Canada is a federal state comprising 10 provinces (Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Quebec and Saskatchewan) and three territories (Northwest Territories, Nunavut and the Yukon). The respective powers of the various levels of government are set out in the Constitution Act 1982.
Canada is a common law jurisdiction, with the exception of the province of Quebec, which operates under the Civil Code of Quebec. Each province has its own provincial court of general jurisdiction and an appellant court. The jurisdiction of Canada's Federal Court is limited to specific matters under federal jurisdiction and appeals or judicial review applications from federal tribunals. Canada operates a unitary system of courts in which all cases can ultimately be appealed to the Supreme Court of Canada.
The provinces have primary responsibility for energy regulation through their jurisdiction over local works and undertakings, non-renewable natural resources and electrical energy. The provinces exercise jurisdiction through legislative enactments, various forms of delegated legislation and through independent energy and utility commissions. Provincial legislation and tribunals also govern most environmental matters pertaining to the development of energy projects.
The federal government has jurisdiction over international and inter-provincial trade and commerce, which includes authority over international and inter-provincial transmission lines and energy exports. The federal government also has jurisdiction over nuclear safety, aboriginal affairs, and a number of environmental matters that affect energy projects.
For purposes of expediency, this chapter will discuss the regulation of energy at a general level with illustrative examples drawn from various Canadian jurisdictions.
The power sector in Canada is principally regulated by the provinces and markets are regional in nature. Most electricity trade is intra-provincial or north–south, between provinces and neighbouring US states; there is relatively little east–west trade between provinces.
Two provinces, Alberta and Ontario, restructured their electricity markets, albeit with differing success. In the mid-1990s, Alberta deregulated generation, mandated open access for regulated transmission and distribution and introduced a real-time electricity spot market. Alberta now has a fully competitive wholesale and retail electricity market. In 1998, Ontario unbundled transmission, generation and dispatch, and in 2002 it introduced fully competitive wholesale and retail markets. Deficiencies in Ontario's market design and a confluence of other market conditions and political pressures, however, brought about a partial closing of the Ontario market. Today, Ontario operates under a hybrid structure where there is nominally wholesale and retail competition, but a large amount of generation remains regulated or subject to long-term government-backed contracts. The remaining provinces have more traditional government-owned vertically integrated utility structures, which offer bundled services at regulated rates. Some provinces – for example, British Columbia, Quebec and Nova Scotia – have limited generation opportunities for independent power producers, largely in the renewable sector.
The most significant developments in the power sector centre on investments in renewable or clean generation and infrastructure renewal and upgrades. In 2009, Ontario launched the most ambitious renewable feed-in-tariff (FIT) programme in North America. Some other provinces have followed suit, albeit on a smaller scale. A number of provinces are also investing in and constructing major transmission and other infrastructure to facilitate economic and resource development, access renewable resources (wind, hydro) and facilitate export to the United States. Alberta and Ontario have launched competitive processes to develop major transmission projects, which are attracting foreign companies.
ii Natural gas
The Canadian gas sector, by comparison, has traditionally been characterised by more national east-west trade. Most gas production is in the western Canadian sedimentary basin ('the WCSB') and gas has traditionally been shipped via inter-provincial pipelines to eastern Canada and the north-east United States. Recent non-conventional shale gas discoveries in the midwestern and north-east United States are transforming the Canadian gas industry. Natural gas prices have plunged in North America, west-to-east pipeline throughput has substantially fallen and plans are underway to satisfy eastern Canadian demand from the eastern United States. As a result, western Canadian producers are eyeing opportunities for new markets and making plans to export liquefied natural gas ('LNG') to the Asian markets from Canada's west coast. This will require the development of significant infrastructure to transmit the natural gas to the west coast, liquefy it and ultimately ship the LNG to foreign markets.
As is the case with natural gas, the majority of Canadian oil production is in the WCSB. In particular, Alberta's oil sands contain some of the world's largest oil reserves. These reserves have been attracting significant investment and, as a result, Canadian oil output has reached all-time highs and the forecast is for a continued increase in Canadian oil production. Currently, the vast majority of Canadian oil production is exported via international pipelines to the midwestern United States; however, there is currently a significant price differential between the price received by Canadian producers for oil delivered to the Midwest. This differential is the result of a supply glut in the US midwest (Cushing, Oklahoma) as US supply (primarily from the Bakken fields in North Dakota and Montana) has increased in the presence of limited pipeline takeaway capacity. In order to ease these price differentials in western Canada, pipelines are being proposed that will connect Canadian and US production with coastal hubs that provide for export and purchase of crude oil at international prices.
