This paper discusses the principle elements of the Canadian
legal environment as it applies to the energy sector and,
specifically, the oil and gas and electricity industries. It is
divided into the following parts: first, an overview of the
Canadian constitutional framework; second, the legal framework for
the oil and gas industry; third, the legal framework for the
electricity industry; and fourth, the federal government's plan to
ratify the Kyoto Protocol and the opposition to the plan.
Canadian constitutional framework
Canada is a constitutional monarchy and multi-jurisdictional
parliamentary democracy. The monarchy has primarily a ceremonial
role and governmental power resides among our federal government
and the governments of each of our 10 provinces and three
territories. The division of powers between federal and provincial
governments is set out in our Constitution Act, 1867. Generally,
the federal government has jurisdiction over matters of national
and international importance while the provinces have jurisdiction
over matters of a local or private nature. Since the territories do
not have independent constitutional status, the territorial
governments are delegated their jurisdiction directly from the
federal government's jurisdiction over those territories.
The federal government has authority to make laws for the
"peace, order and good government" in relation to all matters not
exclusively assigned to the provinces and including the regulation
of trade and commerce. The provinces have authority over property
and civil rights and in respect of exploration for, and
conservation and management of, non-renewable natural resources and
forestry resources in the province and over the development,
conservation and management of sites and facilities in the province
for the generation and production of electrical energy.
Balancing the federal government's authority over trade and
commerce with the provinces' specific powers presents a challenge
in determining which level of government is responsible for
regulating a particular matter. Jurisdiction will typically be
determined based on the location, nature and scope of the matter
and certain other factors. Canadian courts have traditionally
interpreted the federal power over trade and commerce to be limited
to interprovincial and international trade and commerce and to
general trade and commerce, which has been narrowly interpreted and
historically applied most significantly to intraprovincial aspects
of business competition.
Accordingly, the two levels of government exercise
constitutional powers in respect of different aspects of energy
development, transportation, marketing and use. Generally, the
provinces regulate local matters regarding oil and gas exploration
and production, electrical generation, and energy transportation
and marketing within provincial boundaries. With respect to energy
transportation and marketing, the movement of goods
interprovincially or internationally is regulated by the federal
government. Likewise, pipelines, transmission lines and other
transportation systems that cross provincial or international
boundaries are under federal jurisdiction.
The oil and gas industry
Petroleum and natural gas in Canada is primarily located in the
Western Canadian Sedimentary Basin, a geologic region that includes
most of Alberta, significant portions of British Columbia and
Saskatchewan as well as parts of Manitoba and the Northwest
Territories. Other areas containing petroleum and natural gas
reserves include offshore British Columbia, the Beaufort Sea, parts
of the Yukon and the Northwest Territories, parts of Ontario and
offshore the north, west and east coasts of Canada.
Federal jurisdiction
The principal federal regulatory body having jurisdiction in
energy matters is the National Energy Board (NEB). The NEB derives
its powers primarily from the National Energy Board Act, which
(subject to federal cabinet approval) empowers it to grant
certificates of public convenience and necessity for
interprovincial, international and offshore pipelines and power
lines. The NEB can issue licences for the import and export of oil,
gas or electrical energy, and has jurisdiction over the
interprovincial movement of those commodities and their tariffs and
tolls. In addition to the National Energy Board Act, the NEB
derives additional powers under the Northern Pipeline Act, Canada
Environmental Assessment Act, Mackenzie Valley Resource Management
Act and other pieces of federal legislation. As noted below, in
some Canadian jurisdictions, the NEB is also authorized to regulate
oil and gas exploration and development activities.
Provincial jurisdiction: Alberta, British Columbia and
Saskatchewan
Provincially owned mineral resources (approximately 81% of all
such resources) in Alberta are administered by the Department of
Energy under the Mines and Minerals Act. Under this legislation,
the department grants licences and leases of petroleum and natural
gas whereby producers and explorers obtain the exclusive right to
explore and drill for and produce petroleum and natural gas from
provincially owned lands. In return, a royalty is paid to the
province in accordance with regulated requirements.
