Canada: 2015 Year In Review: Top 10 Regulatory Decisions Of Import To The Canadian Energy Industry

Last Updated: January 15 2016

Article by Michael G. Massicotte, Alan Ross, Michael A. Marion, Karen A. Salmon, Rick Williams and Laura M. Poppel

Borden Ladner Gervais LLP

2015 saw the Supreme Court of Canada, the National Energy Board, the Alberta Court of Appeal, the Alberta Utilities Commission, the Alberta Surface Rights Board, the British Columbia Supreme Court and the British Columbia Environmental Appeal Board, each release significant decisions in areas of fundamental importance to the regulation of gas and electric utilities, and the operations of oil and gas companies. These decisions address a multitude of issues, including market manipulation and insider trading, the treatment of stranded assets in Alberta, the jurisdiction of and deference owed to industry regulators, the role of tribunals on appeals from their own decision, the inability to collaterally attack regulatory decisions, the inability of a municipality to thwart the development of a federally governed energy project by way of bylaw enforcement, standard of review, standing, enforcement mechanisms available to regulators to address industry non-compliance, and the interplay between bankruptcy legislation and regulatory processes. In this Bulletin, we highlight what we believe to be the top ten regulatory decisions of 2015, of most significance to energy industry participants.

1.Manipulative Behaviour: Market Surveillance Administrator v TransAlta (AUC)

In July 2015, the AUC released its landmark decision (found here) in a matter involving Alberta's electricity market watchdog, the Market Surveillance Administrator or MSA, and TransAlta.  In its Phase 1 decision, the AUC found that TransAlta had contravened Alberta's Electric Utilities Act and the Fair, Efficient and Open Competition Regulation, by engaging in anticompetitive conduct, manipulating electricity prices, and allowing insider trading to occur. 

The AUC found that TransAlta had, on four occasions between November 2010 and February 2011, intentionally timed outages at its coal-fired generating units on the basis of market conditions, for the purpose of maximizing its own portfolio. It also found that TransAlta allowed one of its employees to trade while in possession of a non-public outage record. TransAlta failed to establish due diligence or officially induced error, and was unable to demonstrate that the MSA's investigation or its enforcement actions constituted an abuse of process.

In its Phase 2 decision (found here), the AUC approved a settlement under which TransAlta will pay $56 million, comprised of an administrative penalty of nearly $52 million (of which $26 million constitutes disgorgement of profits), and full costs of the MSA's investigation and participation in the proceeding, in excess of $4 million. The $52 million administrative penalty is believed to be the largest of its kind in Canadian history.

The TransAlta decisions are required reading for market participants in Alberta's electricity sector. The decisions include discussion regarding: a) the history of the post-1996 restructuring and deregulation of Alberta's electricity market, and the amendment of the Electric Utilities Act and introduction of power purchase arrangements; b) the statutory framework for Alberta's wholesale electricity market; c) the nature of the respective roles of the MSA and the AUC; d) key provisions of the Electric Utilities Act and the Fair, Efficient and Open Competition Regulation; e) the statutory framework governing Commission approval of a settlement; and f) considerations in determining the appropriateness of administrative penalties, and the recovery of the MSA's costs (in this case on a full indemnity basis). The case is also of importance to administrative law practitioners. It decided issues regarding the level of disclosure to be provided to respondents, the production of investigation files, the nature and burden of proof in strict liability offences, the test for standing, and the defences of due diligence, officially induced error, mistake of fact and abuse of process. 

It is worth noting that TransAlta was found to have acted offside the governing legislative and regulatory framework, despite having an in-house regulatory and legal department overseeing  regulatory compliance issues.  TransAlta argued that it thought its strategy was compliant with the rules, underscoring how important it is for regulated entities to ensure as vigilantly as possible that their activities are compliant. This may entail engaging outside counsel to review compliance policies, and to provide opinions on proposed actions or strategies in certain circumstances.

