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Home > Speeches and Presentations > Speeches and Presentations 2008 > Energy Regulation in Canada: lessons learned from the past - the way forward

Energy Regulation in Canada: lessons learned from the past - the way forward

Presented by
Gaétan Caron
Chair and Chief Executive Officer
National Energy Board

12^th Annual Meeting of the
Asociación Iberoamericana de Entidades Reguladoras de la Energía (ARIAE)
San Luis Potosi, México

13-16 April 2008

Energy Regulation in Canada: lessons learned from the past - the way forward

I wish to thank Señor Presidente Francisco Salazar de la Comisión Reguladora de Energía (CRE) de México for inviting me to participate in this 12^th annual meeting of the Iberoamerican Energy Regulators Association.

I am with the National Energy Board of Canada, a public institution comparable to the CRE. The NEB has been a partner with the CRE since about 1993, even before the law that formed the CRE was passed. Along the way, we have learned from each other. I feel privileged today to be among you and be part of the learning among Iberoamerican regulators.

Sr. Salazar asked me to speak about the experiences and challenges that the NEB has faced in the past, and the opportunities that lie ahead.

Public institutions define a nation's quality of life

Like the other regulatory agencies represented at this meeting, the NEB is a public institution, created by government. In our case, we were created by the Canadian Parliament in 1959. We will celebrate our 50^th anniversary next year.

The quality of life that the citizens enjoy every day depends in large measure on the quality of their public institutions. Regulatory agencies in the energy sector are such institutions. Since we are dedicated to the public interest, what we do is very relevant to the quality of life of citizens.

Determining the public interest is never easy. It is a very challenging task. Promoting the public interest also is about seizing opportunities. I would like to talk about those challenges the NEB has learned from and how it is preparing to seize the opportunities that will arise in the future. At the outset, I would suggest that regulatory cooperation is one of the key opportunities. A meeting like this one is very important in preparing for the future. Very often, we face a problem which we believe is unique, when in fact another regulator may have faced a comparable situation from which we can learn.

Laws creating public institutions create consistent and well understood frameworks

First, it is important to recognize that a regulatory agency produces significant value for society. It is not only that each and every decision it makes is sound and well explained. What is also very important is that, taken as a whole, the successive decisions of the agency represent a consistent and well understood framework.

In Canada, we use the expression "regulatory framework" to describe where an agency like the NEB is coming from, in other words, the foundation of its decision-making processes. The regulatory framework consists of:

the legislation that creates the agency;
the regulations that stipulate how the agency discharges its mandate;
the many guidelines issued by the agency, such as filing manuals, guidance documents, information bulletins;
and past decisions and the reasons for these decisions.

I regard the regulatory framework in Canada as an optimal balance, for our socio-political environment, between the doctrine of "let the market work" and the oversight by government of the market. In a nutshell, markets, including energy markets and energy infrastructure markets, are allowed to operate freely, subject to regulatory oversight when it is demonstrated that markets alone would not serve the public interest. For example, in Canada, you may not build a new pipeline, or expand an existing one, without approval from the National Energy Board or the relevant authorities in one of Canada's provinces or territories. Conversely, you may export natural gas on a short term basis (for period of less than two years but without a limit on the amount) with a simple one page application - you will get your approval within 48 hours. For longer term exports, you need a licence, which is subject to a market-based procedure, which includes a public hearing. The large majority of investments in Canada's energy sector come from the private sector - the exception being in the electricity sector where provinces rich in hydro-electric power own their publicly funded and publicly managed utilities. In the end, the public good depends in large part on private sector investments regulated by government.

A consistent and well understood framework leads to regulatory stability, a key attribute that many participants in the regulatory process value greatly and which is part of the public interest. Regulatory stability has two main components:

process stability: this means that participants in the process know in advance how it will work, how long it will take and, when a process change is being considered before its implementation; and
content stability, created by legislation, regulations, principles affirmed by the regulator, and the decisions and reasons for decision the regulator has issued over the years, constituting, when taken as a whole, the regulatory framework.

Markets and sustainable development

Letting the market work is consistent with the increasing degree of integration of world economies, which leads to the prosperity of nations. Promoting economic prosperity must come hand-in-hand with social prosperity and environmental excellence - this is at the heart of sustainable development. The integration of these three variables was well established at the Earth Summit in Rio de Janeiro in 1992 and the concept is still alive and well in 2008.