One such proposal is TransCanada Corp's Keystone XL pipeline. Keystone XL was denied a presidential permit by the United States, which halted its development. TransCanada has been working to revive the project and on 1 March 2013, the US State Department released its draft supplemental environmental impact statement for the Keystone XL pipeline project, which reaffirmed that there would be no significant impact on resources along the proposed project route. Enbridge Inc has also proposed the Northern Gateway oil pipeline, which could connect Alberta production with Canada's west coast for export to the Asia-Pacific markets. Such access to Asia-Pacific markets would fundamentally change the balance of future oil trade between Canada and the United States and help to ease the price discounts currently received by the majority of Canadian producers. Other pipelines proposals are also being prepared to increase oil transportation capacity to Canada's west coast and to eastern Canada.
i The regulators
The National Energy Board ('the NEB') establishes regulatory policies for energy matters under federal jurisdiction. The primary area of NEB's activity is the regulation of Canada's interprovincial oil and gas pipelines owned by TransCanada Pipelines Limited and Enbridge Pipelines Inc. The NEB also has regulatory responsibility for the construction and operation of international transmission lines and the export of natural gas, oil and electricity.
Provinces have authority over the exploration and development of energy resources. This function may be assigned to an independent regulatory tribunal (e.g., Alberta's Energy Resources Conservation Board ('the ERCB') or may be under the direct control of a government ministry. Oil and gas exploration in frontier and offshore areas are regulated either by bodies created by federal or provincial management agreements (e.g., the Canada– Newfoundland and Labrador Offshore Petroleum Board) or by the NEB.
Canada's energy sector is also regulated by provincial utility regulators that are responsible for facilities that lie completely within the borders of any single province. This jurisdiction can include diverse matters such as facility siting, rate setting, utility divestitures, retail issues and consumer complaints. In some provinces, energy regulators' authority is limited to responsibility for energy resources and energy utility regulation (e.g., the Ontario Energy Board); in other provinces, utility regulators also have jurisdiction over other sectors such as automobile insurance, railways and water utilities (e.g., Nova Scotia Utility and Review Board).
A new regulatory development in the province of Alberta is the creation of the Alberta Energy Regulator ('the AER'). The newly passed Responsible Energy Development Act creates a single provincial regulator – the AER – for all oil and gas-related activities currently administered by the ERCB and Alberta Environment and Sustainable Resource Development. The government of Alberta anticipates that the AER will be fully operational by June 2013.
Energy and utility commissions are established through federal or provincial legislation and their members are appointed by the relevant government, usually for fixed terms. They act as quasi-judicial tribunals, independent of the businesses they regulate. Although in large part they exercise their powers free of interference from government, their jurisdiction is set out in legislation that may be amended by the relevant legislature. By statute, some tribunals are also subject to direction from provincial or local governments. These tribunals generally exercise their powers through policy instruments (such as codes, rules and generic decisions), licensing authority and individual decisions.
The decisions of Canadian regulatory tribunals are generally subject to appeal or judicial review by the courts – the Federal Court in the case of the NEB and other federal bodies, and the provincial superior courts in the case of provincial energy and utility commissions. In some jurisdictions the right to appeal is not automatic but requires leave of the court. Appellate judicial review is generally limited to questions of law or jurisdiction, procedural unfairness, bad faith or unreasonableness on the part of the regulator. Federal and provincial courts tend to give deference to regulators on matters of law that are intertwined with economic policy and rate setting that lie within a regulators' area of expertise, but give less deference on matters of law that are of general importance.
There is also federal and provincial jurisdiction over anti-competitive practices in the energy sector. The Competition Bureau reviews anti-competitive practices, both criminal and civil, under the federal Competition Act. Criminal offences are prosecuted by the Attorney General before the criminal courts; the federal Competition Tribunal has the power to issue remedial orders for reviewable civil matters (e.g., abuse of dominance and tied selling). At the provincial level, bodies such as Ontario's Market Surveillance Panel and Alberta's Market Surveillance Administrator monitor activities within competitive energy markets and the conduct of market participants to identify abuses of market power, gaming and market deficiencies or design flaws.
ii Regulated activities
At the federal level, approval from the NEB is required to construct and operate an interprovincial or international oil and gas pipeline, an international power line or any inter-provincial power line designated by the federal government, and any additions to an existing pipeline or transmission line that is under federal jurisdiction. In determining whether a project should proceed, the NEB reviews, among other things, its economic, technical and financial feasibility, and the environmental and socio-economic impact of the project. Further, as a result of recent amendment to the National Energy Board Act ('the NEB Act') expected to come into effect on 6 July 2013, the NEB's responsibilities will include oversight of navigable waters and fish habitats related to pipeline and international power line crossings projects. As a result, if NEB authorisation is granted for these projects, a separate approval under the Navigable Waters Protection Act will not be required. Ultimately, it is hoped this 'one window' approach will reduce regulatory duplication for these projects and streamline the regulatory approval process.
The NEB regulates tolls and tariffs for oil and gas pipelines under its jurisdiction to ensure they are 'just and reasonable' and that there is no 'unjust discrimination' in tolls, services or facilities. Pipelines under the Board's jurisdiction are divided into two groups that tailor the degree of financial regulation to the size of the regulated operations. Group 1 consists of major oil and gas pipelines, which are generally subject to on-going regulatory oversight by the NEB. Some smaller Group 1 facilities and Group 2 pipelines are regulated on a complaint basis.
