Canada: Energy @ Gowlings - October 20, 2008

Last Updated: November 6 2008

Edited by Paul Harricks

Contents

  • Anti-Corruption Legislation: Mitigating the Risks - Kristine Robidoux
  • IPSP Hearing on Hold - Carlton Mathias
  • Energy and Infrastructure Investment Opportunities in Alberta and British Columbia - Kevin Keyes
  • Ontario Extends Transfer Tax Exemption - Tim Wach

Gowlings is pleased to welcome Kristine Robidoux, QC, as a partner in the Calgary office. Kris has extensive experience in the areas of corporate risk and business integrity and compliance with an emphasis on the energy and construction industries. She specializes in the creation and implementation of corporate compliance programs in the areas of domestic and international anti-bribery and corruption laws, privacy and data protection laws, utility market conduct rules, energy trading regulations and business conduct and ethics. Kris also spent nearly 10 years as in-house counsel, resulting in a practical, business focused approach that is appreciated by our clients.

Anti-Corruption Legislation: Mitigating The Risks
By: Kristine Robidoux

The Canadian business community is becoming increasingly aware of the formidable challenges associated with doing business in foreign countries. It is well known that corruption is an obstacle to sustainable economic activity, hinders the development of fair market structures and distorts competition. More importantly, participation in corrupt business practices undermines citizens' trust in the political and business system as well as its institutions and leadership. Recently, the risks to Canadian companies doing business abroad have been greatly increased as a result of the surge in investigation and enforcement activity by authorities under Canadian, U.S. and international legislation prohibiting improper payments to foreign public officials. Virtually every company operating overseas, regardless of size or complexity, must ensure it has effective policies and procedures in place to mitigate the risks of non-compliance. What may once have been accepted in certain locations and cultures as being simply a part of business is now treated as a criminal act in most countries. The consequences for executives involved and their companies can be enormous. In addition to significant fines, disgorgement of profits, harsh collateral sanctions and debarment from future contract opportunities, a company and its executives can also face crippling reputational damage.

Canadian companies operating internationally need to pay particular heed to the federal Corruption of Foreign Public Officials Act (CFPOA) as well as the U.S. Foreign Corrupt Practices Act (FCPA). Essentially, both the CFPOA and FCPA criminalize acts of bribery anywhere in the world by prohibiting companies from acting directly or indirectly to further a payment or offer of money or anything of value to a foreign official for the purpose of obtaining or retaining business or an improper advantage. Often when a business is entering a new market overseas, anti-bribery and corruption risks are not readily apparent. As examples, many Canadian companies remain unaware of the potential risks they face through gifts and offers of other non-monetary favours or "things of value" to an official, through the activities of their overseas agents, or through the improper practices of a target company in the case of a proposed merger or acquisition.

Combating foreign corruption has become a significant priority for international law enforcement authorities, especially in the U.S. as they prosecute more offenders than any other country. The U.S. legislation attacks corruption not only at the payment stage but also in respect of how these payments are recorded in a company's books and records. Often Canadian companies assume that because they do not have U.S. operations, employ U.S. citizens, or issue securities on U.S. exchanges, they cannot be subject to this U.S. legislation. This assumption is often incorrect, as the nexus to the U.S. that is required to engage the FCPA's long-arm provisions can be quite minimal.

What is gaining particular attention now is in the intensification of enforcement activities. In 2007, the United States Department of Justice and the Securities and Exchange Commission prosecuted more cases of international bribery and corruption than they had in the eight previous years combined. There is no indication that the pace of prosecution will slow down any time soon.

Here in Canada, the Royal Canadian Mounted Police (RCMP) international anti-corruption team was launched in 2007 in an effort to increase significantly the enforcement of Canada's CFPOA. In the past, Canada has been criticized by the international law enforcement community for failing to investigate and prosecute foreign corruption offences with an acceptable degree of fervour. However, with sizeable RCMP anti-corruption teams now located in both Ottawa and Calgary, the number of active investigations underway has grown dramatically, disproving the perceived lack of investigatory and prosecutorial interest. Canadian executives should expect to see charges laid against Canadian companies in the near future.

