Goal-Oriented Regulation

Presented by
Bob Vergette
Board Member
National Energy Board

Goal-Oriented Regulation
NEB Forum 2009
Calgary, Alberta

27 May 2009

It is a pleasure to be joining Gary and John to discuss why we use the term Goal-Oriented Regulation, what it means and why it is important to the Board for the regulation of NEB facilities.

This Forum has an overall goal of communication regarding how the NEB regulates and how regulated companies perform to protect the environment and safeguard workers and the public. A key part of improving performance is understanding the regulatory framework. We want to help stakeholders know how NEB administered Acts or "legislation" are applied as well as how the regulations under those Acts apply to them. In addition, people should understand how the NEB assures compliance.

Outline

This presentation will focus on:

• How the NEB arrived at a Goal-Oriented Approach,
• How it is applied, and
• How we can work together to improve it.

I will conclude with a look at where the Goal-oriented approach may take us in the future.

Origin of Goal-Oriented Regulation

The commonly accepted nexus or root of goal-oriented regulation in the oil and gas industry occurred in 1988 when the Piper Alpha platform went down in the north sea. I am going to quote from the Houston based Offshore Energy Center citation for the Right Honorable Lord Cullen.

"On 6 July 1988, gas condensate ignited on Occidental Petroleum's Piper Alpha platform in the North Sea. In a brief 22 minutes, 167 of the 229 people onboard were killed in what is characterized as the most deadly disaster in offshore oil industry history.

Lord Cullen of Whitekirk, one of Scotland's most-respected jurists, led the public inquiry. Originally charged with determining what happened on Piper Alpha, Lord Cullen proactively undertook to develop recommendations to prevent recurrence of such a disaster. Wisely rejecting a prescriptive approach, he developed comprehensive objectives and made 106 specific recommendations to initiate a new and improved safety regime.

Ultimately, anyone wishing to operate a fixed or mobile installation offshore UK was obliged to submit a Safety Case. (We at the NEB would call that a management program) These are documents providing full details for managing Health, Safety and Environment issues. Because a goal-setting approach was used, operators are able to choose the best methods available to achieve the objective. As a result, reportable offshore industry accidents had declined more than 75% by 2001. Most importantly, Lord Cullen's report reassured all stakeholders - the oil industry, the UK Government and its citizens - that offshore oil and gas operations could be conducted safely if a rational, goal-oriented approach were implemented, together with effective application of technology and stringent inspection procedures."

The NEB was influenced by this approach as well as by findings from other events - the result was a unique hybrid approach called Goal-Oriented Regulation.

Origin of Goal-Oriented Regulation

In 1999, the NEB promulgated its first Goal-Oriented regulation, the Onshore Pipeline Regulations, 1999 or OPR. Three years later, the National Energy Board Processing Plant Regulations or PPR were promulgated - again using a Goal-Oriented approach.

In 2003, the Government appointed the External Advisory Committee on Smart Regulation (EACSR) that reported its recommendations in September 2004. The then President of the Treasury Board unveiled a Smart Regulation Report on Actions and Plans in March 2005.

On April 1, 2007 the federal Government released a Directive on Streamlining Regulations with the objective of protecting and advancing the public interest by working with Canadians and other governments to ensure that its regulatory activities result in the greatest overall benefit to current and future generations of Canadians. The Directive replaces the Government of Canada Regulatory Policy (1999).

When regulating, the federal government will:

• protect public health, safety and security and environment
• promote a fair and competitive market economy
• make decisions based on scientific evidence using precaution as necessary
• create accessible, understandable, and responsive regulation
• advance the efficiency and effectiveness of regulation

What is Goal-Oriented Regulation?

Regulation can be thought of as a spectrum ranging from regulations which are entirely prescriptive to those that are completely goal based. The Board has adopted the term “goal-oriented” to refer to regulations that are a hybrid. That is, regulations that are somewhere between entirely prescriptive and entirely goal based.

Prescriptive regulations prescribe the methods to be used and the results to be achieved in carrying out a regulated task. There is no option for the use of alternative approaches. Goal based regulations, sometimes referred to as objective based or as performance based regulations, establish the end result to be achieved which could be a goal or a prescribed performance target or objective. This approach leaves the means of achieving the end result to the discretion of the regulated entity.

Goal-oriented regulations are a mix of prescriptive and goal based styles of regulation. They contain sections which provide prescription where deemed necessary and provide for latitude in the achievement of certain targets or results where appropriate.

It is worth noting that the precise nature of many sections of the OPR or the PPR could be debated as to where they would fit on the spectrum described in this slide. In determining the methods used to achieve compliance, it is important to remember that the NEB's goal-oriented regulations are intended to be applied as a package and not as individual sections. The Board has prepared Guidance Notes for both the PPR and the OPR which provide information on how compliance could be achieved and may also be helpful in determining what latitude may exist.

In Canada, the view is that where appropriate, moving from a prescriptive regulatory structure to one where the details of how to comply with the regulations are increasingly the responsibility of the regulated entity results in more effective regulation.

