Canada: Regulatory Chess: How Energy Proponents Should Approach Regulatory Approvals

Last Updated: November 11 2013
Article by Rodney V. Northey

Most Read Contributor in Canada, October 2018

This article is adapted from a luncheon address given by the author during the Canadian Energy Summit, held at the Toronto Region Board of Trade on September 25, 2013.

The past year has provided all of us with regular information on the challenges facing Northern Gateway, Keystone and many other energy pipelines and projects that need regulatory approval.  It is therefore timely to ask whether energy proponents start these approval processes with a regulatory strategy or something less.

What do I mean by a regulatory strategy? I will start with what it is not: it is not merely a descriptive activity. It's not the identification of all of the approvals required by a project to begin operations. That list of approvals is an essential building block to developing a regulatory strategy, but it's no substitute for one. A similar building block is knowing the procedures and standards demanded by a regulator to obtain a specific approval, but this is also a descriptive exercise and no substitute for a strategy.

In simple terms, a regulatory strategy is the task of setting priorities and making choices about the best way to obtain all required approvals.

Unfortunately, my experience has shown me few proponents who give their regulatory strategy serious early attention: instead, the topic seems to get serious attention only after the company is in the glue. I make this statement after having done virtually nothing but regulatory law for almost 25 years in the areas of environment, energy, and land use approvals, and from all sides of the fence — proponents, governments, First Nations, municipalities, NGOs and residents.

How is this possible? One part of my answer is that regulatory strategy is not taught in school. There is no professional training that has made this topic central or even prominent. Although lawyers lead hearings and learn about hearing processes in law school, regulatory strategy is never specifically discussed. Equally, although engineers have enormous involvement in the tasks associated with getting approvals relevant to energy projects, regulatory strategy is not part of any engineering program I can identify. Lastly, turning to business schools, I can identify many courses on strategy, but few that deal with the complexities of regulatory strategy.

This is how we can have businesses subject to complex regulatory approval processes working ad hoc — with either no regulatory strategy or something very primitive.

What does "no regulatory strategy" look like? As described above, it is an approach that has the proponent identify the required approvals, but then hand off to consultants the task of getting them done. This approach views regulatory approvals as simply a technical exercise with no management strategy involved.

As for a primitive regulatory strategy, the best example — and I have seen it in play often — is the "domino theory." The domino theory treats each regulatory approval as a domino. The strategy is to figure out the first approval to obtain and then line up all other approvals like dominoes that will fall once you get the first one. Unquestionably, the domino theory presents a tidy and satisfying regulatory strategy. What could be more satisfying than watching the first domino fall and triggering the fall of all other dominoes on the path to project approval?

But there are problems with thinking that a regulatory approval process resembles falling dominoes. The fundamental difficulty is that the image of dominoes falling is an impersonal one. Some approvals do fit this image. Some have clear rules and requirements: meet them and you get your approval. Unfortunately, most approvals are not rules-based. Nor are they impersonal. Instead, they involve the judgment of the regulator and often other stakeholders.

A further problem with the dominoes image is that bad things can happen when proponents try to start project approval with an uncontentious approval. It may be best in dominoes to get the pieces falling, and this can work in regulatory approvals; however, this approach can give the wrong impression to a regulator down the queue of approvals. Few regulators welcome the idea that they owe an applicant an approval because the applicant has already obtained another approval.

A similar and attractive image of regulatory strategy is the "checkers theory," in which regulatory approvals are like pieces on a checkerboard. The novel idea with checkers, as opposed to dominoes, is that there is some recognition that other people such as the regulators are involved in the regulatory process. Checkers also introduces the idea that these other people may be working with a different objective than the proponent. After all, checkers is a two-person game. One player has to take pieces from someone else in order to succeed.

But checkers also appears to be too simplistic to count as a good model for regulatory strategy. While some approvals are straightforward and may therefore be "hopped over" with relative ease, many have multiple facets and complexities. Equally, like the image of dominoes, the checkers image hardly does justice to independent regulators.