The NEB also regulates the export and import of energy. The export and import of natural gas is authorised under either long-term licences of up to 25 years (which require a public hearing and approval by the federal Cabinet) or short-term orders for a maximum of two years. However, the federal government recently announced the aforementioned amendments to the NEB Act (which are anticipated to come into force on 6 July 2013) that will change natural gas export licences by providing that hearings for such licences are no longer mandatory and to provide that, when deciding whether to issue these licences, the NEB will only consider whether the quantity to be exported is surplus to Canadian needs, taking into account trends in discovery of the resource. Oil exports are authorised by short-term orders for periods of less than one year for light crude oil and less than two years for heavy crude oil. With respect to electricity, the NEB has issued permits and licences for as short a period as three months and for as long as 30 years, with the average being for 10 years. In reviewing applications for electricity exports, the NEB applies a 'fair market access' policy under which exporters must afford Canadian purchasers who have demonstrated an intention and ability to buy electricity for consumption in Canada an opportunity to purchase electricity on terms and conditions as favourable as those offered to an exporter customer. The NEB does not regulate imports of oil or electricity.
Provinces regulate oil and gas pipelines and facilities that lie completely within their borders; this includes regulatory authority over the construction of new infrastructure and the setting of 'just and reasonable' rates for service. Electricity generation, transmission, distribution and sale are all broadly regulated. Licences to generate, transmit, distribute or sell electricity are required from provincial regulatory authorities. Approvals or permits to construct generation, transmission or distribution facilities must also be obtained from provincial energy commissions or from a variety of provincial and municipal authorities. Rates for transmitting and distributing electricity are also set by provincial regulators, as is generation in the case of those provinces with vertically integrated structures.
In addition, a range of other authorisations may be required from federal, provincial and local authorities. These will vary depending on the facility's scale, physical location, fuel type, discharge characteristics and the potential environmental effects. For major projects, the most significant approvals required are generally under federal or provincial environmental assessment legislation. The environmental assessment process may be consolidated or coordinated with the project approval process, although this can vary depending on the type of project and jurisdiction involved. Provincial approvals are often required for air and noise emissions, water intake and discharge, storm sewer management, archaeological assessment and for decommissioning and clean-up of contaminated sites. Local land use approvals required may include official plan and bylaw amendments, sewer use, building permits and servicing easements.. As previously discussed, the NEB has introduced amendments to the NEB Act that are intended to streamline the regulatory approval process.
Section 35 of the Constitution Act 1982 provides protection to the aboriginal and treaty rights of Canada's aboriginal peoples. The courts have interpreted this section as placing a duty upon the government to consult with aboriginal peoples where approval of a project could affect an aboriginal or treaty right. While the duty belongs to the government, in practice responsibility for consultation is often delegated to the proponent. In some cases where the impact upon a right is significant, a proponent may be required to accommodate the right. The courts have ruled that regulators may assess whether the duty to consult has been satisfied when issuing an approval, although the scope of that assessment depends on the nature of the particular approval being sought and the stage of the project. For example, an economic regulator might assess the duty as it relates to the issues that are within the regulator's mandate and not the entire project.
iii Ownership and market access restrictions
The requirements to obtain a licence and licensing conditions vary depending on the sector involved and the type of activity that is the subject of the licence.
Those segments of the energy industry that are economically regulated are subject to restrictions designed to eliminate the risk of market dominance and improper cross-subsidisation of competitive business at the expense of captive ratepayers. For example, there are restrictions in the electricity and gas sectors that prohibit regulated transmitters and distributors from operating other competitive businesses. A shareholder is generally permitted to own both competitive and regulated entities, although in those cases the regulated entities will be subject to transfer-pricing provisions to ensure transactions with affiliates are at fair market value. There may also be limitations on employee and information sharing between regulated and unregulated affiliates.
Acquisition of control of a Canadian business, whether or not currently foreign-owned, by a non-Canadian investor requires review (generally pre-closing) or notification (post-closing) under the Investment Canada Act. A transaction will be reviewed if it meets certain asset thresholds. Reviewable transactions may not be completed until the Minister of Industry Canada has found that the proposed transaction will be of 'net benefit' to Canada. While the federal government has generally welcomed foreign investment, in 2010 the federal government exercised its authority to block the acquisition of PotashCorp by BHP Billiton because it failed the 'net benefit' test. This issue was revisited in 2012 with announcements by Petronas (Malaysia's state-owned oil company) of its proposed C$5 billion acquisition of Progress Energy and by CNOOC (a majority Chinese state-owned oil company) of its proposed C$15 billion acquisition of Nexen.
