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 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, Nova Scotia and Saskatchewan – 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. On 16 August 2013, changes were made to the FIT programme, including changes to the domestic content rules applicable to new contracts. The changes help to move the FIT programme towards compliance with the 24 May 2013 World Trade Organization ruling by lowering the domestic content requirements for certain renewable electricity projects. 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 (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 northwest Alberta, northeast British Columbia and 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 under way 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. A number of projects have been proposed and have received export licences from the National Energy Board (NEB); export applications for a number of other projects have been approved by the NEB. The government of British Columbia has been highly supportive of LNG development.
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 has been a significant price differential between the price received by Canadian producers for oil delivered to the Midwest. This differential has been 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 Corporation's Keystone XL pipeline. Keystone XL was denied a presidential permit by the US, which partially halted its development and the project continues to seek governmental approval. While the southern part of the project has been completed to deliver 700,000 barrels per day of crude from Cushing Oklahoma to the Texas Gulf Coast (helping to ease the current supply glut in the US Midwest), the northern part of the project remains in flux. TransCanada has been working to revive that part of the project. In January 2014, the US State Department released its report for the Keystone XL pipeline project, which reaffirmed that approval of the project would not significantly increase greenhouse gas emissions, which the White House has identified as a key concern.
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. The joint Canadian Environmental Assessment and NEB review panel issued its decision on the proposed Northern Gateway project on 19 December 2013. It recommended that the federal government approve the pipeline, subject to Enbridge satisfying 209 conditions that are to be included in the NEB's Certificate of Public Convenience and Necessity. It remains to be seen whether Enbridge can satisfy all of the conditions. 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 pipeline proposals are also being promoted to increase oil transportation capacity to Canada's west coast and to eastern Canada, such as Enbridge's Line 9 Reversal and TransCanada's Energy East project that aim to ship oil to refineries in eastern Canada. On 6 March 2014, the NEB approved Enbridge's Line 9 reversal (with conditions), which will, once completed, allow western Canadian oil to displace up to 300,000 barrels per day of crude oil imported from the North Sea, West Africa and the Middle East which is purchased by eastern refiners at international (Brent) prices.
i The regulators
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. 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., the Alberta Energy Regulator (AER) or may be under the direct control of a government ministry (e.g., Saskatchewan's Ministry of Economy). 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 AER. The newly passed Responsible Energy Development Act creates a single provincial regulator – the AER – for all upstream oil, gas, oil sands, coal and related activities previously administered by the Energy Resource Conservation Board and Alberta Environment and Sustainable Resource Development. The transition to the AER was completed on 31 March 2014.
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), 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 ongoing 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, recent amendments to the NEB Act provide that hearings for natural gas export licences are no longer mandatory and, 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 by-law 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.
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This article was first published in The Energy Regulation and Markets Review - Edition 4
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.