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Home > Speeches and Presentations > Speeches and Presentations 2005 > The National Energy Board's Experience: 45 Years of Lessons Learned

The National Energy Board's Experience: 45 Years of Lessons Learned

Kenneth W. Vollman
Chairman
National Energy Board

18 October 2005

CRE 10th Anniversary - The National Energy Board's Experience: 45 Years of Lessons Learned

I'd like to say it's a great pleasure to be here on the occasion of the CRE's 10^th anniversary! I recall when the CRE was first starting up and we had a few visits from your Energy Ministry to discuss some of the good things to do and some of the bad things to avoid when creating a regulatory agency. It doesn't seem so very long ago and now the CRE has already had ten successful years of contributing to the energy sector in Mexico.

During those ten years, our agency has benefitted greatly from the close ties we have maintained. You have continuously looked for best practices to deal with your energy market issues and we've been able to borrow some of that learning for our work. The most recent example would be the information you have shared with us on liquefied natural gas matters.

I'd like to congratulate Dionisio and his colleagues for all the hard work they have put in and the progress they have made in establishing the CRE as a strong well-respected regulatory body. I look forward to our strong partnership continuing for many more decades.

Outline

Today, I will try and share with you some of the lessons we have learned in our 45 years of regulatory experience and discuss some of the current challenges we are facing.

Country and Population Comparison

Before I talk about the National Energy Board, I'd like to establish some context by making a few comparisons between our two great countries.

Canada has a land mass of 10 million square kilometres, about five times greater than Mexico, but if we look at the arable portions alone, that ratio shrinks to less than two.

Mexico's population on the other hand is more than triple Canada's, 106 million to 33 million.

Comparison of Canadian and Mexican Markets 2004

Both Mexico and Canada are net energy exporters.

As shown in the first chart, we are both large producers and exporters of crude oil.

The situation is different with respect to natural gas. We are currently the world's third largest producer of natural gas and the world's second largest exporter. Mexico's gas production is more modest and in fact you are a net importer. It may interest you to know that we are exporting about 55% of our natural gas production, about the same percentage of your oil production that you export.

Areas of Responsibility

Let me turn to an overview of what our regulatory agency does. The National Energy Board, which I will refer to as the NEB, is responsible for regulating the construction and operation of all interprovincial and international hydrocarbon pipelines in Canada. This all includes regulation of the tolls and the terms and conditions of service.

With respect to electricity we only regulate the construction of cross-border interties with the U.S. and do not regulate tolls for transmission.

We also regulate energy commodity exports from Canada; oil, natural gas and electricity.

We regulate exploration and production activities in some federal lands, primarily in northern Canada.

Finally, we have an advisory capacity which we carry out primarily by being a provider of energy market information in Canada. We also provide advice to the federal government upon request of the Minister for Natural Resources Canada.

Gas and Oil Pipelines

The NEB regulates a vast network of pipelines, including most of the world's longest oil pipeline system, the Enbridge system and one of the world's largest natural gas transmission systems, TransCanada.

This pipeline infrastructure is a critical element in Canada's prosperity as a modern nation. We estimate that about billion of energy products will be transported on this system in 2005.

I mention this because I want to emphasize the importance of enabling the development of infrastructure as a key goal of a regulatory agency. In my view, regulators must always remember that the responsible development of infrastructure is a key enabler in the wealth and prosperity of its citizens.

NEB Regulated Energy Exports: Annual Revenue

This slide shows the annual export revenue that Canada has been deriving from its energy exports between 1996 and 2004, which almost entirely go the U.S. There is no doubt that the figures for 2005 will be much higher. Again, these large energy export revenues are an important source of Canada's wealth.

NEB's Vision

With that background, I'd like to share with you the NEB's vision for itself as a regulator. We protect and enable in the Canadian public interest.

I have already discussed some of the enabling part. As I mentioned in the previous slides, we enable the development of responsible energy infrastructure in Canada.

However, we also protect individual rights, including those of landowners, environmental integrity, public safety and shippers' rights. Good regulation requires that we both protect AND enable. Either one without the other does not result in good outcomes in the public interest.

Key Characteristics of NEB

With that background on the NEB's mandate and the importance of infrastructure to economic well-being, I will now turn to some of the lessons we have learned over our 45 years of regulation.

There are four characteristics of the NEB which I think will be of most interest to you.

First, the NEB is legally independent from the policy arm of government.

Second, our Board Members are appointed for 7 year terms and, while they are members, they cannot own shares of any companies.

Third, the Board has quasi-judicial powers that invest it with the powers of superior court. Our decisions are all enforcable in law.

Fourth, the Board has a very broad mandate to regulate in the Canadian public interest.

I would like to speak to you briefly about how each of these characteristics has enabled the Board to fulfill its mandate effectively over the years.