Both acquisitions were approved by the federal government in December 2012, but the government announced new guidelines governing proposed acquisitions by state-owned enterprises ('SOEs') of controlling interests, including joint ventures, in the Alberta oil sands. Henceforth, proposed acquisitions of controlling interests in the oil sands industry by SOEs will be found to pass the net benefit test only on an 'exceptional basis', and updated SOE guidelines will require all SOE investors to demonstrate their commitment to transparent and commercial operations and the extent of any influence by the foreign state on such SOE. The new guidelines will apply only to oil sands investments, but the government warned that it would continue to monitor investments by SOEs in other sectors. As a general rule, Canadian provinces do not limit the acquisition of interests in the energy sector by foreign companies, although the potential exists for restrictions and conditions to be imposed if regulatory approval of a transaction is required.
iv Transfers of control and assignments
While the particular requirements vary by sector and jurisdiction, a regulator's approval is generally required before a regulated entity can issue any stocks or bonds, or dispose of or encumber a significant part of its facilities. A regulator must also approve any change in control of voting securities or any merger with or acquisition of another regulated entity. In deciding whether to approve a particular transaction, the regulator must consider the public interest and the continued financial stability of the regulated entity. The time to obtain approval depends upon the complexity of the transaction and ranges between several weeks and a few months.
The transfer of oil and gas interests in Crown leases, and licences for wells, pipelines and facilities, is regulated by the respective government in each provincial jurisdiction. Typically, the transfer of a licensee's rights must be approved by a provincial regulatory body. The regulatory body will assess the licensee's and licensor's creditworthiness and will assess the exploration or production site prior to approving the transfer of the licence.
Mergers, acquisitions or changes of control may also be reviewable under both federal and provincial legislation. The federal Competition Act establishes mandatory pre-merger notification for mergers meeting certain financial thresholds and if notifiable, the merger cannot be completed for specified no-close periods. The Competition Bureau reviews mergers and may challenge a transaction before the Competition Tribunal. Competition Bureau review can take, generally speaking, from one to five months or more depending on the complexity of the competition issues. Following expiry of the no-close period, the merging parties are free to close unless the Competition Tribunal has enjoined the transaction because of a finding that a merger would prevent or lessen (or likely prevent or lessen) competition substantially, but in practice most merging parties only close upon receipt of an affirmative clearance from the Competition Bureau.
III TRANSMISSION/TRANSPORTATION AND DISTRIBUTION SERVICES
i Vertical integration and unbundling
Canada has had a competitive interprovincial natural gas market since 1 November 1986. The genesis of this was an agreement between the federal government and the three western gas-producing provinces of British Columbia, Alberta and Saskatchewan (commonly referred to as the Halloween Agreement). Consumers can purchase natural gas directly from producers or indirectly through arrangements with local distributors. While there is some overlapping ownership, the generation, transmission, distribution and retail segments of the market are generally disaggregated.
The nature of Canada's electricity market is more complex. The provinces of Alberta and Ontario have restructured their electricity markets and unbundled generation, transmission, distribution and retail services. Other provinces have functionally unbundled some services, but public ownership and vertical integration remain common.
In Ontario, virtually all transmission remains in hands of the government-owned transmitter Hydro One Networks Inc (which owns and operates more than 95 per cent of the transmission in Ontario). The province, however, recently launched a competitive process to designate a transmitter to develop a major new transmission project; this may be followed by further competitive processes for other transmission projects. Ontario's distribution sector is highly fragmented, with over 80 local distribution companies; there are opportunities for consolidation and private sector investment in this area. In April 2012, the Ontario government initiated a review to examine removing barriers and encouraging consolidation.
In Alberta, the provincial transmission system is owned by a number of utilities (known as transmission facility owners or 'TFOs'). The Alberta Electric System Operator ('the AESO') contracts with the TFOs to acquire transmission services. The AESO oversees the design and use of the transmission system to ensure fair market rates, nondiscriminatory access for all market participants and the safe reliable operation of the system. The Alberta Utilities Commission ('the AUC') approves the costs for transmission facility owners to provide their services. The regulated costs of the transmission companies are passed on to the AESO, which recovers the cost of operating the system and the transmission companies' costs through the AESO's transmission tariff, which is also approved by the AUC. Like Ontario, Alberta has initiated a competitive process to select transmitters to develop several major new transmission lines. The distribution system remains regulated, with distribution tariffs being approved by the AUC. The majority of distribution systems are owned by municipally owned utilities, rural electrification associations or local cooperatives.
In the other provinces, government-owned utilities own most transmission assets, with distribution in provincial or municipal hands. In Quebec, for example, Hydro‑Quebec's TransÉnergie division owns and operates the provincial transmission grid under open-access rules and regulated tariffs. Hydro-Québec Distribution has the exclusive right to distribute electricity at regulated rates throughout the province with very limited exceptions.
ii Transmission/transportation and distribution access
Distributors of natural gas and transmitters and distributors of electricity generally enjoy the exclusive right to serve a particular territory. These exclusive rights can be conferred through franchise agreements with municipal governments or by way of specified service territories or facilities prescribed in a utility's licence. A competing utility will not be permitted to operate in an exclusive franchise area without regulatory approval. It should be noted that Canadian natural gas transmitters typically do not enjoy exclusive franchise rights.