As a result of this greatly increased emphasis on enforcement, corporate management must be increasingly vigilant to ensure that the company and its employees are not caught up in allegations of corruption. Every company that operates overseas or engages agents, distributors or other third party intermediaries in foreign countries should carry out a world-wide corruption and ethics risk assessment that prioritizes both geographical and functional areas which are vulnerable. Transparency International's corruption perception index was created to rank those countries where corruption is perceived to be most prevalent, and is a useful tool in this risk management exercise. The company should have high-level corporate policies and procedures, including a global code of business conduct that sets a very clear tone from the top that no act of bribery will be tolerated anywhere in the orga nization. Supporting the code of business conduct should be internal systems and controls, corporate gift registries, policies in respect of political and charitable donations in foreign countries, due diligence checklists for the retention and monitoring of all agents and consultants, and country and risk specific training in respect of the company's ethics and bribery policies. In addition, companies should consider establishing and maintaining a whistle-blower hotline to allow employees to internally report suspected or observed misconduct without fear of retaliation.

The result of a robust compliance program is that employees will know the company's standards of conduct, understand the consequences of non-compliance, and know where to go to get further help. In the bigger picture, it will help insulate the company and its management from the serious risks outlined above.

IPSP Hearing On Hold
By: Carlton Mathias

In oral Reasons for Decision issued by the Ontario Energy Board (OEB), Ontario's Integrated Power System Plan (IPSP) Hearing was placed on hold on October 2, 2008 "until further notice".

The IPSP Hearing had started on September 8, 2008 and the evidence of the Ontario Power Authority's witnesses and cross-examination of them was proceeding in earnest. On September 17, 2008, new Minister of Energy and Infrastructure and Deputy Premier, the Hon. George Smitherman, issued to the OPA an amendment to the Supply Mix Directive (the "Amended Directive"). It was the Supply Mix Directive of June 2006 (the "SMD") which had required the OPA to begin preparation of the province's power system plan. Since at least June 2006, the OPA had been carrying out its research, engaging in consultations and marshalling its evidence in support of the plan. The OPA's evidence, more than 7,000 pages, was filed in August 2007. In mid-December 2007, the OEB held a one-week hearing solely to determine the issues for the Hearing.

The SMD, among other things, called for achieving total peak demand reduction from conservation by 2025 of 6,300 MW, the doubling of Ontario's then-current renewable energy supply to 15,700 MW by 2025, strengthening the transmission system to enable the achievement of the SMD goals, replacing coal-fired generation by cleaner sources in the "earliest practical time frame" and planning to use nuclear capacity to meet base-load electricity requirements but limiting the installed in-service capacity of nuclear power to 14,000 MW.

In issuing last month's Amended Directive, Minister Smitherman lauded the OPA for its considerable effort in preparing the filed plan and acknowledged the OPA's leadership efforts in helping to meet the province's electricity demand and supply requirements for the next 20 years. Nonetheless, the Minister cited "the change in circumstances since the development of the IPSP" as warranting further consideration of various aspects of the plan. The Minister has now required that the OPA revisit its IPSP with a view to establishing new targets in the following areas:

  • The amount and diversity of renewable energy sources in the Supply Mix;
  • The improvement of transmission capacity in the "orange zones" in northern Ontario and other parts of the province that is limiting the development of new renewable energy supply;
  • The potential of existing coal-fired assets to be converted to bio-mass;
  • The availability of distributed generation;
  • The potential for pumped storage to contribute to the energy supply during peak time; and
  • The viability of accelerating the achievement of stated conservation targets, including a review of the deployment and utilization of smart meters.

In addition, the OPA has been directed to undertake and enhance the process of consultation with First Nations and Métis communities, including the consideration of partnership opportunities in generation and transmission.

In adjourning the IPSP hearing, the OEB decided that it will not consider changes to the Issues List at this time, which some intervenors had asked it to do. The OEB also determined that it would not give the OPA an interpretation of or guidance on the Amended Directive; this in response to several intervenors who had submitted that the Amended Directive is vague and injects a new uncertainty into the process. The OEB reasoned that it is the OPA which is to use its best judgment in implementing the Amended Directive and the OEB's final ruling will determine whether the OPA complied with the Directive.