For further discussion of the TransAlta decisions, see our August 4, 2015 and November 12, 2015 blog posts found here and here.

2.Don't Get Stranded: FortisAlberta Inc. v Alberta (Utilities Commission) (ABCA)

In September 2015, the ABCA released its decision in FortisAlberta Inc. v Alberta (Utilities Commission) (found here). In it, the court considered issues in appeals brought by five electric utilities and two gas utilities from two AUC decisions: a) Decision 2013-417, known as the Utilities Asset Disposition or UAD decision (found here); and b) Decision 2011-474, being the 2011 Generic Cost of Capital Decision or 2011 GCOC (found here).  

At issue in the appeals was the treatment of "stranded assets", described by the ABCA as utility assets no longer used to provide utility service as a result of extraordinary circumstances (e.g., flood, fire or early obsolescence). The AUC found that stranded assets must be removed from rate base, regardless of whether they have been fully depreciated. The "controversial aspect" (in the words of the ABCA) of the UAD decision from which the appellant utilities appealed, was the AUC's finding that the risk of "stranded assets" should be borne by utility shareholders, as opposed to being retained in rate base and paid by ratepayers. 

As summarized by the ABCA, in the UAD decision the AUC had concluded that the relevant jurisprudence, including the Stores Block line of cases (found here, here, here,here and here), clarified certain legal principles regarding utility regulation relating to the disposition of assets inside and outside the ordinary course of business. The AUC found that any gains or losses on utility assets are for the account of the utility and its shareholders, and not ratepayers, and that rates should cover the cost of assets only when they are used or required to be used for utility service. Accordingly, assets that are stranded by virtue of extraordinary retirements must be removed from rate base, regardless of whether they have been fully depreciated. In the same way that the utility is entitled to the benefit of any gains on assets removed from service, the utility, and not ratepayers, must bear the risk for the loss of those assets.

The issues on the appeals were found by the ABCA to include: a) whether the Commission had the power to make the policy determinations it made, having regard to the governing jurisprudence and legislative schemes; b) the extent of the impact of judicial pronouncements in circumscribing the power of the AUC; and c) the extent of the effect of the jurisprudence beyond the gas industry, to the legislation governing the electric industry as well.

In a unanimous decision written by Madam Justice Paperny, the ABCA determined that the appropriate standard of review was reasonableness, which required it to consider whether the decision fell within "a range of possible, acceptable outcomes which are defensible in respect of the facts and law." In dismissing the appeals for both the gas and electric utilities, the ABCA found that it, as well as the AUC, were bound by the SCC decision in Stores Block and subsequent ABCA jurisprudence, and that only legislative amendment, reconsideration, or a reversal of Stores Block by the Supreme Court of Canada could change that. With respect to the gas utilities, it was held that the AUC is charged with fixing fair and reasonable rates, and that this role cannot be usurped unless one reads the governing legislation as guaranteeing a return on all investments in all circumstances, which the Court said it was unable to do (holding that there is no guaranteed return, but only an opportunity to earn a reasonable one). The UAD decision was found to represent a reasonable approach within the AUC's statutory authority, and in keeping with the Stores Block line of cases. 

The electric utilities had argued that the Stores Block line of cases dealt with gas utilities, and that the legislation was different for electric utilities. In particular, it was argued that following the deregulation of Alberta's electricity industry in 1995, the legislation had been amended so that electric utilities were entitled to recover all prudently incurred capital investment. This position was based on the "used or required to be used" basis for cost recovery being replaced in the legislation with a prudent cost recovery model, with the determination of prudence occurring at the time the costs are incurred. It was held that while the prudent cost recovery model was a permissible interpretation of the Electric Utilities Act, it was not the only permissible interpretation. The ABCA stated that while it would be tempting to confine the effects of Stores Block to gas utilities to minimize the "deleterious effects on the regulation of utilities in Alberta", those legal principles remained sound. It was held that the Commission's decision, having regard to the legislation and the law of Alberta, was reasonable.