1. Independence

The Government of Canada cannot directly interfere with the operation of the Board or the Board's decision-making process.

If the Minister wishes to request the Board to do anything, he must do so through an open public letter.

This independence has been respected over the years and it has provided all parties affected by regulation with confidence that the NEB will render unbiased decisions.

In the 46 year history of the Board, I am not aware of there ever being a case where it has been alleged that the Board's decision-making has been inappropriately influenced by political drivers.

2. NEB Members

The Board Members represent a diverse background, including engineering, law, economics, public policy and environment. The Board makes its decisions based on the evidence that is presented before it and not on political considerations.

Most Canadian tribunals now have terms for their members of less than 7 years. I believe that an longer term, such as 7 years, promotes independent decision making by members.

Our members are bound by a stringent code of conduct which prohibits activities which could raise any apprehension of bias, such as owning shares in energy companies.

On the down side, although we have had success, I find it has been difficult to attract highly qualified Members because of the prohibition against owning shares and because our salaries are relatively low compared to what is offered in the private sector. I suspect that this concern is equally shared by our colleagues on the CRE.

3. Quasi-judicial processes

This is a very unique feature of the Canadian regulatory approach, at least as it applies to the NEB.

When we receive a major application, a formal quasi-judicial public hearing process is normally set in motion. This requires formal registration of all interested parties, and it requires that all information is equally shared with all parties to the process.

The applicant is required to submit formal written evidence in support of its application. Intervenors have the right to submit both written interrogatories and to cross-examine the applicant's witnesses during a public hearing. In turn, intervenors may submit their own evidence and be cross-examined by the applicant.

Quasi-judicial: the Good and the Bad

Quasi-judicial processes are good in the sense that all affected parties have an opportunity to participate and the process is very transparent. This builds confidence that the NEB's decisions are based on the facts and not on any extraneous considerations.

The Board's decisions are legally enforceable and this is good because it confers clear rights on certificate holders. In other words, once the Board has approved a certificate, the certificate holder has the confidence that it has the legal right to proceed with its project. I must point out that the Canadian government has the right to agree or deny the Board's decisions with respect to certificates but, again, the government of Canada has consistently respected the Board's decisions.

The Board publishes written Reasons for Decision, which over time form a body of precedent. The cumulative impact of this process is that it promotes consistency in approaches between decisions and over time. This improves regulatory predictability.

On the downside, the hearings can become very adversarial, slow and costly. The adversarial nature of hearings is not conducive for a pipeline to build positive relationships with its shippers, landowners and other affected publics. The Board has been increasing encouraging negotiated settlements and alternative dispute resolution, or mediation, as alternatives to the formal hearing process.

Finally, while the public nature of our hearings means that any member of the public who has a legitimate interest in the application can participate, the reality is that it is very challenging for small groups to do so.

4. Broad Mandate

As I previously mentioned, the NEB has a broad mandate to regulate in the Canadian public interest. In other words, the National Energy Board Act, which spells out the Board's powers, conveys very strong powers on the Board and provides us with considerable latitude in interpreting and applying these powers.

Now while some might be concerned that this would result in a licence to abuse our powers, I believe it has provided us with the flexibility needed to adapt to changing circumstances. If the Act had been more prescriptive, the Government would have been forced to keep rewriting the legislation. At the same time, there are a number of other constraints which ensure that we behave in a responsible predictable manner, including the fact that parties can appeal our decisions to the federal courts. The Board has a very good track record in having its decisions upheld by the federal courts.

The broad mandate also enables the Board to make integrated decisions that reflect all dimensions of the public interest, including of course the benefits of the project from a national perspective. A problem today in Canada and I believe in the U.S. is that there are too many agencies with powers that examine a project from either one perspective, such as the environment, or from a local perspective. The advantage of having a national agency with a broad mandate is that all public interests can be considered and reflected in decisions that balance and reflect these interests.

Of course, the downside of having a broad mandate is that you MUST take into account all relevant considerations. I often think that a regulator charged with looking at only aspect of a project has a much easier job. The NEB must have both Board Members and professional staff with the breadth and depth of expertise to adequately address all the issues that come before us. Clearly, this requires that the regulatory agency be adequately funded. Building and maintaining the technical excellence to excel is admittedly a challenge but I believe it is one that we have consistently met over the years.

Approaches that have worked

Besides the four key characteristics that I have discussed above, there are regulatory approaches or strategies that have served us well over the years.

First, although we are independent of the policy arm of government, we always make our decisions in the context of the policy of the day. A mainstay of the Board's regulatory philosophy for the last 20 years is to support market-based solutions wherever possible. We believe that this makes good sense at any time, but it is also consistent with the Canadian government's support for market based outcomes in the energy sector.

