Canada: NEB Declines Jurisdiction Over Coastal Gaslink Pipeline But Leaves Open Question Of Jurisdiction Over The LNG Facility

Last Updated: August 6 2019
Article by Toby Kruger and Alastair MacKinnon

On July 26, 2019, the National Energy Board (the “NEB” or the “Board”) released its decision concluding that it does not have jurisdiction over the Coastal GasLink Pipeline (“CGL Pipeline”) in British Columbia. The decision is based on a constitutional analysis of the division of powers between the federal and provincial governments, which, in turn, relies on a careful factual analysis of where, how, and why the CGL Pipeline operates. This decision is important, both because it demonstrates Canada’s constitutional framework of federal jurisdiction over interprovincial undertakings, and because it provides insight into how the Board assesses jurisdictional matters in the face of complex corporate arrangements governing the pipeline in question.

This post outlines the facts relating to the CGL Pipeline project, the constitutional framework applied by the Board in this case, and the Board’s reasons for concluding that the CGL Pipeline is within provincial jurisdiction.

1. The CGL Pipeline Project

Once completed, the CGL Pipeline will be approximately 670km in length, running from the Groundbirch area of northeastern BC to a liquefied natural gas (“LNG”) terminal in Kitimat, BC (the “LNG Terminal”). Currently, the CGL Pipeline is the only planned source of natural gas for the LNG Terminal.

The LNG Terminal is owned by LNG Canada, a joint venture between five major international oil and gas companies (the “LNG Partners”). It comprises a processing plant to convert natural gas into LNG and tanker ship loading facilities so that LNG can be loaded onto ships for export. At present, the LNG Terminal facility is primarily regulated by British Columbia, although LNG Canada has a permit from the NEB to export LNG from Canada.

Under the joint venture agreement among the LNG Partners, each LNG Partner is responsible for sourcing a certain amount of natural gas to be delivered periodically to the LNG Terminal for processing and export. Most of the gas required to meet each LNG Partner’s obligation will be sourced from its respective interests in the gas reserves of the Groundbirch area and shipped to the LNG Terminal on the CGL Pipeline. Some LNG Partners, however, intend to source some of their natural gas from elsewhere, including through the NOVA Gas Transmission Ltd. natural gas system (the “NGTL System”), a federally regulated natural gas pipeline network spanning Alberta and BC. A future connection between the CGL Pipeline and the NGTL System is contemplated, and a 3km right-of-way has already been acquired to facilitate the future connection.   

TransCanada Pipeline Limited (“TCPL”) is the proponent of the CGL Pipeline. Importantly, NGTL is a wholly owned subsidiary of TCPL, and TCPL operates the NGTL System under an operating agreement with NGTL. For the purposes of constructing the CGL Pipeline, however, TCPL incorporated a new wholly owned subsidiary, Coastal GasLink Pipelines Ltd. (“CGL Ltd.”). By virtue of being a TCPL subsidiary, CGL Ltd. follows a number of TCPL corporate policies, including engineering and operational procedures (customized to meet the needs of the LNG Partners), as well as other overarching corporate policies related to public engagement, Indigenous relations, the environment, and emergency response. Also of significance, two of CGL Ltd.’s three directors are also directors of NGTL, and 12 of CGL Ltd.’s 14 officers are officers of either or both of NGTL and TCPL (or its parent company, TC Energy Corporation).

While the CGL Pipeline will be owned by CGL Ltd., it is being built to the technical specifications of LNG Canada. The LNG Partners have collectively contracted for 100% of the CGL Pipeline’s capacity, and under these agreements the LNG Partners have control over any future expansion of the CGL Pipeline and whether any other shippers are later permitted to use it. Furthermore, management of the CGL Pipeline will be conducted through a committee of which CGL Ltd. and LNG Canada each have one vote. Accordingly, decision making will either be by consensus or resolved through formal dispute resolution.

Construction of the CGL Pipeline commenced at the direction of LNG Canada after the requisite provincial approvals had been obtained. Subsequently, an application was made to the NEB by applicant Michael Sawyer, seeking a declaration that the CGL Pipeline falls within federal jurisdiction and therefore ought to undergo a federal environmental review. On October 22, 2018, following its established two part test, the Board found that a prima facie case existed for federal jurisdiction on the basis of the apparent connections between the CGL Pipeline and the NGTL System. Accordingly, the Board held a full hearing on the jurisdictional issue, resulting in the present decision. In these proceedings, Mr. Sawyer was joined by the group Ecojustice, advocating in favour of federal jurisdiction. Whereas CGL Ltd., NGTL, the LNG Partners, and the Attorneys General of Canada, British Columbia, and Saskatchewan all argued against federal jurisdiction (referred collectively as the “industry and government participants”).

2. Constitutional Framework

The case is governed by sections 91(29) and 92(10)(a) of the Constitution Act, 1867. Together, these provisions provide that provincial governments have jurisdiction over “local works and undertakings” while the federal government has jurisdiction over “works and undertakings connecting the province with any other of the Provinces, or extending beyond the limits of the province.” The analysis is easy when a pipeline clearly physically crosses a provincial or international border., but, as in this case, is more complex when a pipeline segment located entirely within a province is alleged to form part of a large pipeline network that extends beyond the province in which the segment is located.

As the Board noted, the leading case on whether an intra-provincial pipeline falls under federal jurisdiction is the Supreme Court of Canada’s decision in Westcoast Energy Inc. v Canada (National Energy Board). In Westcoast, the SCC held that federal jurisdiction can arise in one of two ways:

  • the intra-provincial pipeline forms part of a single federal work or undertaking (the “First Branch” of the test in Westcoast); or
  • the intra-provincial pipeline is essential, vital, and integral to a federal work and undertaking (the “Second Branch” of the test in Westcoast).