In exchange for exclusive franchise rights, transmitters and distributors in Canada are legally obliged to connect and serve third parties that lie within their franchise area upon request. These obligations are rooted in the 'common carrier' doctrine that Canada adopted from English common law. The obligations to connect and serve are generally prescribed by statute and are typically enforced by regulators through codes and licensing. For example, Sections 28 and 29 of Ontario's Electricity Act 1998 require an electricity distributor to connect a 'building that lies along any of the lines of the distributor's distribution system' and to 'sell electricity to every person connected to the distributor's distribution system'.
The obligations to connect and serve are not absolute. A utility is entitled to recover the reasonable costs to connect a third party and is not required to continue to provide service to a customer that has failed to pay its bills. The precise parameters of these obligations are spelled out in regulations, codes, regulatory decisions and the utility's conditions of service. A corollary of the obligations to connect and serve is that transmitters and distributors must provide third parties with non-discriminatory access and cannot favour a particular category of customer. This principle, however, can be modified as illustrated by recent legislative changes in Ontario that direct electricity transmitters and distributors to provide preferential access to renewable generators.
iii Terminalling, processing and treatment
Provincial regulatory bodies, such as the ERCB in Alberta, are responsible for regulating the design, construction, operation and maintenance of oil and gas facilities within their respective provinces. Often, such regulation will require compliance with relevant Canadian Standards Association standards as well as applicable environmental legislation.
The nature of storage of petroleum products depends on the product being stored. Generally, crude oil is stored above ground in storage tank facilities. Often, these facilities are owned and operated by the pipeline companies. In contrast, natural gas is generally stored underground. Underground natural gas storage facilities are a vital and a complementary component of the North American natural gas transmission and distribution system. Natural gas storage serves a number of functions within an overall scheme for the production, transmission and distribution of natural gas from the wellhead to the ultimate consumer. Storage may be located at any point along that chain. In Canada, most storage facilities are located close to the ultimate market and thus at the distribution end of the chain (especially in Ontario), but there is significant upstream storage in both British Columbia and Alberta.
In contrast to the very limited regulatory authorisations applicable to owners of energy products, numerous and varied regulatory requirements arise in relation to the ownership and operation of petroleum and natural gas storage, terminalling and processing facilities in each of the provinces. Applicable regulatory schemes include pipeline acts, acts to regulate oil and gas or petroleum-related activities, utility or energy board acts, hazardous substances and waste-handling regulations and environmental protection legislation.
Under such provincial acts it is normal that any rights, responsibilities and liabilities attach to the operator and owner of the facility, as opposed to the title holder of any substance-making use of such facilities. In some limited situations, however, such as regarding liability on release under certain environmental protection legislation, the title holder or owner of a substance may be included in the group of 'persons responsible' for a substance. In such cases there is a risk that ownership could potentially give rise to liability for any environmental harm caused by a stored substance.
Rates for transmission and distribution services in Canada are generally set pursuant to rate proceedings before federal or provincial regulatory tribunals. In some cases, rates may be set by the provincial Cabinet, or in the case of some municipally owned distribution systems, by the municipal council.
Where rates are set by a regulatory tribunal, transmitters or distributors are required to submit applications requesting rates and providing evidence to support the underlying revenue requirement (including a return on investment). Customers and other interested parties are provided with an opportunity to intervene and challenge the company's projected revenue requirement. The application may proceed to a full cost-of-service hearing before the regulator, although often many of the issues are resolved through negotiated settlements with intervenors prior to a hearing.
When considering an application, the regulators' mandate is to set a rate that is 'just and reasonable' to both utility owners and consumers. The concept of just and reasonable rates is well-established in Canadian law and the concept can be found in most statutes that govern rate-regulated entities. Canadian regulators are generally granted wide discretion over the methodology used to calculate a just and reasonable rate.
Canadian law requires that the resulting rate must be sufficient so that the utility's shareholders can earn a 'fair return' upon their capital investment (i.e., as large a return on the capital invested in the company as the investor would receive if it were investing the same amount in other securities possessing an attractiveness, stability and certainty equal to that of the company). The rate of return is composed of a return on equity and cost of debt and may be set by a regulator in a generic proceeding to ensure consistency between all of the entities it oversees.
Various Canadian regulators have experimented with performance or incentive ratemaking and automatic adjustment formulas in an effort to limit full cost-of-service rate proceedings.
v Security and technology restrictions
Oil and gas pipelines are subject to safety and security standards established by the NEB or applicable provincial regulators. The NEB's security standard includes criteria for establishing a security management programme to ensure security threats and associated risks are identified and managed and proper procedures are in place to minimise the effects of any security breaches.
Electricity infrastructure in Canada is subject to standards established by the North American Electric Reliability Corporation ('NERC') and various regional reliability organisations ('RROs'), which have established specific standards for protecting the security of the bulk electric system. NERC and RRO standards are often made enforceable through memorandums of agreement signed by provincial regulators.
