When TransCanada Corp. decided to pull the plug on the Energy East pipeline this week, it set off a noisy and worrisome east-versus-west political spat.
The scarier response was the total silence over the death of the $15.7-billion project from CEOs at Canada's largest utilities.
No one in the energy industry is speaking out this week, but know that what Montreal Mayor Denis Coderre celebrated as a "victory" for opponents of Energy East and Saskatchewan Premier Brad Wall decried as "a very bad day for the west" was seen by Canadian executives as yet another reason to look south at U.S. expansion, rather than get their heads kicked in pushing plans to build infrastructure in Canada.
The failure of Energy East is latest in a series of domestic setbacks for Canadian utilities, and this isn't just about troubled pipeline proposals. In contrast, when the same companies push U.S. projects, all they do is win.
The north/south dynamic was summed up in a CIBC World Markets report published three days before the Energy East decision. The investment bank pointed out that Canadian regulators are turning the screws on the returns that utilities are allowed to earn, while U.S. counterparts are happy to sign off on new projects with healthy profit margins. CIBC analysts said: "The divergent environments for regulated utilities between Canada and the U.S. affirm our view that U.S. franchises can be relatively attractive acquisitions targets for Canadian companies."
Specifically, CIBC pointed out that Ontario regulators recently hammered Hydro One Ltd., the province's largest electrical utility, by eliminating tax breaks and slashing capital spending requests. The investment bank said the decision "highlights the ongoing challenges Canadian utility companies face domestically."
At the same time, Florida regulators signed off on Emera Inc.'s plan to spend $1.1-billion on six solar energy projects that are expected to earn the Halifax-based utility a return of between 9.25 per cent and 11.25 per cent. Florida enticed a private sector investor into paying for the state's move from coal to renewable energy, while Emera got assets that generate dependable cash flow.
Canadian governments of all stripes talk about the crying need for infrastructure renewal, to ensure the country's economic competitiveness. Domestic utilities are the natural source of capital for many of these projects.
Yet, Canada's largest utilities are choosing to invest outside the country, dropping more than $100-billion over the past two years on major U.S. acquisitions. Hydro One, for example, is in the midst of a $4.4-billion takeover of an electrical and natural gas company based in Spokane, Wash., while TransCanada spent $10.2-billion (U.S.) in 2016 to buy natural gas pipelines that stretch from New York to the Gulf of Mexico, and Emera dropped $6.5-billion in 2015 on an electric utility that keeps the lights on in Florida and New Mexico.
The public debate over pipeline projects will continue to rage, with Kinder Morgan Inc.'s planned Trans Mountain expansion in British Columbia looming as the next battleground. So too will the long-simmering political disputes over the rights and needs of eastern and western provinces within Canadian federation. But leaders of Canada's largest utilities are signalling they've made up their minds on where they want to operate, and effectively voted with their wallets. Across the board, domestic utilities are committing massive amounts of capital to build infrastructure in the United States, due to a perceived lack of opportunity in their home markets.
While no CEO is willing to say so in public, what's playing out around the Energy East and Trans Mountain projects will serve to justify that view.
Andrew Willis