The AUC's treatment of stranded costs is considered to be at odds with mainstream regulatory practice throughout North America, including past practice in Alberta. The Alberta utilities have applied for leave to appeal to the Supreme Court of Canada. 

 3.Prudence, Deference, and the Role of Tribunals on Appeals: Ontario (Energy Board) v Ontario Power Generation Inc.; ATCO Gas and Pipelines Ltd. v Alberta (Utilities Commission) (SCC) 

These companion cases, which were released simultaneously by the Supreme Court of Canada in September 2015, considered the reasonableness of decisions made by utility regulators in Ontario and Alberta that prevented the utilities from fully recovering their operating (as opposed to capital) costs  through regulated rates. In the Ontario Power Generation case (found here), the Ontario Power Commission had disallowed certain labour costs (amounting to $145 million), notwithstanding that the utility had already committed to those costs in a collective bargaining agreement. In the ATCO case (found here), the AUC refused to allow certain pension costs (amounting to 50% of an annual cost of living adjustment for 2012), that the utility claimed it had previously committed to. 

In both cases, the regulators considered comparator companies, and determined that the operating costs claimed by the utilities were unreasonably high, and not prudently incurred. In response, the utilities attempted to draw a distinction between operating costs already committed to or incurred, and operating costs that are prospective in nature. The utilities argued that if the costs have already been committed to by the utility, there is a presumption that they have been prudently incurred. 

The SCC held that neither the governing legislation nor the common law required a presumption of prudence in retrospective cases. Rather, as part of their overarching mandate to ensure that the rates charged to customers are just and reasonable, the regulator has broad discretion to determine retrospective and prospective methods for evaluating the prudency of costs in each particular case.

These decisions highlight the deference which will be afforded to a regulatory tribunal's interpretation of its home statute, particularly where that interpretation invokes the tribunal's core policy expertise. They reject a formalistic approach in favour of regulatory flexibility, permitting the choice of approach that meets the statutory objectives given the specific facts before the tribunal. 

In the Ontario Power Generation case, the Court also provided clarity regarding the nature and extent of the role which counsel for a regulatory tribunal is permitted to assume on appeal – an issue which has been arising with increasing frequency (see, for example, the discussion of this issue in paragraphs 104 and 105 of the UAD appeal decision, discussed above). It was held that a discretionary approach by the appellate body (as opposed to a categorical ban) provides the best means of ensuring that the principles of finality and impartiality are respected without sacrificing the ability of reviewing courts to hear useful and important information and analysis. Further, cases may arise (including this one) where there is simply no other party to stand in opposition to the party challenging the tribunal decision (in which case, the presence of the tribunal as an adversarial party may help the court ensure it has heard the best of both sides of a dispute). With respect to the issue of "tribunal bootstrapping", it was confirmed that a tribunal is precluded from supplementing what would otherwise be a deficient decision with new arguments on appeal. Absent a power to vary its decision or rehear the matter, a tribunal cannot use judicial review as a chance to amend, vary, qualify or supplement its reasons. In the Ontario Power Generation case, it was held that the Board had not stepped beyond the boundaries of its original decision in its arguments before the Court.

 4.Collateral Damage: Togstad v Alberta (Surface Rights Board) (ABCA)

In June 2015, the Alberta Court of Appeal released its memorandum of judgment (found here) in Togstad v Alberta (Surface Rights Board). In Togstad, the ABCA dismissed appeals from two separate decisions of the Alberta Court of Queen's Bench, namely Togstad v Alberta (Surface Rights Board) (found here), and Kure v Alberta (Surface Rights Board) (found here). In Togstad, the ABCA considered the inter-relationship between the Surface Rights Board and the AUC, and confirmed that the SRB's role is ancillary to regulators who authorize or permit energy development. It also reviewed and applied the law relating to the doctrine of collateral attack.