The OPRs and PPRs are regulations that are somewhere between entirely prescriptive and entirely goal-based. We have found, however, that some aspects of regulation remain best addressed by prescription. Therefore, we continue to strive to balance the approaches we use in order to achieve a particular regulatory goal, depending on the situation, need and complexity. In doing so, we see goal-oriented regulations as permitting flexibility, good judgment and experience to determine the most cost-effective and efficient solutions to protect people, property and the environment.

Regulation, whether goal based or prescriptive, apply to all phases of a pipeline's lifecycle; design, construction, operation, maintenance and abandonment.

International Pipeline Conference 2008

More recently, at the International Pipeline Conference in 2008, Board Vice-Chair Ms. Sheila Leggett commented that the Board believes that the development and implementation phase of the NEB's introduction of Goal-oriented regulation was now complete.

The use of management systems is necessary to achieve goals and effectively manage risks. Since the introduction of the OPR in 1999, the NEB has been consistent in their message that compliance with the OPR requires companies to develop, implement and maintain management programs for the design, construction, operation and maintenance of their infrastructure. These programs and the elements of a management system are mandated by the OPR and CSA.

The NEB expects that after 10 years, companies should have robust, documented programs in place as required under the OPR and that these programs should have benefited from internal audit and review over that 10 year period thus ensuring their adequacy and effectiveness.

Advantages of Goal-Oriented Regulation

The application of goal-oriented regulation means different things for the NEB and for industry although there are some commonalities. For example:

• It should come as no surprise that just like companies, Regulators have finite resources with different skill sets and availabilities. The challenge for regulators is to ensure that the resources they have access to are applied efficiently and in the most effective manner, while ensuring they still meet statutory and natural justice requirements. It should also be noted that if a serious incident occurs, the public often blames the regulator for not exerting enough oversight.
• Performance measurement of regulatory action is key to implementing a regulatory strategy. The NEB has established the results it wishes companies to attain via application approvals, regulations , guidelines and other means where appropriate.
• The NEB has also defined the manner in which it intends to measure companies (e.g. audits, inspections, meetings, manuals, submission reporting) as well as when and at what frequency the NEB will report on them.
• Visible and trusted evidence of performance is essential to sustain public trust.

For companies, goal-oriented regulation provides companies with the ability to assess and take measured risks where appropriate, in their decision making. The means employed to achieve the desired end result or goal are to a large extent under the control of individual companies. This can allow them to employ proprietary or new methods and technologies which meet the requirements of the regulation and which may also provide a competitive advantage. The test of adequacy of these methods is the responsibility of the companies to assess and the regulator to determine - most commonly through an audit.

There is no doubt that the industry has improved over the time I have been in it. It has also become more complex. However, the rules are clear; the standards are clear and achieving compliance should be clear.

Success Requires an Evolving Process

Goal-Oriented Regulation can not be a hands off approach. It has to be mutually beneficial from a resource management perspective, a risk management perspective as well as a public perception perspective. This means it has to not only make sense to industry and the regulator from their scientific view but it has to have the practical public interest view in mind.

The evolutionary process of regulation requires a suite of affirmative aspects in order to move the approach forward. Communication such as we are having today is critical to ensuring all stakeholders understand where the bar is and what tools can be applied to meet and exceed the bar.

There must be no backing away from challenges such as negative performance trends. Rather than focusing on individual events, company behavior needs to be taken into consideration by the NEB. This will require a closer relationship fostered by open communication.

Development of new tools (included in new OPR's) for assuring performance is going to take some time and patience but with a culture of shared responsibility and continuous improvement it can be achieved.

The Future of Goal-Oriented Regulation

In closing, I thought it might be useful to speculate as to what the future may hold for goal-oriented regulation.

• the 2007 edition of CSA Z662 introduced a formal requirement for management systems which encompass the full pipeline lifecycle. Future regulations contemplated by the NEB, including a new OPR, are likely to incorporate clear requirements for documented management systems tailored to meet the requirements of the regulations;
• Audits are here to stay. Ideally, they will become viewed as a positive development within the industry and as an opportunity for improvement although at present it is difficult to imagine a time where a company will say they are happy to have been audited by the NEB;
• As we continue to employ risk based methodologies as a regulator, the reliance on consistent, complete and comprehensive reporting and our need for confidence on data sets will increase. This may mean expanded reporting in the future;
• The flexibility permitted under goal-oriented regulation may hasten a levelling of the regulatory landscape as the requirements imposed by other regulators in other jurisdictions may provide a means to achieve compliance under goal-oriented regulation. This would not lead to harmonization - a term that has fallen from favour for many practical reasons. It might instead lead to rationalization - a rational approach to regulation that could allow company programs, procedures and management systems to be consistently applied across multiple jurisdictions;
• Finally, the Board has developed robust methods for applying risk methods to the companies it regulates for use in planning compliance activities. These will continue to evolve as data improves and as our ability to understand and define performance grows.

Thank You

Finally, with a long history in industry and now with regulatory responsibilities, I want to say that I believe that the blend of prescriptive and performance based elements within regulations works and that there will always be a need for both approaches within energy regulation.

Self regulation and fully goal based regulations are not targets or objectives envisioned by the NEB. There will be advances made in regulation and technology that will change our industry for the better. But as a regulator, there will always be a need to have an effective regulatory framework that uses direction when necessary and allows freedom of choice where appropriate. The key to implementation is clear and frequent communication - something I am glad we are doing today at this forum.