Under the First Branch, the primary factor to consider is whether the intra- and inter-provincial works are functionally integrated and subject to common management, control and direction. The focus is on the works themselves. Other non-determinative factors include whether all of the facilities are subject to common ownership, and whether the intra-provincial works primarily or exclusively service the inter-provincial works. Conversely, a mere physical connection or commercial relationship between intra- and inter-provincial works is insufficient to ground federal jurisdiction. Overall, a careful factual analysis is required. Under the Second Branch, federal jurisdiction effectively depends on the degree of dependence by the inter-provincial undertaking upon the intra-provincial undertaking.

3. Findings of the NEB

(i) First Branch Jurisdiction

The NEB ultimately concluded that the CGL Pipeline is not functionally integrated or subject to common management, control and direction with the NGTL System. This precludes federal jurisdiction under the first branch of the test in Westcoast.

The Board considered numerous factors in reaching this conclusion. Regarding functional integration, the Board considered whether the two works shared a common purpose, physical connections and commercial relationships between them, whether the works were exclusively or primarily dedicated to one another, and whether they were operated together as a single enterprise. Regarding common management, control, and direction the Board paid particular attention to the ownership structure of the CGL Pipeline.

From a functional perspective, the Board found that:

  • The purposes of the CGL Pipeline and NGTL System were different. The former serves the feedstock needs of LNG Terminal, whereas the purpose of the latter is transportation of natural gas to the markets in Canada and the United States.
  • Characterizing the two systems as being for the transportation of gas to markets was too broad, as that is the basic purpose of any pipeline system.
  • When assessing the operations of the CGL Pipeline, the Board had to focus on what it actually does (transporting natural gas within British Columbia) as opposed to what it facilitates (exporting LNG from Canada).
  • There would likely be a future physical connection and limited commercial relationship between the two pipelines, but found these facts to be insufficient to ground federal jurisdiction, especially given there was no relationship of dependence or interdependence between the two pipelines.
  • While the NGTL System might, in the future, deliver gas to the CGL Pipeline, the CGL Pipeline would not be available for use by third-party shippers like the rest of the NGTL System.
  • The CGL Pipeline and NGTL System were not being operated together as a single enterprise, as the former is a closed system serving only the LNG Partners, whereas the latter operates on an open access basis.

From a management perspective, the Board concluded that the CGL Pipeline would be controlled separately from the NGTL System. The Board held that the overlap and linkages between CGL Ltd., NGTL, and TCPL personnel and policies were “organizational features” and “administrative practices” consistent with the arrangements that most pipeline subsidiaries have with their parent companies in Canada. It is reasonable and common practice, the Board concluded, to have shared corporate policies and services between subsidiary, parent, and affiliate companies under common ownership. Alone, these corporate relationships are not sufficient to collapse everything into a single, federally regulated undertaking. Rather, a single entity can own and operate more than one undertaking. Furthermore, through their contracts with CGL Ltd. and their equal vote on the CGL Pipeline management committee, the LNG Partners exercised a large degree of control over the CGL Pipeline—which did not extend to the NGTL System. Without the LNG Partners’ consent, neither CGL Ltd. nor TCPL could deploy excess capacity on the CGL Pipeline to meet the needs of shippers on the NGTL System. Thus, the Board held, it could not be concluded that the two pipeline systems were being managed together in common.

(ii) Second Branch Jurisdiction

Noting that it must be a federal work or undertaking that is dependent upon a local work or undertaking for the latter to fall within federal jurisdiction, the Board concluded that (i) the CGL Pipeline is not vital, essential, or integral to the NGTL System, and (ii) that, on the limited record before it, there was insufficient evidence or authority to conclude that the LNG Terminal is a federal undertaking.

The Board noted that none of the proceeding participants expressly took the position that the CGL Pipeline was integral to the NGTL System. Rather, Ecojustice simply refused to rule it out as a possible basis of federal jurisdiction. Given that the NGTL System is already operating without any connection to the CGL Pipeline, the Board held that when and if the two systems are later connected, the operations of the NGTL System will not be affected.

The Board’s findings regarding the LNG Terminal are, perhaps, more interesting. While the Board concluded that it had insufficient evidence to conclude that the LNG Terminal is a federal undertaking, it did not rule out the possibility that such a finding could result if the issue were fully canvassed in a subsequent proceeding. Rather, because the present proceeding focused on the jurisdictional significance of the CGL Pipeline’s connections to the NGTL System, virtually no evidence or argument was directed to the proper jurisdictional characterization of the LNG Terminal.

Conclusion

The western Canadian natural gas transportation industry is likely to welcome the NEB’s decision about jurisdiction over the CGL Pipeline. It is notable that both industry and all levels of government were agreed in this case that the CGL Pipeline fell within provincial jurisdiction. The Board’s vindication of this position provides further certainty about jurisdiction over intra-provincial pipelines. However, the door to federal jurisdiction may not be completely closed. The Board’s emphasis on inadequate evidence in this proceeding to conclude that the LNG Terminal ought to be federally regulated seems to leave open the possibility that such a determination might follow from a future proceeding on that issue.  We will continue to follow this case and report on whether any appeal is taken from this Board decision, and whether any further proceedings are instituted related to federal jurisdiction over the LNG Terminal that might impact upon jurisdiction over the CGL Pipeline.

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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