By way of background, AltaLink had obtained a permit and license from the AUC to construct and operate the Western Alberta Transmission Line, or WATL. In AUC Decision 2012-327 (found here), intervener landowners had argued that the 500-kV transmission line and substations formed part of an international or interprovincial work or undertaking and were, therefore, beyond the jurisdiction of the AUC. This argument was rejected by the AUC which, on December 6, 2012, approved the application and granted to AltaLink the approvals it had requested.

AltaLink subsequently sought from the SRB a right of entry order (or ROE Order), over Togstad's lands for the purpose of constructing WATL. Togstad opposed the application arguing, among other things, that the approval of WATL by the AUC was not within the AUC's constitutional jurisdiction. The SRB rejected Togstad's position (decision found here), finding that it amounted to a collateral attack on the AUC's previous decision, and that the SRB did not have jurisdiction to decide a question of constitutional law.  AltaLink was, accordingly, granted the ROE Order over Togstad's lands. AltaLink also applied to the SRB for an ROE Order over the Kures' lands. Similar constitutional arguments were raised in opposition, which were similarly rejected by the SRB (decision found here). 

Both Togstad and the Kures applied to the Alberta Court of Queen's Bench for judicial review of the SRB's respective decisions. The applications were dismissed and the applicants appealed to the ABCA. The ABCA confirmed that the rule against collateral attack prevents a party from attempting to challenge the validity of a binding order in the wrong forum, and precludes a party from forum shopping for a different and better result. The ABCA held, among other things: a) that the AUC, which was the appropriate regulatory forum to consider the question of whether the transmission line is an interprovincial work, had considered and finally decided that question, from which no appeal was taken; b) that the SRB's jurisdiction is ancillary to that of the AUC and cannot be exercised to effectively repeal a permit granted by the AUC; c) that the SRB is entitled to decide that it will rely on the determination of the AUC and, indeed, is statutorily prohibited from making an order which is inconsistent with that of the AUC; and d) that the SRB has no jurisdiction to consider constitutional questions. 

The ABCA went on to hold that "[a]ll of this leads to the inescapable conclusion that the appellants' objections were collateral attacks on the Commission's decision" and that "[b]y seeking to raise the question again before the Board, the appellants were attempting to circumvent the Commission's order and were forum shopping for a different and inconsistent result", which was "precisely the approach that the rule is designed to prevent." It was held that the rule against collateral attacks should be strictly applied in these cases so as to maintain the integrity of the integrated and interrelated regulatory regime, and that a direction that the Board must consider this question "would turn the legislative scheme upside down." While the SRB and the Queen's Bench judges did not err in concluding that the objections were prohibited collateral attacks, even if they were not, it was held that they clearly fell within the doctrine of abuse of process. 

Togstad is of widespread significance to the energy industry, given what appears to be a recent trend for aggrieved parties to seek to attack regulatory decisions in a different forum, in the absence of pursuing an otherwise available appeal or judicial review. See, for example, the Burnaby v. Trans Mountain decision discussed immediately below, and the Ominayak v. Penn West decision discussed in our 2015 Top 10 Judicial Decisions blog, found here. The rule against collateral attack provides regulatory certainty to industry participants. In this respect, its confirmation, clarification and application by the Alberta Court of Appeal should be welcomed by industry.

For further discussion of the Togstad decision, see our June 15, 2015 blog post foundhere.

5.The Future of Rolled-In Tolling – Further Word from the NEB: NGTL's North Montney Mainline Project (NEB)

In April 2015, the National Energy Board released its decision on an application by NOVA Gas Transmission Ltd. for the North Montney Mainline Project.  In June, the Government of Canada accepted the NEB's recommendation to approve the Project subject to 45 conditions addressing a multitude of issues, including pipeline integrity, protection of the environment, and matters regarding public and Aboriginal consultation.  There was a strong dissent in the decision, based on the fact that a portion of the proposed pipeline and associated facility would traverse land that is of special significance to First Nations.