The remaining mineral rights within the province are either
privately owned, Indian Lands or federally owned. Privately owned
mineral rights are typically acquired and developed pursuant to
freehold oil and gas leases, which are privately negotiated
agreements. Ownership of such lands and obtaining interests therein
is governed by the Land Titles Act and common law. Indian Oil and
Gas Canada, an agency of the federal government, administers
mineral rights in Indian Lands located within a province. In a few
instances, mineral rights within the province are also owned and
administered by the federal government.
The Alberta Energy and Utilities Board (AEUB) has jurisdiction
over oil and gas exploration, development, production,
transportation, sale and exportation. The AEUB is delegated
authority under numerous pieces of legislation including the Energy
Resources Conservation Act, Oil and Gas Conservation Act and Gas
Utilities Act.
The other provinces with a significant onshore oil and gas
industry, being British Columbia and Saskatchewan, have similar
mineral ownership, legislation and regulatory agencies.
Offshore British Columbia
The potential for oil and gas development offshore British
Columbia has long been recognized but to date has not been
developed in any significant way. There are a number of reasons for
this, including the continuing disputes regarding ownership of and
jurisdiction over these resources among the province, the federal
government and First Nations groups.
The Supreme Court of Canada has partially answered some of these
questions, however, significant issues remain in dispute
respecting, in particular, the area commonly referred to as the
Hecate Straight and geologically known as the Queen Charlotte
Basin. A federal moratorium preventing tanker traffic and
exploratory drilling in the Hecate Straight is in effect.
The minerals located within the territorial sea and continental
shelf area offshore British Columbia have been judicially
determined to be under federal jurisdiction and its geographical
boundaries have been established by the UN Convention on the Law of
the Sea, 1982, and extend 12 nautical miles from a baseline along
the western coast of Vancouver Island and the Queen Charlotte
Islands. These resources are regulated by the NEB under the Canada
Petroleum Resources Act and the Canada Oil and Gas Operations
Act.
There is now no provincial legal regime in British Columbia
regulating an offshore oil and gas industry in those areas that
come under provincial jurisdiction and, in fact, there is a
provincial moratorium on exploration and development in the Inland
Marine Zone and the areas between Vancouver Island and the
provincial mainland.
On May 1 2002, the British Columbia provincial government
released a report by a scientific review panel appointed by the
Ministry of Energy and Mines which concluded that there was no
scientific justification for the 30-year moratorium on oil and gas
exploration off the coast of British Columbia. The panel further
concluded that the existing moratorium is the product of federal
and provincial policy and there is no formal or legal moratorium in
place at either level of government. Accordingly, the panel felt
that no legislative action is required to change existing
moratorium policy to allow offshore oil and gas exploration
development in British Columbia. To date, no further steps have
been taken to lift the moratoriums by either level of
government.
The Yukon
In late 1998 the territorial government of the Yukon assumed
management and administration of the development and conservation
of onshore oil and gas resources from the federal government. The
powers transferred to the Yukon are consistent with those vested
with the provinces pursuant to Section 92A of the Constitution Act,
1867. However, the ability to exercise such powers is further
complicated by the authority transferred to 14 First Nations
governments in addition to the Yukon territorial government.
Dispositions of oil and gas leases and licences and regulation of
oil and gas exploration and development activities are governed by
the Yukon Oil and Gas Act, which has been structured with a view to
providing a common regime for addressing oil and gas matters within
the 15 various jurisdictions.
The Northwest Territories, Nunavut and offshore far
north
Until recently the federal government was the owner and had sole
jurisdiction over oil and gas resources in these territories. As a
general rule, the management of oil and gas resources in these
areas remains the responsibility of the Northern Oil and Gas
Directorate of the Department of Indian Affairs and Northern
Development under the Canada Petroleum Resources Act which governs
the licensing and leasing of Crown lands (including mineral
rights), tenure to such mineral rights, and collection of
royalties. The Canada Oil and Gas Operations Act governs resource
conservation and development and environmental protection and is
administered by the NEB. However, as a result of a number of
negotiated settlements between the federal government and First
Nations groups, ownership of some surface lands and mineral rights
have been transferred to First Nations resulting in a number of
stakeholders, private groups, individuals, governmental and
quasi-governmental bodies exercising authority over oil and gas
exploration and development matters.
