Regulating Energy Projects

Energy infrastructure projects face increased regulatory requirements and challenges

For the first
time in Canada, new laws are making energy infrastructure owners expressly liable for environmental damages impacting future generations.

The new Energy Safety and Security Act (ESSA) and Bill C-46 (the Pipeline Safety Act) both introduce liabilities for the “non-use value” of land and water, or what legal experts define as the value of the continued existence of the natural environment.

How the non-use value will be interpreted and assessed and how it will be pursued in the courts are uncertain until the first judgment is sought by a federal or provincial government. But it’s only one of a welter of legal initiatives confronting owners and developers of pipelines and other energy infrastructure in Canada.

The two new laws work in combination with important amendments to the National Energy Board Act, the Canada Oil and Gas Operations Act and new Onshore Pipeline Regulations. The new legal regime takes direct aim at operating facilities, and lawyers say it’s intended to reassure the public that oil pipelines, in particular, will be environmentally sound. But by addressing issues of public confidence, the new laws highlight serious questions about whether energy infrastructure projects can be developed within commercially acceptable timeframes and costs.

“It’s increasingly challenging,” says Lawrence Smith, QC, with Bennett Jones LLP in Calgary. “And, yes, that’s good for lawyers. But I care about what’s happening to the process.”

Underscoring both sides of Smith’s comment – the demand for legal expertise and the erosion of the regulatory process – the National Energy Board (NEB) has been moved to create space on its website to chart the course of rapidly multiplying court challenges against its rulings and decisions. At press time, the list ran to 18 legal actions against the NEB and one in which the board is not a respondent, including three opposing the Northern Gateway project that was approved more than a year ago but has yet to break ground. Meanwhile, the Trans Mountain Pipeline Expansion has attracted eight court actions even before the NEB has issued its recommendation to cabinet.

Ottawa’s legislative efforts have cut two ways, attempting to speed up hearing processes  which had sometimes taken longer than project construction while simultaneously seeking to reassure the public that the environment would be protected.

In the name of timeliness, amendments to the NEB Act (July 2012) place a 15-month time limit on project hearings, tighten the scope of matters hearings may consider and redefine the right to be heard (standing) by emphasizing those directly affected by a project. Further, the previous power of the NEB to reject project applications is now assumed by federal cabinet.

After attempting to make hearings smaller and approvals faster, Ottawa announced compensating “world-class pipeline safety” measures to prevent, or increase penalties for, environmental misadventures.

Onshore Pipeline Regulations were amended (March 2013) to list and make mandatory every tiniest facet of pipeline safety, down to the details of x-ray inspections on pipeline welds. Amendments also require every company to designate an “accountable officer” for pipeline integrity in the same way that CFOs and CEOs are now personally accountable for the accuracy of financial statements. Bill C-46, the Pipeline Safety Act (PSA), which received Royal Assent June 18, increases absolute liability for spills from major pipelines from $30 million to at least $1 billion, and empowers the NEB to specify higher amounts where it sees fit. The bill also requires companies to maintain financial instruments sufficient to meet such charges. It makes explicit the established common-law principle of polluter-pay, by formally declaring there is no limit on liability where a company is at fault for leaks or spills. It recognizes the non-use value of land and water for the first time in Canadian law, and enables Aboriginal governments to bill for all reasonably incurred expenses of spill cleanups on their land and waters. The Energy Safety and Security Act (which received royal assent in Feb. 20, 2015) includes the same provisions of absolute liability, unlimited liability and non-use value of land in the cases of nuclear facilities, offshore pipelines and oil platforms.

While the $1-billion absolute-liability provision has attracted the most media coverage, experts say the recognition of the non-use value of land is far more important for infrastructure developers and owners because it greatly extends the range of damages covered by the polluter-pay rule previously established in common law and now made explicit in the ESSA and PSA.

Smith says the enunciation of a non-use value is “new, for sure” and “something to watch” for its impacts on infrastructure projects. But it’s only actionable by federal and provincial governments, thereby excluding suits by municipalities, environmental groups and Aboriginal organizations who have been the prime movers of legal actions against pipeline projects.