In Canada's case, we are privileged as an energy regulator to have, in our mandate, all dimensions of sustainable development. With respect to gas and oil pipelines, for instance, we are responsible for public safety, security, environmental protection, tolls, tariffs and access. Moreover, we are responsible for the entire life span of facilities. We are involved even before applications are filed, since we have requirements with respect to public consultations that must take place before applications are filed. We conduct public hearings on the larger or more contentious applications. When we approve facilities, we do so under specific conditions, which we monitor ourselves. We have engineers and environmental experts who inspect construction of facilities. We audit companies for compliance with our requirements. We also regulate the abandonment of facilities. We are a good example of a one-window approach to regulation.

2007 Natural Gas Flows

This map shows the origin and destination of Canadian natural gas. As you can see, natural gas markets in Canada and the U.S. are highly integrated.

Natural gas exports for 2007 were about 10 Bcf/d. We are exporting more than half of our production. From a US standpoint, Canadian natural gas represents 15% of their natural gas requirements. The U.S. Central/Midwest and Northeast regions are Canada's largest export markets.

Integrated TransCanada PipeLine System

A significant proportion of the natural gas consumed in Eastern Canada flows through US pipelines.

This map represents the integrated natural gas system of TransCanada PipeLines. As you can see in the middle of the map, Canadian gas may flow on the Central section, in Canada, or through the Great Lakes Gas Transmission system in the United States. The tolls of the two systems are integrated - it makes no difference where your molecules were moved, the toll is the same. The US Federal Energy Regulatory Commission (FERC) regulates the transportation tolls on the Great Lakes system. When TransCanada files its tolls with the NEB, it incorporates in them a component called "transportation by others". This arrangement has worked well over the years.

Gas Pipelines - Oil Pipelines

The same story can be told about oil pipelines in Canada. These two maps show the integrated pipelines shipping Canadian natural gas, oil and oil products. Much of the products of course continue to travel beyond these pipelines, in Canada and the United States.

Canada's Oil Reserves

This degree of integration comes in part from the fact that Canada is rich in energy sources.

Canada's oil reserves are second only to Saudi Arabia. This includes Canada's oil sands. Note that this slide shows Venezuela reserves at the internationally recognized 80 billion barrels, and that Venezuela's internal estimates of extra heavy crude in that country might be an additional 250 billion barrels not shown here .

Canadian Oil Production Outlook

This production forecast is our Continuing Trends scenario from our most recent Canada's Energy Future report that was released in the Fall of 2007. Canadian crude oil production is forecast to grow from about 2.7 million barrels per day in 2006 to 4.1 million barrels per day in 2015. By 2030, Canadian crude oil production could reach 4.7 million barrels per day.

You can see from the graph that oil sands production (the top two bands shown in purple and blue) will increasingly dominate Canadian oil production.

Canadian Gas Production and Net Gas Exports - Continuing Trends

This slide speaks to Canadian natural gas production. After growing steadily over the past two decades, natural gas production has flattened to around 17 Bcf/d. While production was increasing, exports to the United States also increased such that exports were more than half the total production, and were still at 51% of production at the end of 2007 (as shown by the red line). Based on our Energy Future report, this graph shows the Continuing Trends scenario, one possible projection of future production and net exports to the United States. You can see in this scenario that our natural gas production level is expected to decline by about 40% while domestic demand increases. As a result, net natural gas exports are expected to decline to the point where Canada becomes a net importer of natural gas by 2030.

There remains a significant amount of natural gas in Canada, however many of these new reserves are remote (for example, in the North) or unconventional (such as coal bed methane) and therefore relatively expensive and will require a higher price to make them economic to develop.

Who the NEB is

We do our work through a relatively modest organization, in terms of overall size. There are about 340 people working at the Board. Our budget is approximately $US 40 million. We have only one office, located in Calgary, Alberta (most other national institutions are located in the national capital, Ottawa, in Ontario). We travel a lot throughout the country for hearings and meetings with the people of Canada. Our staff have expertise in a broad range of fields, given our broad mandate: engineers, environmental specialists, economists, market analysts, financial specialists, lawyers, and many others.

We are independent in that we report to Parliament, through the Minister of Natural Resources of Canada. Our decisions are based on a public record, and our hearings rigorously follow the principles of natural justice, which includes transparency and procedural fairness.

We obtain our budget from Parliament. Our costs are recovered from industry, and the money collected returns to government. These costs are typically recovered by pipeline companies and energy exporters in their tolls. Therefore, the citizen does not pay for the NEB, except as a user of energy facilities.

Challenges

These broad responsibilities come with a range of challenges and opportunities.

I will identify four main challenges we have faced and, I believe, will continue to face.