The Project includes the construction and operation of new facilities and a 301 km sweet natural gas pipeline, which will ultimately connect to a proposed Prince Rupert Gas Transmission pipeline and then to a future LNG plant on the west coast, which will supply global liquefied natural gas markets.  

Apart from the dissent on facilities approval, perhaps the most significant aspect of the NEB's decision is in respect of tolling methodologies. NGTL had asked the Board to find that the costs of the Project should be added to the cost pool for the entire NGTL system (i.e. treated on a "rolled-in" basis), rather than creating a stand-alone cost pool for the Project's facilities. The NEB approved rolled-in tolling, but for only a portion of the Project's lifecycle, and subject to a number of conditions, including the following:

• NGTL can only use its current tolling methodology during the "Transition Period" (which the NEB defined as starting as soon as gas begins to flow on the project, and ending when North Montney gas production is first delivered at the Mackie Creek Interconnection, likely in 2019).
• Upon conclusion of the Transition Period, NGTL can revert to stand-alone tolling for the North Montney or, alternatively, it may apply to the NEB for a revised tolling methodology.

Other conditions were imposed intended to address cost accountability, cost causation, cost efficiencies, facilities integration and cross-subsidization, details of which may be found in our April 22 blog post (found here).

The North Montney decision is not necessarily to be taken as a general rejection by the NEB of the rolled-in tolling methodology. In a post-Transition Period filing, NGTL may be able to demonstrate that the North Montney Project facilities could be combined or rolled-in with other facilities, and still be consistent with the cost accountability, cost causation, efficiency and other objectives, which were identified by the Board.

That said, the North Montney decision is the latest NEB determination which challenges the notion that a rolled-in methodology is the Board's default position.  In RH-001-2014, which addressed toll-setting methodology parameters until 2030 for the TransCanada PipeLine Mainline, the Board was clear that it would consider in future applications "the reasonableness of continuing the practice of rolled in tolling". The Board did precisely that in its denial of the Northwest Mainline Komie North Extension Project. The denial was based on Board findings that rolled-in tolls would not be an appropriate methodology since they would result in unreasonable subsidization of the extension of the NGTL Alberta System, and would create economic inefficiencies. 

The key take-aways for applicants from the NEB's TransCanada Mainline, Komie North and North Montney decisions are that: (i) rolled-in tolling will be subject to increased Board scrutiny; (ii) demonstration of cost accountability and cost causation will be critical; and (iii) consideration of alternate toll methodologies is well advised.  

6.Burnaby Bylaws Constitutionally Inoperative: Burnaby (City) v Trans Mountain Pipeline ULC (BCSC)

This November 2015 BCSC decision (found here) is the latest in a series of rulings and decisions involving the City of Burnaby's opposition to Trans Mountain's proposed pipeline expansion. Significantly, this most recent decision addresses an issue which has been the subject of much recent debate among academics and practitioners alike – to what extent is a municipality able to thwart the progress of an energy project falling within federal jurisdiction? The issue was characterized in the Burnaby Decision as "a contest between the applicability of valid provincial law in the form of Burnaby's bylaws and valid federal law as found in the NEB Act and the NEB's resulting jurisdiction over interprovincial pipelines."  

In December 2013, Trans Mountain applied to the NEB for a Certificate of Public Convenience and Necessity in respect of its proposed pipeline expansion project, which would largely entail a twinning of approximately 1,000 kms of existing interprovincial pipeline along a 1,147 km route. The pipeline, which is partially located on rights of way passing through Burnaby, moves crude oil and other petroleum products from Sherwood Park, Alberta, westerly to terminals and refineries in the Lower Mainland in British Columbia and elsewhere. The expansion project will require work on the existing right of way or, alternatively, elsewhere in Burnaby. Burnaby is one of 400 interveners opposing the expansion project. 

