave them away for next to nothing.

But the gas pipeline agreement chugs on year after year, costing, costing and costing. It never gets any publicity, because the pipeline is underwater and the funding agreement is under the radar.

Last week's mention noted that the government is pencilling in an extra $6 million this year as a contingency cost arising from the deal. Another $30 million in extra costs could be added over the next two years.

That's all on top of the $33 million allocated for the deal in last spring's budget. (The year before the government budgeted $29 million and pumped in another $20 million over the course of the year.) All the money goes to Terasen Gas, a division of U.S.-based Kinder Morgan.

It's the latest in a series of natural gas firms that have come and gone over the years.

The company uses the money to keep the price of natural gas lower on the Island than elsewhere.

Why is the government protecting Vancouver Island customers from natural gas price hikes year in and year out? Because a deal's a deal.

The New Democrats signed an agreement in 1996 promising the payments.

It ensures that whoever owns the gasworks (U.S. giant Kinder Morgan, for the moment) doesn't have to jack up prices on the Island in order to make money.

And that deal was designed to get the government out from under an even more expensive continuing obligation that arose after the previous Social Credit government blithely signed on to the pipeline project.

"We bought our way out of a pretty bad situation," then-minister Dan Miller told the legislature in 1996. "It was a terrible deal." The Socreds made the original commitment back in the late 1980s, matching the $150 million that was available from the federal government to support the project. The $300-million total pot was considered enough to build the pipeline across the strait and subsidize customers -- including the major pulp and paper mills -- for the first few years to make the project feasible.

It was pitched as a benefit that would cut the risk of oil spills, attract industry and bring cleaner-burning fuel to the Island.

But construction costs soared and all the risks to the project -- oil and gas prices, interest rates, operating costs -- went well beyond the worst-case scenarios.

The pipeline itself was estimated in the late 1980s to cost $250 million. By the time it opened in 1991 it had cost $360 million.

But that 44-per-cent overrun was a pittance compared to what happened with the ongoing cost of the subsidy.

B.C.'s potential exposure was originally estimated at $36 million.

An analysis of the debacle 10 years ago figured it would rise to about five times that amount.

And figures from the ministry show B.C. taxpayers have actually shelled out $247 million over the last 11 years under the Island pipeline agreement.

The deal also involved the government waiving royalties on Island gas.

That had a value of $80 million at the time, but has probably tripled since then.

Remarkably, the continuing payments still have five years to run. B.C.

won't get out from under the obligation until 2011, a full 20 years after the pipeline was built.

There's no telling what will happen then to the price that tens of thousands of customers now pay for gas, but it's unlikely to be very pleasant.

The total cost of bringing natural gas to Vancouver Island is incalculable, but it's likely two or three times what was estimated at the outset.

It could have been even worse if not for the loss-cutting deal in 1995.

The fast-ferries project will always be a monument to governmental recklessness.

The Island gas pipeline is much more obscure, but an equally painful lesson in how long-term planning can go bad.

leyne@island.net