Going forward, the OEB has required that the OPA file a written progress report by November 30, 2008, providing an update as to when it expects to file additional evidence. At the time of the Reasons for Decision, the OPA expected that its additional evidence would be filed by March 16, 2009. Once the OPA's additional evidence is filed, the OEB will establish a process for amending the Issues List and for resumption of the Hearing.

When and indeed, if, the IPSP Hearing may resumes seem now to be fair questions.

Energy And Infrastructure Investment Opportunities In Alberta And British Columbia
By: Kevin Keyes

The following is an abridged version of a paper which Kevin Keyes presented recently to the Inter-Pacific Bar Association in Los Angeles. Footnotes and some statistics have been deleted from the original, and are available on request .

Abstract: An expanding economy and population, coupled with a limited and aging infrastructure, present huge opportunities for private sector investment in Canada's two westernmost provinces. Even areas traditionally controlled by the public sector offer investment opportunities through "public-private partnerships". This article examines several sectors in these two provinces which will be looking for major sources of capital in the coming years.

The Challenge and the opportunity

Energy and infrastructure and related spin-off industry sectors are driving investment opportunities in Western Canada. Strong local economies and regulatory climates that encourage investment have resulted in significant population growth which in turn is putting a strain on schools, hospitals, transportation networks and other essential infrastructure.

As a funding alternative to tax-based capital reinvestment programs, all levels of government are entertaining private sector-sponsored finance and construction projects that will enable near-term redevelopment of aging facilities as well as construction of new infrastructure.

Infrastructure Deficit

Many of Canada's utilities, roads, tunnels, bridges, hospitals, schools, courthouses, recreational facilities and other public and social infrastructure are coming to the end of their expected life spans. Canada's national infrastructure deficit is currently projected at anywhere between $50 billion and $125 billion, approximately six to ten times the combined annual infrastructure budgets of all levels of government in Canada.

The Great Canadian Compromise

Current levels of taxation, by all levels of government, cannot fund the entire cost of infrastructure replacement. This reality, when combined with existing public sector debt and the difficult task of coordinating, managing and building new public works, has led the federal and provincial governments to partner with the private sector. These projects are officially called "public-private partnerships" (P3s) in British Columbia and Alberta, "alternative financing and procurement" in Ontario and "private financing initiatives" in some other quarters.

P3s present a classic "Canadian compromise", allowing for some degree of continued public control over essential assets and services while shifting risks and costs to the private sector. P3s encompass a range of models involving different degrees of private (versus public) participation and risk; however, few involve true legal partnerships between government and the private sector.

Government Procurement and Alternative Financing

Canada's federal government recently announced measures to provide support for P3s. PPP Canada Inc. was created as a federal Crown corporation to promote the use of P3s in Canada. A $1.3 billion P3 Fund has been established to support innovative P3 infrastructure projects and invest in public-private partnerships using a range of innovative financing instruments such as loans, loan guarantees, non-voting shares and repayable contributions.

Alberta published the Alberta Infrastructure Guidance Document to assist the government's approach in assessing P3s. While Alberta has a limited track record in embracing P3 models to date, British Columbia has established Partnerships BC to promote P3s and to identify options for maximizing the value of public capital assets. Partnerships BC is currently overseeing more than 14 P3 projects, five of which are healthcare facilities.

Pension Funds Investment

The pension industry has encouraged the government to create the necessary conditions to capitalize on a shift in investment policy by pension funds away from equities and toward infrastructure as an asset class necessary to meet long-term pension requirements. It has been reported that fewer than 20 design, build, finance and operate projects have reached financial close over the past few years in Canada, compared to some 600 P3 projects in the U.K. since 1990. As a result, even Canadian pension funds are searching for opportunities to invest in public infrastructure outside Canada.

Private Equity Financing

The private sector has raised huge sums to invest in infrastructure projects around the world. During the past two years, the flood of money into private infrastructure funds has been astonishing: the world's 20 largest funds now have nearly $130 billion under management. Taking into account leverage, the global market can likely support $1 trillion in capital projects. Key attractions of investments in infrastructure include the potential for reliable cash flows, the prospect of predictable operations and relatively low overall risk.

