Taxpayers on the hook for Lac Mégantic damage: expect the same for pipelines, says economist

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Economist and former ICBC CEO Robyn Allan says the situation of Lac-Mégantic, in which the rail company responsible for the crash was unable to pay for damage costs, is sadly all too common.

Montreal, Maine & Atlantic lost its license to operate in Canada on Tuesday after the Lac-Mégantic, Québec explosion that killed 47 people and left the Canadian government to pay $60 million since the rail company itself didn’t have enough to pay.

While Democratic Rep. Mike Michaud (who is running for governor in Maine) told Railway Age that he finds Canada’s decision “concerning” for the future of his state’s businesses, it opened up many questions around oil transportation and liability in the event of a disaster.

In total, the damage caused by the Lac-Mégantic crude train explosion is expected to cost a minimum of $200 million. MM&A’s Canadian subsidiary had nowhere even close to that amount: it carries $25 million in insurance, and just $18 million in assets. By default, the federal government, Quebec’s provincial government (and now, possibly Canadian Pacific Railway) are left to cover whatever MM&A can’t afford.

Public “left on the hook”

“Lac Mégantic shows that companies are making money doing things that cause huge risks, and when they cause an accident, they don’t have the money to pay for the damages, so the public is left on the hook,” said Allan, commenting on liability regimes.

“That’s a reprehensible situation, and it’s the standard — it certainly has been with pipeline companies.”

Allan drew public attention to Enbridge’s “limited liability partnership” structure during the Northern Gateway joint review panel hearings earlier this year. Among the many points covered in her study, she noted that Enbridge set up Northern Gateway so that revenues from the pipeline would go to Enbridge shareholders, but the liability responsibility stopped with Northern Gateway, leaving the parent company protected.

The National Energy Board acknowledged Allan’s concerns, and included in its 199 “potential conditions for Enbridge” that the company must set aside a total of $950 million to cover damage costs in the event of an pipeline accident, if the pipeline were approved (condition 147).

It was a major breakthrough, as such a condition was never required before — companies tended to have the same kind of umbrella insurance policies for pipelines. So if Enbridge were to have a leak in both Northern Gateway and 9B, and the company’s insurance couldn’t cover both, then it would have been unclear which pipeline Enbridge would pay for damages.

“Clearly, the NEB sees now that Northern Gateway would have to have its own protection,” Allan said. She noted that Canadians should be examining not just Enbridge, but every energy company’s liability structure, to see whether the public is adequately protected.

As for a pipeline expansion like Kinder Morgan’s Trans Mountain, Vancouver is pushing for liability to be expanded beyond the current maximum of $1.3 billion for marine spills. Even though $1 billion has become something of a benchmark for insurance, larger incidents such as the BP spill can reach $20 billion just for direct cleanup. Allan’s study submitted to the Tanker Safety Expert Panel proposes that under the current regime, the funds available for major spills have proven “woefully insufficient”.

Some losses never accounted for

Even that, Allan notes, is only limited to terrestrial spills (the liability regime is completely different for a marine spill, in which case the tanker company is held liable). Regardless of how much a company like Enbridge or MM&A can afford to pay in damages, Allan says, there are some losses that will simply “never be paid” after an accident.

“For example, a picnic on the beach with your kids on a Sunday afternoon: that’s not a compensable loss, but it fundamentally affects our well-being,” she said.

“This is why, for First Nations, it’s such as huge issue, because a lot of their activities are traditional food and ceremonial use. These aren’t commercial or market-related at all. These things will never be compensated by a company, no matter how much money is available, because they’ll never be considered ‘losses,'” she said.

She also said that ecological damage gets compensated in a piecemeal way: commercial fishers, for instance, may be paid for the value of fish lost, but the damage done to the rest of the ecosystem will go largely unaccounted for.

“It’s like when there’s automobile insurance: someone gets killed in a car accident,” she said. “A lot of money is paid if someone’s at fault, but you’re never going to make up for that loss of life.”

In her view, new pipelines and pipeline expansion carrying oil through aren’t capable of adequately paying for potential damages caused by an onland or marine oil spill.

“There’s a huge disconnect between what these pipeline companies want and what British Columbians feel they’re being asked to do,” she explained.

Allan believes that British Columbians are right to be wary of pipeline deals in which a company doesn’t have enough reserve funds to pay for damages caused by a disaster, or is structured to leave a company off the hook. And even if it did have the means to pay, she says, there are many permanent losses that can never be adequately paid back. The Exxon Valdez spill, where communities are still struggling to recover over 25 years later, is an example of this, she said.