Second, while we have changed our regulatory approaches over time, we have rarely introduced a sudden change in approach. I would describe it as evolution in our regulatory approaches, as opposed to revolution.

Third, and this is related to my previous point, we have strived to make consistent decisions over time. Our ability to do this has been aided by the relatively long terms of our Board Members. This promotes institutional memory and helps promote consistency over time.

Lastly, before we implement changes, we consult with affected parties. We have perhaps learned this lesson the hard way after a few knocks, but we have found that maintaining an ongoing dialogue with all stakeholders provides two important benefits: one, it helps ensure that we understand our stakeholders' perspectives; and two, it helps build our credibility as an expert regulatory tribunal.

Current Challenges

Dionisio asked me to cover off some of the current challenges we are facing. I hope you will find these challenges interesting, as most of them relate back to the earlier discussion of things that have worked and things that haven't worked so well.

First, we have created in Canada a number of decision-making agencies that have specific mandates with respect to energy projects. For example, in northern Canada, there are 14 agencies that have some regulatory responsibility associated with the Mackenzie Natural Gas Pipeline. Similarly, there are a number of regulatory agencies that can potentially become involved in the regulatory review process associated with LNG terminals. This fragmentation of authority makes it very difficult to provide an efficient and predictable regulatory process for either the applicant and for affected members of the public. It is also impedes effective integrated decision-making as most agencies take a narrow perspective on the project. Timelines are also stretched out because the regulatory process is complicated by the need to coordinate the efforts of the various regulatory bodies. The uncertainty around timelines is, of course, a deterrent to investors.

In Canada, Aboriginal Canadians have unique rights with respect to land ownership. In many cases, the federal government is still negotiating these rights and, until agreements are reached, it makes it very difficult to construct new projects in these lands. At the same time, landowners in southern Canada are increasingly reluctant to agree to allow pipelines to cross their lands. Early and on-going consultation is our preferred approach to address this issue but, as a last resort, we have had to use our powers of expropriation to enable pipeline projects to be constructed.

As I mentioned earlier, the Board does not have powers to provide hearing participants with funding assistance to help them effectively engage in matters before the Board. My colleagues in provincial regulatory agencies in Canada have advised me that effectively funded stakeholder groups can provide valuable input into the decision-making process which enhances the final decisions. Our lack of participant funding tends to erode our credibility with the public and I am concerned should we lose the benefit of informed public input into our decision-making.

We are having interesting discussions in Canada about how to better integrate environmental policy and energy policy. This will of course have implications for regulatory policy.

Finally, high energy prices are hitting energy consumers hard and they are raising questions about the pricing practices of industry. In Canada, we have had a policy of market-based pricing for oil and natural gas for the last 20 years. I believe this policy has served Canada well, but it comes under severe scrutiny when prices get to the levels we are currently experiencing.

NEB Solutions to Challenges

What is the NEB doing to deal with these challenges?

First, we are actively meeting with the other agencies, and seeking to work out cooperative approaches with a view to coordinating and streamlining our regulatory processes.

Second, we have developed guidelines with respect to processing times for all of our major processes. We are working hard to deliver our decisions within predictable timeframes.

Third, we are reaching out to public interest groups, informing them of the Board's processes and helping them participate through education sessions. We are using more informal mediation processes to help landowners and pipelines resolve disputes.

We are supportive of legislative changes that would help address the issues around regulatory fragmentation. We are attracted by the concept of a lead agency that was recently identified in the U.S. Energy Bill with respect to FERC.

Lastly, in light of the high price, tight supply environment, we are increasing our efforts in publishing information about Canadian energy markets. The NEB is trusted as a reliable source of unbiased energy market information and we are doing our best to inform Canadians about the state of energy supplies, markets and prices in Canada.

Concluding Comments

In conclusion, I note that being a regulator is not an easy job. One has to balance the competing interests within industry between shippers, pipelines, gas users and producers. Beyond that, one has to balance the interests of industry with those of landowners, First Nations groups, environmental groups and other concerned members of the public.

Regulation also requires consistency to engender confidence in industry and your government that you are a competent regulator. At the same time, it requires the courage to change and adapt to changing circumstances and, at times, to take a leadership role in promoting desirable changes.

Finally, one's integrity as a regulator rests on one's reputation for independence. At the same time, one's reputation also rests on our knowledge and expertise. To maintain and develop this expertise, a regulator has to stay in close touch with industry and stakeholder issues. Once again, this is a difficult balancing act, but it is one that we in Canada have learned to master. From watching Dionisio wrestle with the challenges he faces in the issue-charged environment of Mexico, I believe he must be a grandmaster at the art.

Thanks once again to Dionisio for inviting me and I wish the CRE many more decades of success in helping Mexico's energy sector develop to the benefit of Mexican citizens.