Canada needs to face off against its powerful southern neighbour by initiating a continental energy pact through renegotiation of the free-trade agreement, says the head of a national economic think-tank.
Jack Mintz, president and chief executive officer of the C.D. Howe Institute, says the alternative is “economic drift” for Canada, and an increasingly uneven playing field that could relegate investment in Canada’s energy sector to the back burner.
“This is the most important issue of this decade,” Mintz told a business audience in Calgary last week.
Despite characterizing the United States as “a 900-pound gorilla,” Mintz said Canada must take the lead in multilateral trade talks, just as it initiated free-trade discussions with the U.S. during the 1980s.
In his address to the Calgary Chamber of Commerce, Mintz called for Canada, the U.S. and Mexico to undertake tax, regulatory and environmental reforms – under the umbrella of the North American Free Trade Agreement – to ensure a continental supply of cheap and reliable energy for consumers.
|C.D. Howe president and CEO Jack Mintz called for immediate reforms.|
“The Canada-U.S. border is irrelevant when it comes to power,” said Mintz, the Deloitte & Touche professor of taxation at the University of Toronto’s J.L. Rotman School of Management.
Envisioning a broad, continental energy strategy, Mintz added: “I believe that we will benefit as Canadians from having open markets.”
Prior to 1998, electricity prices were well below three cents per kilowatt hour. Since 2000, Canadians have been paying, on average, eight cents per kilowatt hour.
“The era of cheap energy prices seen in the 1990s is now over,” said Mintz, a native of Edmonton.
The absence of a deregulated Canadian marketplace – with the exception of Alberta’s electrical power industry – has slowed down investment in critical infrastructure for pipelines and electrical transmission lines, Mintz said, passing on higher costs to consumers.
A deregulation strategy with a continental scope would reduce disruptions in power supply – blackouts and revolving brownouts – by encouraging new investment in infrastructure and efficiencies of scale among energy producers, he added.
Mintz recommended a “one-stop shopping approach” for energy deregulation in Canada, so that producers, which operate province by province, don’t have to deal with up to three levels of government.
He also called for linkages between provinces, resulting in efficiencies for smaller provinces, and creating entry-level niches for new power producers in the marketplace.
Mintz noted that short-sighted, politically motivated policies at the provincial and federal levels could result in investment dollars in energy infrastructure flowing south of the border.
He also called for immediate reforms in corporate taxation, capital cost allowances and royalty regimes to attract resource companies to explore for new oil and gas reserves in Canada’s northern and far-flung frontier regions.
Mintz held up Alberta’s generic royalty system – developed to stimulate new growth of oilsands mega-projects – as “an outstanding royalty system that recognizes a relatively neutral rent.”
Under the Oil Sands Generic Royalty Regime, companies pay a one-per-cent royalty until the project’s capital costs are paid out. After payout, the government’s take increases to 25 per cent of the project’s net revenue or one per cent of the gross revenue, whichever figure is greater.
Mintz suggested that the federal government should apply Alberta’s model to all frontier areas.
“It’s a framework that’s not just good for Alberta, but for Canada as a whole. Royalties really reflect the selling of the capital asset.”
Mintz pointed to a recent survey by Statistics Canada that indicated economic depreciation rates for energy infrastructure were accelerating faster than currently allowed for by the federal government.
He called on Ottawa to more than double the capital cost allowance (CCA) for pipelines to 10 per cent – the CCA is currently capped at a four-per-cent declining annual balance.
Businesses use the CCA to write down the loss in value of capital assets – pipelines, compressor stations and electrical transmission lines – due to wear and tear or obsolescence. The four-per-cent cap is based upon Ottawa’s expectation that oil and gas fields will have 50-year lives.
Mintz said the proposed increase in the CCA is needed to monetize stranded natural gas reserves that lie in the Beaufort Sea and Mackenzie Delta, far from southern markets.
“I don’t think that the economic lives of these pools are going to be 50 years,” he said, suggesting a 20-year lifespan might be more likely.
The C.D. Howe Institute is an independent, nonprofit, research and educational institution that analyses current and emerging economic and social issues in Canada and recommends policy options.
Meanwhile, David MacInnis, president of the Canadian Energy Pipeline Association (CEPA), is also busy lobbying the federal government on the CCA issue.
According to MacInnis, Canada’s CCA rates fall far short of those enjoyed by pipelines in the United States. “In order to make us competitive, we need to be at a CCA rate of 13 to 14 per cent,” he said. “That’s part of the new reality.”
Compressor stations are the workhorses that provide the horsepower to ship gas through pipelines. Although compressor stations currently receive a CCA of 20 per cent, Ottawa wants to reduce this level to four per cent. MacInnis is adamant that this will create an unfair playing field between Canadian and American pipelines.
Under this scenario, he said that companies that operate pipelines straddling the Canada-U.S. border might deliberately build compressor stations south of the 49th parallel, taking advantage of more generous American tax deductions.
“Every compressor station that goes to a United States location represents lost jobs in Canada,” he said, “and lost taxes.”
Linking environmental issues directly to the economy, MacInnis said that the introduction of environmentally innovative technologies by industry depends upon a level playing field and favourable tax incentives.
Citing the current U.S. “protectionist stance” on trade issues, MacInnis cautioned that revisiting NAFTA might be like opening a Pandora’s Box.
“I don’t think it’s the right time to be broaching this subject,” he said. CEPA has chosen a different policy tack: Participating with 20 other industry groups, CEPA is working at the provincial and federal levels through the Council of Energy Ministers to formulate policies that work across Canada.
The federal government tables its annual budget this week – Mintz and MacInnis are waiting to see whether Ottawa has heard their message.
(Susan Eaton is a Calgary-based geologist, geophysicist and freelance writer. She can be reached at email@example.com)