Gulf of St Lawrence and Hudson Bay
Mineral rights and benefits are administered by the Frontier
Lands Management Division pursuant to the Canada Petroleum
Resources Act while the NEB regulates oil and gas activities in
these areas under the Canada Oil and Gas Operations Act.
Offshore eastern Canada
There are two federal-provincial accords addressing ownership
and regulation of mineral resources. The Canada-Newfoundland
Atlantic Accord Implementation Act and the Canada-Nova Scotia
Petroleum Resources Accord Implementation Act (including the
corresponding provincial accord implementation acts) have
established regulations and provisions which incorporate the Canada
Oil and Gas Operations Act and the Canada Petroleum Resources Act.
The Canada-Newfoundland Offshore Petroleum Board and the
Canada-Nova Scotia Offshore Petroleum Board regulate oil and gas
activities on behalf of the respective provinces and federal
government.
On May31 2000, pursuant to the provisions of both Accord
Implementation Acts, a Tribunal was initiated by the Federal
Minister of Natural Resources to establish an offshore boundary
line between Nova Scotia and Newfoundland and Labrador. On April2
2002, the Tribunal released its decision, which established a
boundary line giving Newfoundland and Labrador almost 70% of the
area in dispute between the two provinces.
The electricity industry
Electricity is predominantly generated, distributed and
transmitted by vertically integrated monopoly utility companies
within each province. However, almost every Canadian province and
territory is restructuring, or studying the restructuring of, its
electricity industry. At present, British Columbia, Saskatchewan,
Manitoba, Quebec and New Brunswick have open access transmission
tariffs to encourage the development of wholesale energy markets.
Further, Alberta and Ontario have opened their retail markets up to
competition, and British Columbia, New Brunswick and Nova Scotia
have expressed an interest in doing so.
Federal jurisdiction
The federal government has jurisdiction over electricity
exports, international power lines and nuclear energy and may
regulate, by order, interprovincial power lines in the same manner
as international power lines.
The federal Competition Bureau is the federal body that oversees
competition in the deregulated electricity markets in Canada. The
Competition Bureau is responsible for the administration and
enforcement of the Competition Act, which attempts to promote
competition in the marketplace by prohibiting anti-competitive
practices.
Provincial jurisdiction
Regulated markets
All of the provinces and territories, except Alberta and
Ontario, regulate all aspects of their respective electricity
industries. Generally these jurisdictions have one or two
vertically integrated electricity suppliers which are regulated by
the provinces.
Deregulated markets
Alberta
Alberta was the first deregulated electricity market in Canada.
The deregulation process began in 1995 with the passage of the
Electric Utilities Act, which was further amended by the Electric
Utilities Act Amendment Act in 1998 (collectively known as the
EUA). In accordance with the EUA, Alberta's retail market was
opened to competition on January 1 2001.
The deregulation process required the divesting of power
generation assets through the use of Power Purchase Arrangements
(PPAs) where the divesting generators continue to hold title to the
physical asset and receive a regulated rate of return on the
generation asset from a PPA purchaser, while the PPA purchaser
acquires ownership of the generation asset's output and the right
to market that output in the wholesale market. The duration of
these PPAs range from three to 20 years, at which times generation
output reverts back to the owners. The Balancing Pool of Alberta, a
not for profit entity, manages all PPAs that have not as yet been
sold.
Pursuant to the provisions of the EAU, each PPA has been
approved by the AEUB and has effect in accordance with its terms
and conditions. Buyers gain exclusive rights to the generation
output of the facility for resale in the marketplace by way of
direct sales to customers or sales through the Power Pool and other
electricity markets.
A unique feature of the PPAs is that existing owners retain
ownership and operatorship of their generation assets and have the
right, subject to certain conditions, to sell the assets to other
parties.
In Alberta's deregulated market, all generated power (except
industrial systems and generators in remote locations not connected
to the interconnected exchange system) is now sold through the
Power Pool of Alberta. The Power Pool is an open-access,
competitive market for spot electric energy. Electricity prices are
set every hour at a spot pool price, based on a marginal cost by
which spot prices are set, each hour, by reference to the cost of
the last unit of supply required to meet market demand. All
producers receive the same price even though their bids to sell
supply into the market may be lower. Based on marginal cost
pricing, the price paid may be greater than the average cost of
energy supply. There is also a day ahead energy market and
ancillary service market in Alberta which are operated by Watt-Ex
(Alberta Watt Exchange Limited).