The federal Export and Import Permits Act contains restrictions on the transfer of technology outside of Canada. Generally, the Act restricts the export of technology that is required for the development, production, or use of certain groups of products identified on the Export Control List. The most notable items on the list for the energy sector are nuclear dual-use goods and technology.
IV ENERGY MARKETS
i Development of energy markets
In Ontario, wholesale and retail competition in the electricity market has been dampened by government intervention in the form of price caps, subsidies, rate-regulated baseload generation and other policies. A merchant generation market has not developed in Ontario and most new generation supply is procured by a government agency, the Ontario Power Authority (OPA), under long-term power purchase agreements. While all generation is, in fact, offered and scheduled through a real-time spot market administered by the Independent Electricity System Operator ('IESO'), most customers are largely insulated from the spot price through the aforementioned regulatory measures. Currently, there are initiatives underway to enhance price fidelity and competition in the IESO market.
Alberta has fully functioning competitive wholesale and retail markets. The AESO contracts with transmission facility owners to provide generators access to the electric grid. All wholesale power must be sold through the power pool, which is operated by the AESO, subject to a few exceptions such as 'behind-the-fence' generation or sales under direct sales contracts or forward contracts. The AESO dispatches power through the power pool based on relative economic merit. It is also important to note, however, that much of the electricity traded in Alberta is not priced at the hourly pool price, rather the price is set in a direct sales contracts or forward contracts pursuant to the exception noted above. For example, forwards market trading organisations, provides wholesale power purchasers with the option to buy quantities of power (one hour out, one day out, one month out, one-quarter out and one year out). Electricity retailers, in turn, buy large blocks of energy and then repackage it into offers to end-use consumers, whether that is through the regulated rate or contracts. Alberta has an 'energy-only' market, where generators are paid for their electricity output on an hourly basis and do not receive any other out-of-market compensation, such as capacity payments.
In other provinces that do not have competitive power markets there are some government procurement opportunities for independent power producers. There is also substantial trade between provincial utilities (e.g., Hydro-Québec, BC Hydro) and neighbouring US markets. In particular, British Columbia, Manitoba and Quebec – all of which have abundant hydro resources – export substantial amounts of power to the United States. These exports have in the past produced outsized profits; however, the advent of plentiful shale gas has recently depressed electricity prices in the United States making exports to the US less lucrative.
Canada has a well-developed national natural gas market. Traditionally, gas has been shipped from western Canadian producers to customers in eastern Canada and the US northeast via the TransCanada mainline (although as noted above the recent proliferation of shale gas in North America is fundamentally altering this). The Canadian and U.S. natural gas markets operate as one large integrated market. Canadian gas production is connected to the North American gas market through a network of thousands of kilometres of pipelines that allows buyers to purchase and transport natural gas from a number of supply sources across the continent.
The natural gas price has three components: the cost of the natural gas itself (known as the commodity cost), the pipeline transportation cost and the distribution cost. Generally, the transportation and distribution costs are regulated by government agencies and tend to change moderately over time. The commodity cost makes up most of the final cost to consumers and will change in response to supply and demand conditions and can be much more volatile. The Henry Hub, an intersection of numerous pipelines in Louisiana, is the pricing point for natural gas traded on the New York Mercantile Exchange (NYMEX). As such, many gas market transactions in North America are based on the pricing at the Henry Hub. The AECO-C hub in south-east Alberta is the main Canadian pricing point. Also, Dawn, Ontario, located at the point of convergence of the Vector Pipeline system and the TransCanada mainline system, is increasingly becoming a major Canadian hub for gas trading in eastern Canada and the United States. The price of gas traded at these hubs is publicly available and establishes a commodity cost of natural gas. Natural gas is sold by unit of energy (common energy units include British thermal units (Btu), therms, and joules). Natural gas can be traded for physical delivery same day, or at some point in the future. A price set today for delivery at some later date is referred to as a 'future' price. Spot and future prices are set through the interaction of supply and demand through trading platforms such as the Natural Gas Exchange in Alberta or the New York Mercantile Exchange in the United States.
Canada is a participant in the global oil market in which buyers and sellers trade volumes, mostly on the basis of short-term contracts. It is this interaction that sets the world price of oil. The Canadian and US markets for oil are fully integrated. Canadian crude oil production is connected to the North American oil market through a network of pipelines, tankers, rail and trucks. Although Canada is the sixth-largest producer in the world, it produces only about 4 per cent of global production, so it does not have a major influence on the world price of oil. Currently, Canada exports two-thirds of the oil it produces each day, but also imports half of the oil it needs on a daily basis. Oil is produced and exported from Western Canada and Newfoundland, while the refining industry in Atlantic Canada, Quebec and part of Ontario relies upon imported crude oil for feedstocks. Close to 100 per cent of Canadian crude oil exports are shipped to the United States, to which Canada is the largest exporter of crude oil. Two of Canada's major benchmarks for crude oil are Western Canada Select, which is a heavy crude benchmark blend and Edmonton Par, which is a light oil benchmark blend. As the United States is Canada's main export market, typically Canadian crude oil is priced relative to the crude oil exports are benchmark West Texas Intermediate, at Cushing, Oklahoma. Crude oil, like natural gas, is bought and sold through a variety of contract types, including 'spot' transactions. As noted above, there is currently a disparity between the price paid for Canadian oil production and the world price, such that Canadian oil production is increasingly looking for markets outside of the United States.
