Framework for Regulatory Reviews: First-Order Conditions for Success

by Bennett Jones LLP

Bennett Jones LLP

Balanced Messaging with the Introduction of New Legislation

With the recent tabling of proposed legislation to reform the environmental and regulatory system for major projects, the federal government stated the necessity of both restoring public confidence in project reviews and getting projects built. Ministers submitted that early planning and engagement will build trust. The process will be inclusive, transparent and predictable. Timelines will be shorter. They cited $500 billion in projects planned over the next 10 years. Natural Resources Minister James Carr referred to “a vision that includes a deeply competitive oil and gas industry” as well as “the emergence of Canada as a global leader in the transition to a low-carbon economy.”

The proposed legislation, together with amendments to the Fisheries Act, will now proceed through the House of Commons and the Senate and detailed regulations will be developed. Through this process, there will be much discussion about whether the government’s stated objectives will be served by the legislation and then matched by outcomes. It will be important that the government be open to constructive legislative amendments. Similarly, work on detailed regulations will require input from a number of sources.

The Harder Part of the Exercise: Making a New System Work

As with any such reform, the enactment of new legislation, however important a milestone for the government’s agenda, will be the easier part. The harder part of governing will lie ahead. Three critical factors will determine potential success: leadership; capacity; and clarity of intent. A fourth factor, events and decisions in the transition, will be even more important in shaping the perception of our regulatory framework and the future of Canada’s energy and resource industry. Much is at stake.

a. Leadership

No process can be a substitute for leadership. To garner public confidence, a regulatory process must be objective and informed by facts and science. It must allow meaningful engagement by the affected public, communities and Indigenous peoples. It must address and seek to reconcile legitimate concerns, rights, and interests related to the projects. Yet, critically, confidence in the process also entails defining success as good projects being built on a predictable timeline. Good projects, of course, imply high standards. Getting them built implies a recognition of a competitive environment for capital that cannot accommodate unreasonable delays, costs, or uncertainty.

The government must be consistent in providing the right signals to all participants in the process: the regulatory agencies, project proponents, Indigenous peoples and their representatives, communities, and environmental groups. The legislation will need to be applied with efficiency, judgment and reasonable discretion to ensure that processes and resources focus on key impacts, avoid unnecessary duplication with provincial review, and purse not zero risks and impacts but sensible management of risks and mitigation of impacts. In turn, proponents and participants in the process will need to demonstrate leadership and goodwill in arriving at constructive solutions. Inflexibility and obstructionist tactics should not be allowed to drive regulatory processes and decisions.

b. Capacity

No process can function without the necessary resources and capacity. The proposed legislation establishes the Impact Assessment Agency of Canada (IAAC) and the Canadian Energy Regulator (CER) as successors to the Canadian Environmental Assessment Agency and the National Energy Board, respectively. The governance of the CER is substantially altered to now include a board of directors, a chief executive officer, and a commission, with a lead commissioner.

The government has pledged to invest an additional $1 billion over five years to support the new system. Again, this is the easy part. Resourcing the new and existing bodies with leaders and with expertise wide and deep to deliver the assessments and to conduct the processes with authority, judgment and a focus on results will take time and effort. Quality, timely governor-in-council appointments will be a critical start. Realistically, it will take well over one year after Royal Assent for the agencies to be fully staffed and ready to go. The government must make implementation a priority.

c. Clarity of Intent

Finally, no process will be efficient or predictable without the government making clear its intent on key points. Four, among many, may be cited.

First, the draft legislation establishes that the impact assessment of a designated project must take into account effects on the Government of Canada’s ability to meet its environmental obligations and its commitments in respect of climate change. It is appropriate for a project review to have visibility on the specific environment impacts of a project and to require best economic technology to mitigate those impacts. It is not reasonable, however, for a project review to re-litigate climate change policy, upstream or downstream. Canada and the provinces are implementing a Pan-Canadian Framework for Clean Growth and Climate Change. This includes a carbon price as well as regulation on certain sources of emissions, including methane emissions from oil and gas. Alberta has imposed a cap on total emissions from the oil sands. Some provinces have adopted clean power targets. That is the framework. It is not for project proponents, other participants, or indeed regulators to debate or to seek to move these policy goal posts through the regulatory process.