The AEUB still has a regulatory role in Alberta's electricity
industry. To prevent duplication of costs arising from competing
transmission lines across the Province, the AEUB regulates and
manages the transmission and distribution systems in Alberta under
the EUA and requires all retailers to be licensed by the AEUB. In
addition, under the Hydro and Electric Energy Act, the AEUB ensures
that the province's electric industry builds, operates and
decommissions hydro developments in an efficient and economic
manner.
The EUA created independent entities whose mandate is to protect
the interest of customers and market participants by ensuring the
electricity market is fair and competitive.
The Power Pool Council is responsible for ensuring that the
Power Pool operates as an open, fair and efficient market for
power. Pursuant to Section 9(1) of the EUA, the Power Pool Council
developed the Power Pool Rules that generally outline what
behaviour by participants may be considered anti-competitive.
The Market Surveillance Administrator is an independent
individual appointed by the Council who has no material stake in
the electricity market. The responsibilities of the Market
Surveillance Administrator include:
- monitoring anti-competitive activities;
- investigating complaints; and
- proposing recommendations to the Power Pool Council on the
disposition of complaints and improvements to the Power Pool
Rules and procedures.
The Transmission Administrator is responsible for the overall
co-ordination of the transmission system to ensure buyers and
sellers have fair access to the power market. The Transmission
Administrator's duties include:
- contracting with individual transmission owners to provide
ancillary services;
- acting as a financial clearing house between buyers of
transmission services and the transmission owners;
- setting province wide tariffs for system access; and
- interacting with the Power Pool on issues such as amount of
generation needed for operating reserve.
At present the independent, for profit, Transmission
Administrator is ESBI Alberta Ltd. However, the Alberta government
has recently elected to adopt a not-for-profit independent system
operator. Under this model the Transmission Administrator, System
Operator and Power Pool Administrator functions will be unified in
a new not-for-profit organization.
Ontario
Ontario's electricity market opened to competition on May 1
2002. The restructured Ontario market is a function of the Energy
Competition Act and the Electricity Act.
Like Alberta, transmission and distribution is not subject to
competition and is regulated by the Ontario Energy Board. The
Ontario Energy Board is responsible for regulation which
includes:
- licensing electricity market participants;
- determining the rates to be charged for standard supply
service and the distribution and transmission of electricity in
Ontario;
- monitoring and reporting to the Minister of Energy, Science
and Technology on market competitiveness; and
- reviewing the Independent Electricity Market Operator
market rules in considering appeals of the IMO orders.
Prior to deregulation, Ontario Hydro was the vertically
integrated power supplier in Ontario. It has now been restructured
into the following five separate entities.
The Independent Electricity Market Operator is a non-profit
crown corporation which runs the electricity exchange for the sale
and purchasing of power and is responsible for directing the
operation of an open access transmission system, establishing and
operating competitive wholesale electricity markets, authorizing
market participants, monitoring market activities to ensure fair
competition, forecasting supply requirements and encouraging
additional investment through disclosure of information to market
participants and stakeholders.
Ontario Power Generation Inc (OPG) is a commercial entity that
will continue to generate electricity and will compete with other
generating companies in the market place. To address concerns that
the OPG may manipulate market prices due to its market power, the
Market Power Manipulation Agreement (MMPA) imposes the
following:
for four years from May 1 2002, a large portion of OPG's
production in Ontario will be subject to a revenue cap of 3.8
cents/kWh, the excess being rebated to Ontario consumers on a pro
rata basis;
- within three and a half years from May 1 2002, OPG must
reduce its generation capacity that has the greatest influence
on market prices to 35% or less; and
- within ten years from May 1 2002, OPG cannot control more
than 25% of the total generation capacity.
Hydro One Inc assumed ownership and operation of transmission,
distribution and energy retailing businesses of Ontario Hydro. The
MMPA requires Hydro One to increase interconnection capability by
2,000 MW within three years of open access.
Ontario Electricity Financial Corporation is the crown agency
responsible for determining how Ontario Hydro's stranded debt will
be paid down.
The Electrical Safety Authority is responsible for setting the
safety standards for wiring and installations and equipment and
appliance certification.