In my experience, the game of chess offers an apt image for regulatory strategy. Right off the bat, there are two things about chess that appear well-suited to guide regulatory strategy:

  • Chess reflects the idea that regulatory approvals are not mechanical, straight-line processes. In chess, it is very rare that one side can end the game in a few quick steps.
  • Chess also reflects the idea that regulatory processes involve multiple pieces, doing different things, toward an overall objective.

With the chess image in mind, there are three principles of regulatory strategy that proponents need to keep in mind:

Principle No. 1: Applicants must lead

This principle may seem unremarkable, even obvious. However, based on  my experience, this principle can be completely absent right from the get-go.

For example, a company needs an approval, so it goes to the regulator to ask the regulator what to do to get approval. This kind of meeting happens all the time.

This approach, however, is contrary to this first principle. In a scenario where the applicant leads, there are, of course, meetings with regulators. But the starting point for an applicant who leads is not getting or having the meeting with the regulator: the starting point is the applicant privately getting familiar with approval requirements and the approval process in order to develop a preliminary regulatory strategy. Only then does the applicant go to the regulator. Furthermore, the applicant goes to the meeting with the regulator and leads the meeting. The applicant proposes the regulating approach. The regulator's job is to respond.

In chess, this principle is caught by a simple point: the white side always starts the game of chess. Thus, the applicant is always white. The message for applicants: Don't start a regulating process until you are ready to lead it.

A further aspect of this principle is that the applicant has to be the face of the application. This principle is certainly not obvious. Often, consultants or lawyers are engaged to be the face of the applicant in the regulatory process, but there are problems with this approach.

Turning back to chess, an interesting question is which piece or pieces best represent the regulatory  applicant. Those familiar with chess know that the king can move in any direction on any turn. This seems like a good image for an applicant. However, the king can only move one square at a time. The king is thus constrained compared to other pieces.  On the other hand, the queen can move multiple squares in any direction on any turn. Thus, in chess, the queen has more options than the king. Who, then, is the best face of the regulatory applicant: the king or the queen?

Unfortunately, many regulatory applicants behave as if they are the king. In chess, the king needs protection. Like the king in chess, these applicants do not really want to be out leading; instead,  they want other pieces to protect them. Where the applicant considers itself king only, it does not visit the regulator; other people visit the regulator. The applicant as king does not step outside company walls; other people step outside company walls. Thus, the applicant as king reflects a regulatory strategy of protecting the applicant from danger.

But, as in chess, it is difficult for an applicant to win approval where it is focused on protecting itself.

I think the better model for the applicant is to make the face of the applicant that of both a king and a queen throughout the regulatory process. Like the king, there should be someone in the castle at all times; and, like the queen, there should also be someone from the applicant out leading — moving in multiple directions and moving quickly across many spaces when required.

Why should the applicant be the queen and not a consultant or lawyer? It is a question of confidence. A confident applicant wants to be the chess queen. It wants to lead; it wants to move in many directions, and it wants to move confidently across many spaces that others fear to, or cannot, tread.

This is not to say there is no role for consultants, advisers, etc. Chess has many pieces beyond the king and the queen. Furthermore, like chess, a regulatory strategy that uses multiple pieces is a more robust strategy for success than single "all or nothing" strategies. Like chess, a proponent should seek to use all of its available pieces. However, all of those other pieces must be secondary to the king and queen..

Principle No. 2: Always be visible

This principle speaks to the need for a project proponent to maintain a visible presence during the regulatory process. A proponent is well advised to have important communication updates and always occupy media space around the project. The public and interested parties such as municipalities and First Nations have both curiosity and concern about major projects. To address these interests, a proponent needs a broad and sustained strategy of releasing important information throughout the regulatory process.

In my experience, proponents harm themselves when they start a regulatory process and then disappear for a period of time during the process. If the project has opposition, opponents will use this opening to fill the vacuum with their own views.