“It’s going to be kind of a policy issue for the government that [first] triggers it,” he says. “It’s not clear what the government would seek as a result.” He concedes the new provision could be used to seek punitive damages, in addition to cleanup costs, but he adds, “I would hope that it would be more constructive than that.” Rather than seeking massive payments for long-term damages, he suggests, governments might negotiate offsets in the form of enhancements to wetlands or other environmentally valuable areas.

Martin Ignasiak, with Osler, Hoskin & Harcourt LLP in Calgary, sees the newly recognized non-use value as inescapably a measure of the degree to which public opinion is offended by environmental damages. The Rocky Mountains, Ignasiak notes, have measurable tourism values, “but we value the Rocky Mountains way beyond whatever that financial value might be. The environment has a significant value to us, as a society,” which he says the Supreme Court of Canada has recognized since its 2004 decision in British Columbia v. Canadian Forest Products Ltd., in which the court acknowledged “the subjective or emotional attachment of the public to the damaged or destroyed area.”

“You can expect that, in future litigation, it will be identified as a compensable head of damage,” Ignasiak predicts. “The interesting thing is how you value that.” And that, he says, will only be determined by future jurisprudence. Until then, infrastructure developers will have only limited guidance as to the size of liabilities they’re shouldering.

Smith says he doesn’t see the $1-billion absolute liability becoming a huge barrier for major pipeline companies launching new projects. Insurance or letters of credit will be allowed as proofs of financial capacity. But big pipeline companies will likely use their substantial internal resources to self-insure rather than pay annual insurance premiums that might easily exceed the $1-billion mark in a handful of years.

Krista Hill, a nuclear-industry expert with Torys LLP in Toronto, says the response will likely be different among public utilities, which will “definitely” require increased insurance or other security to offset the risks of increased absolute liability. But Hill adds that the Energy Safety and Security Act has been welcomed by the nuclear industry, whose governing safety legislation was decades old. “The structure of the old act was similar, but the amount of the absolute liability has been increased to keep it in line with international norms and conventions,” she says.

“The Act channels liability to the operator” of a nuclear facility, aligns with international standards and enables Canada to sign onto the International Convention on Supplementary Compensation for Nuclear Damages, governing cross-border liabilities.

Smith reckons the $1-billion absolute liability could constitute a significant barrier to smaller pipeline companies promoting larger projects. But he says pipeline development applications have for many years required proofs of financial wherewithal, including the ability to meet potential environmental cleanup claims.

“You need to be able to satisfy any potential claims brought against you,” Smith says. The guiding principle is, “people shouldn’t bite off more than they can chew.”

The new legislation is part of what Prime Minister Stephen Harper’s government calls a “world-class pipeline safety initiative.”

“I think a large part of this initiative is to reassure the public,” by writing statute law to make explicit what was previously established in case law, Smith says.

While critics have said that Ottawa’s efforts to speed up hearings have backfired by triggering a raft of potentially lengthy legal challenges, Smith argues that history didn’t begin with amendments to the National Energy Board Act and the feds bear no fault for the current impasse. He says the amendments were made necessary by a long record of activist efforts to draw out hearing processes, delay approvals and ultimately kill energy projects. (The Mackenzie Valley Natural Gas Pipeline Project and the Joslyn Oil Sands mine were both shelved after hearings extended beyond six years.)

“The activists had no respect for the NEB … no interest in these projects taking place,” and their tactics, including legal actions, have been designed “so that you could never really complete a project approval.”

Ignasiak says an array of new laws invariably provokes an initial spate of litigation aimed at testing the validity of the legislation — but he’s confident progress is being made on streamlining environmental processes. He says the bigger hurdle will be Aboriginal consultation that’s embedded in constitutional law.

“We have to find a way to separate the reviews of projects from the question of what sort of benefits should accrue to Aboriginal groups,” Ignasiak says. “Where companies shy away from infrastructure projects in Canada is where they form the opinion that there’s simply too much uncertainty about the timing of the receipt of regulatory approvals.”