Sector Opportunities

The following sectors are providing energy and infrastructure and related spin-off investment opportunities in Western Canada:

Oil and Gas

Canada is an emerging energy superpower. Next to Saudi Arabia, it has the second-largest petroleum reserves on the planet (around 179 billion barrels) and is the largest exporter of oil to the United States. The oil and gas industry employs 500,000 people in Canada and pays $26 billion per year in taxes and royalties. It represents 25% of private sector investment in Canada and accounts for 81% of Canada's trade surplus (representing 14% of all Canadian exports).

Alberta recently appointed its own diplomatic representative in Washington (the only provincial envoy with an office within the Canadian Embassy near Capitol Hill). In the coming years the United States will look increasingly to Western Canada for its secure supply of imported petroleum products, and as the safe transmission corridor for its own Alaskan resources.

Oil Sands Development

The Athabasca oil sands currently account for 50% of Alberta's petroleum production and, in a few years, will dominate the industry due to declining conventional reserves. Capital investment in 2007 was $16 billion and operating expenditures were $9 billion. According to the Canadian Energy Research Institute, by 2020 the Canadian oil sands development will add almost $800 billion to Canada's gross domestic product (which is about two-thirds of current annual GDP).

The global economic boom has made the oil sands viable but has also fuelled inflationary pressures that have sent development costs out of control. Labour shortages in Alberta are reaching crisis levels, housing is in short supply and existing pipelines - critical to moving products to market - are reaching capacity.

Carbon Trading

Oil sands companies are currently the fastest-growing greenhouse gas emitters in Canada (at 40 megatonnes per year), a figure which is expected to double in the next 10 years. As Canada begins to impose emission targets on the country's emitters, oil sands companies will be eager to trade "carbon credits" on the recently-launched Montreal Climate Exchange, Canada's first trading floor for carbon futures contracts. Through the exchange, carbon emitters who exceed their quota will be able to buy carbon credits, while companies that emit below their quota will be able to sell carbon credits. The global market for carbon trading is roughly $100 billion, based on World Bank estimates.

Commercial Real Estate

Although Calgary and Edmonton are seeing significant investment in retail and industrial projects, the bigger story is housing and social infrastructure, as the expanding economy attracts a mobile labour force that needs to be housed and cared for. The problem is even more acute in Northern Alberta; Fort McMurray has doubled in size in the past ten years, and both housing and services are stretched beyond their limits. It is estimated that the cost of the municipal infrastructure needed to keep up with the current pace of development in the Regional Municipality of Wood Buffalo is about $1.2 billion, and the provincial government has recently committed $400 million towards infrastructure spending for this town of 60,000 people.

Health Care

The federal government funds Canada's provinces for health and social services through the Canada Health and Social Transfer program. The provinces must directly provide all "medically necessary" hospital and physician services. This approach affects the scope of P3s in health care because it forces the distinction between "clinical" services (which cannot be contracted out) and "non-clinical" items (i.e. "bricks-and mortar" facilities and non-clinical services such as maintenance, food services, parking, etc).

In Alberta and British Columbia, P3s have emerged as the preferred method for tapping private sector resources for non-clinical resources. Recently the Alberta government has been advocating an expanded private sector role in delivering and funding a broader scope of health care in the province. Its recommendations have been endorsed by a Senate Standing Committee report, which concluded that "Canada's publicly funded healthcare system as it is currently organized and operated is not fiscally sustainable given current funding levels", and which encouraged both federal and provincial governments to explore P3s for hospitals.

Electricity

Historically, the generation, transmission and distribution of electricity in most provinces were strictly controlled by provincial and municipal governments. Over the past few years, some governments have permitted P3s and other forms of private sector involvement.

Alberta deregulated its electricity industry in 2001, with the market separation of generation, transmission and distribution. Several independent firms operate as franchise monopolies; about half of the electricity is generated from coal-fired generators, while most of the balance comes from natural-gas fueled generators. Two of the three major vertically-integrated utilities are investor owned (the third is municipally owned but is operated mostly on commercial terms). Additionally, a private-equity joint venture now owns Canada's first major independent transmission company, and electrical generation in Alberta is primarily in the private sector.