Trends and issues in the deregulated markets
In both Ontario and Alberta, there is overlap in provincial and
federal jurisdiction with regard to the supervision of the
electricity market. In Ontario, the Ontario Energy Board, the
Independent Electricity Market Operator and the Competition Bureau
released, in March of 2002, a joint statement outlining how they
will work together to ensure effective competition in Ontario's
deregulated marketplace. In this joint statement, the agencies
agreed to consult each other on a regular basis and form working
relationships to avoid a duplication of efforts wherever possible.
Essentially, the Competition Bureau will accede jurisdiction to the
provincial agencies in areas where the latter have jurisdictional
authority. In Alberta, there are no plans to take a similar
route.
To secure open access to growing American markets, a number of
provinces are evaluating the feasibility of joining a regional
transmission organization (RTO). For example, both British Columbia
and Alberta are involved in the development of RTO West, New
Brunswick is restructuring its tariffs to align itself with New
England tariffs, and Ontario has stated that while it is not
interested in joining an RTO, it is adhering to the US Federal
Energy Regulatory Commission's (FERC) RTO standard and considers
itself an RTO.
In contrast to the electricity trading regulations in the US,
Canada's electricity trading regulations appear to be
underdeveloped. In Alberta and Ontario, guidelines of what is
acceptable behaviour by participants in the energy market are only
general in nature. In the US, FERC guidelines strictly define
anti-competitive behaviour. Nevertheless, FERC's influence is
likely to be felt in Canada given that Alberta's and Ontario's
guidelines are generally broad enough to allow the application of
FERC's view of anti-competitive behaviour.
Debate over ratification of the Kyoto Protocol
At the time of writing, the Prime Minister of Canada had just
announced the federal government's intention to ratify the Kyoto
Protocol by the end of 2002. By the year 2012, Canada's target is
to reduce its greenhouse gases emissions to 6% below 1990 levels.
The Government of Canada has previously committed C$1.1 billion
($700 million) to reducing Greenhouses Gases emissions between 2001
and 2005.
On May 15 2002, the government released its Discussion Paper on
Canada's Contribution to Addressing Climate Change. The Paper
considers four options, based on different regulatory models to
implement the Kyoto Protocol:
Option 1: Domestic Emissions Trading. This proposes a system of
permits issued to fossil fuel suppliers that are equal to the C02
emissions resulting from the combustion of the fuels they sell.
Companies could then buy and sell their carbon permits to meet
their limits.
Option 2: All Targeted Measures. This approach employs a broad
menu of instruments, including incentives, regulations and fiscal
measures to create change in emissions across a targeted variety of
sectors (electricity, oil and gas, transportation, buildings,
industry, cities, aboriginal and northern communities and
agriculture and forestry). The Discussion Paper states: "Rather
than being driven by market forces, it is built around government
programmes or initiatives, many of which would be the
responsibility of provincial governments."
Options 3 and 4: Mixed Approach and the Adjusted Mixed Approach.
These are variations and combinations of options 1 and 2, with
Canada also taking part in an international emissions trading
system to meet its greenhouse gases targets. The main differences
between these latter two mixed approaches are that the 'adjusted'
approach allocates sector permits by considering their reduction
capacity, uses off-sets created from new technology or activities,
and the choice of targeted measures would consider co-benefits such
as cleaner air or sustainable forestry.
Not surprisingly, there is not unanimous support in Canada for
ratification and implementation of the Kyoto Protocol, especially
given the fact that the US has announced that it will not ratify
the protocol and it is widely perceived that because the Canadian
economy is closely integrated with the US economy, this will put
the Canadian economy at a competitive disadvantage. Further, the
Province of Alberta has sent an open letter to the Prime Minister
of Canada outlining its concerns about the Protocol. While Alberta
has recognized the federal government's constitutional right to
negotiate and sign international treaties, it argues that the
government of Canada does not have constitutional authority to
implement international treaties in areas of provincial
jurisdiction and that the provinces have the constitutional right
to manage their natural resources.
Accordingly, there is some uncertainty as to whether the Kyoto
Protocol will be ratified or implemented or, if implemented,
whether implementation will be in accordance with the existing
principles outlined in the Protocol.
Blake Cassels & Graydon LLP
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