In July 2014, following opposition by Burnaby to Trans Mountain's initial intention to use the existing Burnaby right of way, the NEB directed Trans Mountain to conduct certain engineering studies, to be completed by December 1, 2014, in connection with a newly selected route requiring tunneling through Burnaby Mountain. In response, Burnaby commenced enforcing validly enacted bylaws in such manner as to impede Trans Mountain's ability to conduct the required studies. Burnaby asserted that it was constitutionally permitted to control the routing, and the engineering work needed to determine that routing, through the enforcement of its bylaws. 

Following the NEB's Ruling 28 (found here), which confirmed Trans Mountain's powers under section 73(a) of the NEB Act to carry out route location studies, among other things, Burnaby began serving Trans Mountain workers with bylaw violations. Burnaby then unsuccessfully sought an injunction against Trans Mountain (decision found here). Then, in October 2014, the NEB issued Ruling 40 (found here). In it, the NEB found that the impugned Burnaby bylaws were inoperative or inapplicable, based on the doctrines of federal paramountcy or, alternatively, interjurisdictional immunity, for the purposes of Trans Mountain's exercise of its powers under section 73(a) of the NEB Act. The NEB further found that it had authority to issue an order against Burnaby, which it did (order found here). Burnaby sought leave to appeal Ruling 40 to the Federal Court of Appeal (the "FCA"). That application was dismissed without reasons.

Burnaby then applied to the BCSC, which was called upon to decide the same constitutional questions which had been decided by the NEB in its Ruling 40, from which Burnaby was unsuccessful in seeking leave to the FCA (i.e., that the NEB lacked constitutional authority to issue an order that directs or limits Burnaby in the enforcement of its bylaws). 

In this most recent decision, the BCSC declined jurisdiction over the six constitutional questions before it. Since the NEB and FCA had already ruled on the issue, it was held to be an abuse of process for Burnaby to seek the same relief from the BCSC that it had failed to obtain from both the NEB and the FCA. In the event of a possible appeal, the BCSC went on to consider the substance of the constitutional claims. Agreeing with the outcome in the NEB's Ruling 40, on the basis of federal paramountcy and interjurisdictional immunity it was held that Burnaby was precluded from seeking to apply its bylaws so as to impede or block any steps Trans Mountain was required to take to safely prepare and locate the Expansion Project. Burnaby's application was dismissed with costs. Perhaps not surprisingly given the history of the proceedings between the parties, shortly thereafter, Burnaby announced that it intended to appeal the decision, noting that the matter may eventually wind up in the Supreme Court of Canada.

The Burnaby Decision has addressed a fundamental constitutional issue which has been arising with increasing frequency – the ability of a municipality to thwart the development of a federally governed energy project. Moreover, the Burnaby case can be considered the companion case to the Togstad decision, discussed above. Both affirm that the proper venue for a constitutional challenge to an energy development is the regulatory tribunal charged with approving the development. If a party is unhappy with a tribunal's decision, the only recourse is by way of appeal or judicial review from that decision, and not resort to another body, the latter of which will constitute an abuse of process (or collateral attack). 

7.No Leg to Stand On: O'Chiese First Nation v Alberta Energy Regulator (ABCA)

In this November 2015 decision (found here), the Alberta Court of Appeal dismissed applications brought by the O'Chiese First Nation (or OFN) for permission to appeal two decisions of the AER. Those decisions had dismissed requests by the OFN for regulatory appeals of two prior AER decisions, which approved applications brought by Shell Canada Limited for licenses and other approvals in connection with a proposed development falling within the OFN Consultation Area. 

With respect to the first set of Shell applications, the provincial Aboriginal Consultation Office (or ACO) had deemed Crown consultation with the OFN to be adequate. Statements of Concern (or SOCs) were filed by the OFN, but the AER decided to not conduct a hearing. The AER found that the concerns raised by the OFN were general in nature and did not provide sufficient information to demonstrate how approval of the applications may directly and adversely affect them. The AER approved the applications, issued the requested licenses and approvals, and the OFN filed a request for the AER to conduct a regulatory appeal.