Challenges:

The need for infrastructure - how much, where, with what impact?
Energy market information and analysis - what does the market need?
Regulatory efficiency and effectiveness: how do we do high quality work, engaging Canadians meaningfully, in the least amount of time possible and at the least cost possible to society?
People: in a supercharged economy such as Alberta, how do we attract and retain the people we need to carry out our mandate?

Challenge #1: Infrastructure

Canada has the gift of abundant natural resources. For these resources to be provided to the marketplace, Canada needs infrastructure such as pipelines and electric power lines.

This challenge is being best met by the regulator by maintaining a constant state of readiness for the possible applications that may be filed with us. This means, in practice, that our staff stays in touch with people in the energy sector, and Board members stay abreast, through the information provided by its staff and their own research, of energy developments.

Readiness also includes keeping the NEB's tools up-to-date. I will mention two.

One tool is our goal-oriented regulatory framework. What this means in practice is that, as a regulator, we specify the "what" (for instance, a regulated company must have in place management systems that promote public safety and environmental excellence), leaving to industry the choice of the "how".

Another example is our life cycle approach to regulation. Since our mandate begins before applications for infrastructure are filed, and goes all the way to abandonment, when we have a hearing about a proposed pipeline we need not solve all of the detailed engineering and environmental issues - much of these can be addressed after project approval, during detailed design, during construction and during operation. The hearing then can focus on technical and economic feasibility, and the public interest.

Being goal-oriented and implementing a life cycle approach is a continuing journey which requires ongoing work on the part of everyone in the organization.

Challenge # 2: Energy Market Information

Given the importance of energy resources in Canada, the National Energy Board has a mandate to monitor the outlook of energy supply and demand in Canadian markets and to provide Canadians with energy information. This is the purpose of our November 2007 report on Canada's Energy Future. Given all the information we gather as part of our role as a regulator, it makes sense for us to return that information to Canadians and to the marketplace. Given that the free flow of information is part of what makes energy markets efficient, our provision of information to the marketplace contributes to economic efficiency.

Canada's Energy Future considers whether there will be adequate energy supplies to meet Canadians' needs until the year 2030. Having examined this question under a variety of scenarios, we can conclude the answer is yes. Canadians will have ample energy supplies over that period.

Our key findings are:

Energy demand is expected to grow;
Fossil fuels and other conventional energy resources continue to play a dominate role;
Energy markets are expected to continue to function well.

Canada's Energy Future: Reference Case & Scenarios

To reach these conclusions we examined the supply/demand balance under a number of scenarios.

The Reference Case is our view of the future to 2015 based on current decisions and policies and current economic and energy trends.

Three scenarios are intended to address uncertainty, which is caused by world geopolitical and economic factors, social trends, future policy decisions, or developments in technology. Each scenario is based upon a set of internally consistent assumptions, designed to test our findings. We see each scenario as plausible and don't attach a probability to the scenario.

Continuing trends is a continuation of the reference case out another 15 years to 2030.

Triple E scenario is about well functioning global energy markets, cooperative international agreements, and effective environmental policies. It assumes fairly aggressive conservation goals pursued on a global level. The scenario has more moderate economic growth as a result of economic/environmental trade-offs. There is a preference given to renewables, such as nuclear and natural gas and some form of carbon pricing is assumed. By 2030, this scenario has the lowest energy prices. This is achieved through a cooperative global environment resulting in abundant energy supplies around the world, as well as comprehensive energy demand management programs, which slow energy demand growth.

The Fortified Islands scenario focuses on energy security. It has the slowest economic growth and highest energy prices. These outcomes are a result of a security conscious world, where continued geopolitical tensions, lack of international cooperation and trust, and protectionist government policies limit access to lower price global energy supplies. The emphasis is on developing indigenous energy sources.

Challenge # 3: Regulatory Efficiency and Effectiveness

The journey towards regulatory efficiency and effectiveness never ends. People at the NEB are truly committed to continual improvement in all we do. I will give you a few examples.

Increasingly effective engagement of Canadians in NEB processes is a major opportunity, which we are committed to seizing. The Land Matters Consultation Initiative is one of the means we are taking in that respect. The initiative is aimed at improving everyone's understanding of:

effective company interactions with landowners;
an NEB process which is accessible to al;l
pipeline abandonment, financial aspects;
and pipeline abandonment, technical aspects.

At the same time, we are working towards engaging persons with environmental interests in the continual improvement of environmental protection.