There are multiple examples of this opponent tactic. Perhaps the most recent and obvious example has occurred in Ontario within the green energy scheme for wind farms. Following approval in 2009 of a new regulatory regime, which was intended to facilitate approval of new major wind farm projects, proponents became invisible to the public and other interested stakeholders. They instead focused on getting feed-in tariff approval from the province. Proponents were also invisible after receiving their feed-in tariff approvals, in the period prior to commencing their renewable energy approval processes. During these two gaps, wind farm opponents advanced a major campaign against wind energy. By the time proponents became visible and initiated their public regulatory processes, they were playing catch-up. They were reacting to issues instead of defining them. Wind energy proponents are still recovering from this opponent tactic.

Here, the analogy of regulatory process to chess is clear. In chess, every piece is visible, and every move is visible. It's the same with the regulatory process: there has to be complete transparency about  where the proponent is at all times — from the earliest days until the process is complete.

Notably, being physically visible does not mean that your strategy is visible. As in chess, the strategy behind each move is not always transparent.

Strategy Principle 3: Anticipate your opponent

In a systematic review of regulatory strategy, this principle would take some time to develop. However, in the interest of brevity, let's get straight to the point.

Chess as an image of regulatory strategy is particularly powerful when the other side is not a regulator but a stakeholder who opposes a project. In these cases, a regulatory proponent has a genuine opponent.

There are now many kinds of opponents to energy projects: some are NIMBYs ("Not In My Backyard"), a few are BANANAs ("Build Absolutely Nothing Anywhere Near Anything"). These are ideological opponents.

Other opponents, however, are strategic: they do not tell you what they want. In some cases, these opponents might support your project but not immediately, so you need to work to get their support. In other cases, these opponents do not support your project but are careful to not ever say so. In these latter cases, there really is someone who wants to take the proponent's king and is playing chess to do so.

Two types of opponents merit special attention: First Nations and municipalities.

Across Canada, proponents have come to recognize the legal importance of First Nations, which is a good start. Nevertheless, it is difficult to overstate the current and growing influence of First Nations on energy regulatory processes in Canada. An entire paper could be devoted to this topic alone.

Canadian municipalities are another player in regulatory processes that should be receiving greater attention. Unlike First Nations, municipalities are not well recognized in energy circles. The first key point about municipalities is that their influence has grown significantly in the past few decades. Like First Nations, municipalities have been making legal gains consistently at the highest levels of court and in provincial legislation. In the energy space, these legal gains mean that there are important opportunities for municipalities to be energy proponents.

These legal gains are also relevant where a municipality is opposed to a project.  Where opposed, municipalities can pass bylaws that set new approvals or standards. This legal power is the second key point about municipalities. In contrast to most participants in energy regulatory processes, a municipality has the power to change the rules, not just follow them.

For a strategic municipality, municipal bylaw opportunities exist wherever there are federal-provincial regulatory gaps or regulatory standards that are out of date. Even with the most modern municipal laws, there remain some limits on municipal powers to pass bylaws, but these limits do not match the many new municipal opportunities. Thus, it is no longer accurate to view federal and provincial standards as the universe of standards. Today, it is open to a concerned municipality to address a regulatory gap or an outdated standard, and to do so in the public interest of its residents.

This aspect of municipal powers merits special attention as the federal and provincial governments harmonize their energy regulations. The more that these governments move to one-size-fits-all rules and regulatory "certainty," the more likely that such rules will result in gaps or standards that a municipality can improve by bylaw.

Returning to the game of chess, there is one clear way to characterize municipal participation in energy projects and strategies: a municipality can be a game-changer. It does so not just by playing an old game differently, but by adding a new rule to the game. These new municipal roles command strategic attention early.

Conclusions

For energy proponents, the stakes in regulatory processes are high. Projects can offer major gains to public and private interests; however, there are many kinds of opponents to new projects, and they, too, can articulate and advance public — not just private — interests.

With this in mind, it is rare that a major project can have a regulatory strategy as simple as setting up the dominoes. It is far better to see the regulatory process as a chess game. Like chess, proponents and most opponents have access to the same tools. What distinguishes them is strategy.

Furthermore, regulatory proponents have an advantage that is more than being "white" and starting the game. A proponent can lead throughout the regulatory process, not just at its commencement.

But do not forget to give attention to new players with new legal roles.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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