The boom in oil sands production is placing Alberta on the verge of the largest power build in its history. According to recent figures from the Alberta Electricity System Operator (AESO), which plans and regulates the transmission system, the province will need to boost generating capacity by at least 40%, or 5,000 megawatts, by 2017. The new sources of power will cost at least $10 billion and the province will also need up to $5 billion worth of transmission upgrades.

Most electricity generated in British Columbia is hydroelectric and is controlled by provincially owned BC Hydro, which is responsible for generation and distribution, while British Columbia Transmission Corporation operates the province's transmission grid. Although these two companies are controlled by the provincial government, virtually all new generation projects are offered to the market. BC Hydro recently awarded 38 contracts to independent power producers throughout the province, including 29 hydro, three wind, two biomass, two waste heat and two coal/biomass projects.

Transportation

Using preliminary estimates, Canada's provinces and territories have identified the need for approximately $97 billion in capital investment in transportation priorities over the next 10 years. Canada's large western cities (combined population of about 4 million people) reported a critical infrastructure deficit of $564 million in 2003.

Partnerships BC is currently overseeing six transportation infrastructure projects which include bridges, highways, interchanges and a rapid transit rail line connecting downtown Vancouver, Richmond and Vancouver International Airport (construction is expected to be completed in time for the 2010 Winter Olympic Games to be hosted by Vancouver).

In Alberta, construction is well under way on a $500 million P3 ring road in Edmonton. The project involves a 30-year concession between the Alberta government and Access Roads Edmonton, a consortium of 12 engineering, construction and maintenance companies.

Education

Education has traditionally been within the purview of provincial governments; however, recent experience in the U.K. has shown that construction and operation of public education facilities can be delivered cost effectively by the private sector. The Alberta government is now moving ahead with the planning and construction of 14 new schools that will focus on innovative design and operational concepts for middle and senior high schools in the Calgary and Edmonton regions.

Conclusion

Neither the federal nor the provincial governments have the capability or the funding necessary to maintain and upgrade the existing infrastructure, let alone to build for the future. It will become increasingly necessary for Canada to look to global sources of funding and expertise, which will translate to enormous opportunities for new players to enter the market and participate in the development of Western Canada's energy and infrastructure sectors.

Investment opportunities in Calgary and Edmonton are fuelled by the energy sector and the oil sands developments, while Vancouver is experiencing construction activity in connection with the 2010 Winter Olympics. The increasing strain on schools, hospitals, transportation networks and other essential infrastructure will translate to immediate opportunities for engineering, construction and management companies that develop the infrastructure, but more importantly will provide an enormous opportunity for infrastructure funds and other private sector participants to invest in long-term low-risk projects that will comprise Canada's infrastructure future.

Ontario Extends Transfer Tax Exemption
By: Tim Wach

One of the somewhat unique aspects of the Ontario Electricity Act, 1998 (the Electricity Act) is a so-called "transfer tax" levied on certain transfers of "electricity property". In general terms, the transfer tax is levied on municipal electricity utilities (MEUs) on the transfer of property used in the generation, transmission, distribution or retailing of electricity, and extends to the transfer of shares of a corporation that derive their value from such property. The transfer tax is levied at a rate of 33% and is widely seen as a significant disincentive to consolidation within the MEU sector.

On October 17, 2006 the Ontario Government, in an effort to facilitate such consolidation, announced that a temporary exemption from the transfer tax on dispositions of electricity property by one publicly-owned electricity utility to another. The exemption was to apply to such a transfer if a binding agreement in respect of the transfer was entered into and filed for approval with the Ontario Energy Board before October 17, 2008. One of the public statements announcing the temporary exemption specifically stated that the exemption was "designed to encourage consolidations among municipal electricity utilities".

However, despite the availability of this exemption and its temporary nature, the past two years have seen very little consolidation in the MEU sector. On October 14, 2008, with the exemption about to expire, the Ontario Government announced an extension of the exemption of one year or until October 16, 2009. It remains to be seen whether the next year will see any more activity in this sector, particularly in a period of economic uncertainty.

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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