We are also completing a pilot for online filing of non-hearing applications, making the filing requirements more transparent so that companies can build applications that match their projects in terms of complexity. This way, our staff can focus on more complex issues that require more analyses, making our work more effective from a safety and environmental standpoint, making the work more interesting, saving time and money for industry, and upholding our high standards of safety and environmental excellence. We should go live with the full system in the spring.

Service Standards (sample)

Informing Canadians of the time it takes to process applications is part of transparency and part of regulatory efficiency. Every year, we publish our service standards, and we inform Canadians of our performance under the service standards. I am showing here on this slide our latest published performance relative to service standards for a range of applications.

Tolls, Tariffs, Traffic

Regulatory stability is an attribute which helps a regulatory agency be efficient and effective.

Passed in 1959, the National Energy Board Act is a case of perfect simplicity. It was and still is based on the Railway Act, a piece of legislation that was passed in the early 20th century when Canada was being built and extending westward in large part through a national policy based on the development of rail service from the Atlantic Ocean to the Pacific Ocean.

The language for the economic regulation of pipelines has remained essentially unchanged since 1959. Two key provisions dating from then still define the essence of our regulatory framework:

"62. All tolls shall be just and reasonable, and shall always, under substantially similar circumstances and conditions with respect to all traffic of the same description carried over the same route, be charged equally to all persons at the same rate.

67. A company shall not make any unjust discrimination in tolls, service or facilities against any person or locality."

In addition to these broad provisions, the NEB has, over the years, enunciated a number of regulatory principles and case-specific rulings that are often cited in our decisions. Together, the legislation and these principles amount to the NEB's regulatory framework.

Examples of Principles

The following are examples of regulatory principles.

Cost based/user pay: tolls should be, to the greatest extent possible, cost based and that the users of a pipeline system should bear the financial responsibility for the costs caused by the transportation of their product through the pipeline.
No acquired rights: the payment of tolls in the past conferred no benefit on tollpayers beyond the provision of services at that time. The Board has rejected the notion that shippers who have used the pipeline in the past are somehow entitled to continue using the existing facilities without being affected by new circumstances.
Economic efficiency: tolls should promote proper price signals in order to maximize the utilization of the pipeline system and thus lower costs.

Other toll methodology considerations raised by parties in past Board hearings are practicality, toll stability and administrative simplicity.

Guidelines for Negotiated Settlements

Another feature of a stable regulatory framework is the ability of parties to resolve issues outside the hearing room.

The Board has published guidelines for negotiated settlements. These negotiated settlements provide flexibility to the industry and represent a means of solving business issues outside the hearing room.

It is important to note that the Board normally would not pick and choose among the elements of a settlement. Rather, it would either accept or reject a settlement in its entirety.

If these guidelines are followed, in most cases, the Board would be able to determine that the resultant tolls were just and reasonable without a public hearing.

This illustrates the fact that the Board is flexible in implementing tolls and tariff regulation and in the setting of just and reasonable tolls.

Incentive Toll Settlement Objectives

Incentive settlements for tolls and tariffs are the norm in the Canadian pipeline industry. The objectives of this particular form of settlement are outlined in the slide shown here.

Pipelines should be able to operate their systems more efficiently, with less regulatory burden and they will be able to improve the relations with their customers and increase their profitability.

We are ready and able to resolve the matter when the parties cannot reach a settlement.

Challenge #4: Finding the Right People

The NEB, like everybody else in Calgary, is experiencing a staff turnover rate far greater than we would all like to see, which requires us to work on our people agenda. This is what we are doing. Only good things can come out of a strong focus on people who focus on continual improvement!

International Cooperation

When I look at the past and the lessons learned, and I consider the future and the opportunities that lie ahead, there is one thing which is very clear to me.

No amount of hard work and intelligence can replace the immense value of cooperation among regulators and learning from each other. Over the years, we have exchanged information with several countries, such as Peru, Chile, Mexico, Bolivia, Russia, South Africa, and China. In some cases, when the cooperation is ongoing, we enter into a memorandum of Understanding, as we have here between the NEB and the US Federal Energy Regulatory Commission, in its full length version, signed in 2004.

Clauses 4 and 5 are particularly important. They recognize that appropriate coordination could promote the public interest through increased efficiency, coordinated action on significant energy infrastructure projects, and cost savings to both the public and regulated entities.

We support this cooperation through a three-way agreement with our colleagues at the FERC and CRE. Each year our senior staffs meet to discuss energy markets and regulatory developments.

Looking forward

As energy regulators, our focus must be on what lies ahead. Learning from each other, as I have the privilege of doing here today with you, is part of being ready for the future.