ii Energy market rules and regulation
Power and gas markets are for the most part separately regulated, and power is much more heavily regulated. In Ontario and Alberta, there are market rules administered by the respective independent system operators that govern and regulate the wholesale spot market and related markets. These address, inter alia, registration requirements, reliability standards, prudential obligations, bid or offer protocols, dispatch, settlement, compliance, penalties and dispute resolution. Retail markets are governed by various consumer protection legislation or regulations and energy board rules and codes. These typically impose more onerous requirements on sales to residential or other small-volume consumers.
With regards to the gas market, wholesale trading is not governed by any pricing regulations or rules in Canada. In the case of the retail gas market, like electricity, it is also governed by various consumer protection statutes, regulations and energy board codes and rules.
Some provinces in Canada have commodity futures legislation that regulates trading and advising in commodity futures contracts and commodity futures options. Moreover, in other provinces the definition of 'security' in securities legislation includes over-the-counter derivative transactions (i.e., swap contracts) or physical transactions (including to make or take future delivery of natural gas). As a result, these types of financial transactions and physical transactions are governed by dealer registration and prospectus filing requirements unless the transaction fits within certain exemptions. A number of provinces (including Alberta and British Columbia) have blanket orders that address this issue by exempting such transactions from filing and registration requirements as long as each party to the transaction is a qualified party acting as a principal. It is important to note that in Canada there is no national securities law and no national securities regulator. Rather, securities law and regulation is the responsibility of the provincial and territorial governments; however, many substantive aspects of securities regulation are harmonised through the use of 'national instruments' or 'national policies', which are adopted by each of the provincial and territorial regulators.
As noted above, the NEB regulates the import and export of energy (see Section II.ii, supra, for details concerning import or export permitting and licencing processes).
iii Contracts for sale of energy
In Ontario and Alberta, wholesale and retail customers may contract to purchase electricity. In Ontario, residential and low-volume consumers may purchase from competitive retailers or pay a default price passed through by their local distribution company; this default price is periodically 'smoothed' by the OEB to reduce volatility. As a result of rate-regulation of most baseload generation, various government subsidies and price smoothing, the retail market for residential and low-volume consumers has been significantly dampened. There is a more robust market for commercial and industrial customers.
In Alberta, consumers are free to purchase their electricity from any licenced retailer. Neither wholesale nor retail electricity prices are regulated, making Alberta the only province with fully competitive wholesale or retail markets. Small-volume consumers who do not wish to purchase electricity from a competitive licensed retailer are eligible for a regulated rate available to eligible consumers until 30 April 2018. Owners of distribution systems must provide a regulated rate, either directly or indirectly, by appointing a regulated rate provider. The AUC regulates the rates charged by the regulated providers. As previously noted, much of the electricity traded in Alberta is not priced at the hourly pool price; rather the price is set in direct sales contracts or forward contracts. These direct sales contracts and forward contracts must be undertaken in accordance with rules set by the AESO.
In Canada, wholesale and retail customers may contract to purchase natural gas. Depending on the province, the rate a customer pays for natural gas may be a regulated rate or a contracted rate. Regulated rates are set by provincial regulators whereas the provincial regulators have no jurisdiction over competitive contracts.
iv Market developments
A fundamental change that is being considered for Ontario's wholesale electricity market is to make transmission-connected renewable resources (particularly wind) dispatchable; at present, renewable resources self-schedule and get paid whenever they are generating. Due to the unprecedented increase in renewable resources (both transmission and distribution-connected) Ontario has been experiencing surplus conditions during nonpeak periods that have required it to dispatch off nuclear units in favour of wind and other non-dispatchable renewable resources. Recent market rule changes have been contentious and may have a significant impact on wind generators whose contracts pay them only when generating.
As noted above, western Canada is experiencing a number of new developments that are fundamentally changing the oil and gas industry. The application of horizontal drilling and multi-stage hydraulic fracturing to tight oil formations has given new life to previously low-producing or unproductive oil reservoirs in the WCSB. This is reversing the longstanding decline trends in conventional crude oil production in Alberta, with production at the end of 2010 about 9 per cent higher than the end of 2009. This recent trend in conventional crude oil production coincides with significant new investments being made to develop the oil sands and shale gas reserves. Foreign investment in these projects is rapidly accelerating through the proliferation of large joint ventures, financings and acquisitions. This investment is fuelling rapid development of projects and of related infrastructure. New pipeline proposals, such as Keystone XL and Northern Gateway and the development of new facilities, such as LNG facilities near Kitimat, British Columbia, promise access to new markets in Asia). If these come to fruition, they will significantly alter the relationship between Canadian producers and markets in the United States. These projects are encountering regulatory challenges given their scale and the issues they create with respect to the rights of First Nations, environmental impacts of new oil pipelines, hydraulic fracturing and horizontal drilling and 'dirty oil'. Initiatives are underway to streamline Canada's environmental review process and to address the potential for regulatory log-jams; however, it remains uncertain how successful these initiatives will be.