Second, the legislation makes clear that the regulatory process must consider “any adverse impact that the designated project may have on the rights of the Indigenous peoples of Canada recognized and affirmed by section 35 of the Constitution Act, 1982.” This clause is inserted for greater certainty because the Constitution itself imposes the legal obligation. Indeed good projects tend to go beyond this strict requirement, establish a positive relationship with Indigenous peoples and their representative bodies, and share benefits (the positive impacts). The legislation also specifies that impact assessments must take into account the traditional knowledge of Indigenous peoples provided for the designated project. This is workable in an inclusive and rigorous process and indeed often happens already in practice.

What is less clear is how the government will reconcile this legislation, and others, with its endorsement of the United Nations Declaration on the Rights of Indigenous Peoples (UNDRIP) and, in particular, the requirement “to consult and cooperate in good faith with the indigenous peoples concerned through their own representative institutions in order to obtain their free and informed consent prior to the approval of any project …”. To date, the government has walked a fine line, embracing the Declaration while implying that it does not amount to a veto power. This is particularly sensitive for pipelines or power transmission lines for which even the best consultation and accommodation may fail to secure the consent of all affected communities. The government should clarify at the outset the reach of UNDRIP rather than leaving it to the courts to do it in ways that will be protracted, costly, and unpredictable.

Third, the legislation reintroduces a pre-2012 requirement that project assessments take into account “any alternative” to a project (without further specification), as well as alternative "means" of carrying out the project. A power generation project, a transmission line or pipeline, or any other energy or infrastructure project conceivably would have a wide range of alternatives or means. A proponent cannot reasonably be expected to produce analysis of all potential alternatives nor will the regulator have the capacity to do so. There must, in practice, be parameters around this requirement so that proponents are not placed in a position to compete with undefined benchmarks.

Finally, the project list as well as the information requirements and time management regulations, upon which the government is starting consultations, will set a tone that will help ascertain whether the new framework is risk-based or all encompassing. They will also be instrumental in defining the workload of regulators and their capacity requirements. If the regulations overshoot, the framework will collapse under its own weight. If they undershoot, intense debate will simply shift to other places. The regulations will need to be finalized promptly so that investors and project proponents know under what conditions they may contemplate a future resource or infrastructure project.

Leadership, capacity and clarity of intent will help regulatory processes work as intended and minimize the litigation risks. Otherwise, project reviews and decisions will be litigated endlessly, timelines will be set off course, and the objectives of the reform will be thwarted.

A Priority: Getting Already Approved Projects Built

All this said, what happens more immediately in the transition may matter even more for the success of the future regulatory system. Canada currently is frustrated economically by not being able to get its oil and gas resources to new markets. We are exporting our oil at a large discount and selling our natural gas in a deeply saturated North American market. This is punishing producer margins, costing billions of dollars to our economy, and depriving our treasuries of royalties and taxes that could be reinvested in priorities, including energy innovation and transition.

There are projects that already have regulatory approval that can help Canada close this gap. A pipeline connecting our resources to tidewater would provide early relief by allowing Canada to earn the world price for our oil. Likewise, a positive final investment decision for at least one major liquid natural (LNG) project would unlock the value of our gas fields. Both steps would also enable Canada to make a meaningful contribution to the energy needs of Asian economies, finally matching our words of new partnerships with actual investment and trade.

If projects delivering access to offshore markets for our oil and natural gas are not given a definitive green light by both proponents and public authorities by the time this new legislation is being implemented, then the stated intention of getting good projects built under a new act will be moot because investors will have drawn their conclusions and moved their dollars elsewhere. No one will want to start down the path of an untested regulatory process in the knowledge that even an approval under the former system did not succeed in getting a project over the line. No CEO will dare bring a proposal to a board of directors. This will be true not only for oil and gas projects but also for hydropower or for other renewable energy generation or transmission infrastructure that will be material to Canada meeting its climate change commitments.

A Crossroad

This is a crossroad that will define two distinct energy, economic and environmental futures for Canada. If an oil pipeline is not built and no LNG project goes forward, the result will be lower prices for our resources. Industry will have lesser capacity to invest and create jobs not only in new projects but also in technology and better environmental performance, and governments will have lesser means. Canada will be a poorer and fractured country. Arguments that the outcomes reflect market decisions or court rulings will not matter. Even if this is true, we will have placed ourselves collectively in a box where failure will have damaging, long-lasting effects.

If the projects do happen, then oxygen will be injected into our resource sector and Canada at least will have an opportunity to convince Canadians and investors that it is serious about serving both the economy and the environment and implementing a sound and workable regulatory process.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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