Transforming the NEB

Clients and their lawyers want change at the National Energy Board, but how far to go, and in which city, remains to be seen.
AFTER YEARS OF STURM UND DRANG on the part of many in the oil & gas and electricity sectors, Minister of Natural Resources Minister Carr called, in late 2016, for an expert panel to conduct a review and report on a vision for the modernization of the National Energy Board.

Minister Carr prepared the expert panel by giving them these Terms of Reference: “Efforts to modernize the NEB will deal with a focused set of issues related to the Board’s structure, role, and mandate pursuant to the NEB Act. Specifically, these efforts will aim to position the NEB as a modern, efficient, and effective energy regulator and regain public trust.”

In May 2017, the panel presented its Report, FORWARD, TOGETHER Enabling Canada’s Clean, Safe, and Secure Energy Future (see bit.ly/2hkeF7I). A month-long opportunity for public comment followed. The Report included a number of far-reaching recommendations including dividing the NEB into two separate entities, as happens in certain other jurisdictions: the Canadian Energy Transmission Commission (CETC) would inherit the NEB’s role in approving or denying pipeline applications, while the Canadian Energy Information Agency would take over the NEB’s role as collector of information around energy supply.

And the panel advised creating three different pipeline approval processes, depending on size. “Our vision is one where every regulated activity is reviewed and approved in a way commensurate with its scale and risk.

“This means that the Governor in Council should determine whether major projects are in the National Interest before licensing hearings, that the CETC-CEA Agency Joint Panels should review major and other significant projects, and finally that mechanisms be put in place to allow the CETC to review lower-risk regulated activities, provided that clear criteria are in place to define these classes of regulated activity.”

This did not mean any kind of energy project would proceed without approval: “A tiered system of reviews, as described above, does not in any way mean that lower risk projects should be rubber stamped, or that their environmental impacts should not be considered. Quite the opposite, regulatory review and assessment of environmental impact should always be required for any regulated activity, but via processes that match the scale of the activity in question.”

But arguably, the most controversial aspect of the Report had to do with moving certain of the NEB’s functions to Ottawa. The panel wrote:

“We do agree entirely that Canada’s energy transmission infrastructure regulator needs a stronger connection to the seat of the federal government. Therefore, we propose that the office of the Board of Directors be based in Ottawa, along with a CETC office devoted to governmental coordination. We further envision future investments in staff and resources related to electricity transmission being based in Ottawa, so that as this side of the regulatory business grows, as we expect it to, more of the CETC will be based in the capital. Finally, as the role of energy Report of the Expert Panel on the Modernization of the National Energy Board 65 information provision migrates to the new Canadian Energy Information Agency, it would be prudent to locate that Agency — as well as NEB staff today performing this function — proximate to partners in Statistics Canada, Natural Resources, and Environment and Climate Change Canada, to the extent possible. Our vision calls for an independent Board of Directors (with an office based in Ottawa) and Hearing Commissioners who may reside anywhere in Canada, each appointed according to a transparent competency model.” At the same time, they called for “greatly increased Indigenous involvement, and much more meaningful engagement with all stakeholders on the essential competencies for these governance and decision maker appointments. We feel that these changes will address concerns of the regulator being too close to industry.”

Presumably the panel was following up on a series of historic controversies — from the appointment of oil industry insiders to senior board positions to closed-door meetings with industry lobbyists — which prompted many critics to question the board’s ability to make unbiased decisions. The way to redress that concern remains to be seen.

The Report comes as energy industries face some of their biggest challenges in years, among them weak prices and increased competition from US producers. Not surprisingly, some of the expert panel’s proposals are being met with unease on this side of the border. “There is a lot up in the air right now,” says Thomas Isaac, a partner at Cassels Brock & Blackwell LLP in Vancouver. Isaac, whose clients include mining companies, financial services firms and governments, says all sides need to have patience. “The notion of a quick process is likely not in the cards,” he says. “A revamp of the National Energy Board shouldn’t be quick. I don’t think government deserves any criticism in terms of taking its time. You don’t want to make a mistake.”