V RENEWABLE ENERGY AND CONSERVATION
i Development of renewable energy
Several Canadian provinces have introduced policy initiatives to spur renewable development in recent years. These policies include renewable energy funds, renewable portfolio standards, renewable procurements and feed-in-tariff programmes.
Ontario's green energy policies stand out as the most ambitious in Canada. The Ontario government has mandated dramatic increase in renewable resources. To meet this goal, the provincial government introduced legislation to dramatically increase the contribution of renewable and conservation resources to Ontario's supply mix to encourage 'green investment' and 'green jobs' and to address climate change. The centrepiece of the legislation is a feed-in tariff ('FIT') programme, which provides standard-offer prices and contracts for renewable generation, including wind, solar and biomass. As part of promoting the 'green economy' objectives, the programme includes domestic content requirements aimed at inducing wind turbine, solar panel and other component manufacturers to locate in Ontario. The programme was launched in late 2009 and promises to assist in meeting the government's goal of 10,700MW of non‑hydro renewable generation by 2015.
Other Canadian provinces have introduced more limited green energy initiatives. Notably, Nova Scotia introduced a renewable portfolio standard to source 25 per cent of its electricity from renewable sources by 2015 and is currently introducing a competitive procurement to purchase approximately 300MW of renewable energy from independent power producers. Similar standards also exist in New Brunswick and Prince Edward Island. Quebec, despite significant untapped hydro resources, has mandated that 10 per cent of its generation should be sourced from wind. It is expected that Quebec will issue a call for further tenders for up to 700MW of wind in 2012 or 2013. Saskatchewan has set up the 'Go Green Fund,' which will invest in results-based projects that contribute to the reduction or avoidance of greenhouse gas emissions. Also, the Manitoba government released 'Green and Growing', which provides a goal of developing 1,000MW of wind power in Manitoba over the next decade.
ii Energy efficiency and conservation
At the federal level, the government has established an Office of Energy Efficiency ('the OEE'), which offers a number of grants and incentives to encourage energy efficiency. The OEE's initiatives have included efficiency standards, home retrofitting, and the labelling of consumer products.
There are also various efficiency and conservation initiatives at the provincial level. In Ontario, the provincial government has created a Conservation Fund to fund electricity conservation initiatives. The Conservation Fund supports a wide variety of electricity conservation projects, including programmes that allow electricity users to take advantage of commercially available energy-saving measures and incentives.
iii Technological developments
Ontario has established a Smart Grid Forum that is composed of members of the utility sector, industry associations, public agencies and universities. The purpose of the forum is to make recommendations that focus on removing barriers to smart grid development in the province.
VI THE YEAR IN REVIEW
As noted at various points throughout this chapter, access for Canada's abundant oil and gas resources to the world markets continues to be a pressing issue for Canada. The price for natural gas in North America is significantly less than the price for natural gas in Asia and Europe. This discount may continue to be exacerbated as discovery and development of unconventional gas resources continues in North America. Canadian oil also continues to trade at a significant discount compared with world oil prices. LNG export infrastructure and oil pipeline infrastructure to enable Canadian natural gas and oil to access world markets are key priorities for Canadian oil and gas producers. While progress is being made on the LNG front, LNG development is not taking place as quickly as many had hoped and there is uncertainty created by the upcoming election in the province of British Columbia. Furthermore, the Keystone XL pipeline is still awaiting a decision in the United States as to whether it will receive the necessary presidential permit, and the Gateway pipeline is currently meeting significant opposition from First Nations, environmental groups and the government of British Columbia. Other projects to increase crude oil transportation capacity to the Canadian west coast and eastern Canada and the north-eastern United States are in the works, but those proposals will not address the problem in the near term.
Notwithstanding these problems, foreign investments continue to flow into the Canadian oil and gas sector, as highlighted by CNOOC's successful C$15 billion takeover bid for Nexen and Petronas' C$5 billion takeover of Progress Energy. The Canadian government has, however, made it relatively clear that takeovers of such a
nature in the Canadian oil and gas industry will be much more difficult in the future. The issues with oil and natural gas have also affected other energy resources in Canada. Access to abundant and cheap natural gas has reduced the urgency to develop alternative forms of energy such as wind and solar energy. It has also caused provinces such as Quebec and Ontario to question the wisdom of decisions to develop big hydro projects and to refurbish and expand nuclear generating fleets, respectively. As such, the energy landscape in North America over the past year has continued to change dramatically.
Originally published by Law Business Research Ltd.
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