Projects already partway through the approval process, such as the $15-billion Energy East pipeline, will likely be ‘grandparented’ to some extent through the existing regulatory process, but any new proposals will undergo the process that Ottawa is working on and promises to put in place.

Among lawyers interviewed for this story there is a general view that, whether or not they agreed with the Report, the NEB needed fixing. As a result of what seemed an endless stream of contentious issues faced by the NEB, pipeline applications have been thrown into doubt and approval processes bogged down in delay. “All sides are impacted by the lack of certainty,” says Lisa DeMarco, a partner at DeMarco Allan LLP in Toronto. “I think [the revamp] is a positive for the whole sector.”

A lawyer with more than two decades of experience, DeMarco mainly represents governments and First Nations at the NEB and other regulators. She is particularly pleased to see the expert panel’s advice on paying greater attention to Aboriginal interests. “Everyone has the right to be heard, particularly those who have felt aggrieved by the historical process,” says DeMarco.

Many of the problems identified by the panel were rooted in NEB governance, and some of its recommendations sought to address those issues. They include a call to create separate chairperson and CEO roles, with separate hearing commissioners and a variety of backgrounds. Much of the regulator’s work is “very technical,” says DeMarco. “Some of the project approvals require advanced economic and engineering skills, so you want to have that reflected but you also want to have a strong indigenous perspective, a strong environmental perspective, a strong economic perspective.”

Laura Estep, a partner at Dentons Canada LLP and a member of the firm’s energy regulatory practice group, says she too is pleased with some of the proposed changes. Recommendations such as a move toward a more corporate structure with separate CEO and chairperson roles would move the regulator to “a governance structure that is very similar to the Alberta energy regulator,” she says. “It’s a positive evolution, and I think probably that’s a recommendation that might end up getting implemented.”

Another potential positive, says Estep, is having a “no or go” stage at the start of the project. A determination as to whether a project is in the public interest must ultimately be a political decision, and without a positive result no project can expect to go ahead. But under the existing system that determination can happen years after the initial application is launched, meaning proponents can end up investing significant amounts of money only to find out that they were essentially wasted. “There is the potential for that to be a very good change,” she says.

However, for all the hopeful signs, Estep cautions that there are many details still to be sorted out. As for the recommended three separate approval processes by size, where would lines between them be drawn?

Estep worries that small projects, which once needed to navigate only minimal approval processes, could end up facing more hurdles. That would be problematic, she says. “It would be beneficial if [regulators] took a more restricted view to that so it was more the extraordinary projects, the big new projects, that are going through that additional process.”

There are those in the oil patch who argue wholesale change may not be necessary. According to this viewpoint, if the NEB has shortcomings, they have more to do with public relations. In other words, the NEB essentially makes good decisions, but isn’t up to the task of defending them against its critics. What’s more, this argument goes, having NEB officials come from industry means they understand the often very technical subject matter and companies that come under the NEB’s jurisdiction.

The NEB was “skilled technically, but they weren’t good at selling that story to the public,” says Shawn Denstedt, a lawyer at Osler, Hoskin & Harcourt LLP. “I think if we had injected more money into the board and provided them with more authority, and said, ‘We’re going to give you the resources you need to do a better job,’ that’s better than tinkering around the edges with legal and legislative changes.”

Denstedt’s “take on this comes from what sustainable development really is about … when you develop a project, you make sure you pay attention to the social, economic and environmental impacts. You balance all those things to arrive at a decision that is in the public interest. The problem with the regulatory system in Canada is we have moved way far away from that. We are not balancing the benefits of the impact.”

 “There are varying different applications of the constitutional duty to consult and accommodate, and there are a variety of procedural requirements that are tailored to the proximity of the entity, so what rights are affected,” says DeMarco, who concedes this can lead to complicated solutions. But ultimately the reform of the NEB “is about more transparency, and more openness. I think that is positive for everyone.

The government will consider the Report and the comments from Canadians before introducing new legislation, potentially in 2018.