The second set of Shell's applications were brought utilizing the streamlined approach and expedited timelines available under the Province's Enhanced Approval Process (for further discussion regarding those processes, see BLG's prior blog posts located here,here and here). Once again, the ACO deemed Crown consultation with the OFN to be adequate and stated that Shell could proceed with its applications. The AER received no SOCs and the applications were approved, following which the OFN filed a request for a regulatory appeal.

The AER dismissed both requests for regulatory appeals, concluding that the OFN was not directly and adversely affected by the approvals.

The ABCA dismissed the OFN's applications for permission to appeal.  It held that the AER's decisions involved a question of mixed fact and law and that under the governing legislation, only questions of law or jurisdiction were capable of being appealed to the ABCA. It went on to hold that the OFN's position incorrectly conflated the Crown's duty to consult with the legislative requirement that the OFN be directly and adversely affected by the AER's decisions, to be entitled to a regulatory appeal. Having chosen to adduce no evidence to establish that they were so affected, the OFN was precluded from seeking the regulatory appeals. 

The decision has clarified that in Alberta, the right to appeal an AER decision is not automatically engaged by virtue of development on treaty lands. The OFN failed to adduce specific evidence to demonstrate that it would be directly and adversely affected by the proposed development, and was not able to rely on the fact that that development would be located within the OFN's Consultation Area to establish this. A proposed oil and gas development on treaty lands which triggers a duty to consult, does not, in and of itself, mean that the First Nation is directly and adversely affected by the development, for the purpose of requesting a regulatory review. The decision has also confirmed that the AER's determination of whether a party is directly and adversely affected is a question of mixed fact and law that is not appealable. As  a result, even had evidence been adduced before the AER, the OFN would have nonetheless been precluded from appealing the AER determinations that they were not directly and adversely affected. 

For further analysis of the O'Chiese First Nation decision, see our December 10, 2015 blog post found here.

8.Late Assignments Costly for Landowners: Lemke v Petroglobe Inc. (AB SRB)

This recent Alberta Surface Rights Board decision provides further insight into the interesting and rapidly evolving area of law in which the nature and extent of rights and corresponding obligations in the face of ongoing bankruptcy and insolvency proceedings, are considered. In this particular case (found here), the SRB was called upon to review its prior decision (found here), in which it found that it was precluded from proceeding with an application under section 36 of the Surface Rights Act (the "SRA"). That application, brought by landowners/lessors under a surface lease, sought the SRB's assistance in recovering payment of overdue compensation by an operator, which had accrued prior to the operator's assignment in bankruptcy under the federal Bankruptcy and Insolvency Act (the "BIA"). 

The SRB found that the stay of proceedings under section 69.3 of the BIA precluded it from: a) issuing a notice to the bankrupt operator demanding payment of the outstanding compensation and suspending the operator's rights under the surface lease, pending payment; and b) in the event of non-payment, terminating the operator's rights under the lease. Under the governing legislation, it found that it was required to suspend and then terminate the operator's rights before taking the ultimate step of directing payment to the applicants by the Province. 

The application under section 36 of the SRA was found to be a "proceeding for the recovery of a claim provable in bankruptcy" and, therefore, subject to the stay under section 69.3 of the BIA. While directing payment by the Province would not constitute a step taken by the SRB against the bankrupt operator, the prerequisite steps of demanding payment and suspending and then terminating the operator's rights, would be, to which the stay under the BIA would apply. As a result of those prerequisite steps, it was found that an operational conflict existed between section 36 of the SRA and the BIA, since both of Parliament's legislative intentions under the BIA (i.e., the fair and orderly payment to creditors, and the rehabilitation of the bankrupt), would be frustrated. As a result, the BIA was found to prevail, resulting in the SRB being unable to exercise its powers under section 36 of the SRA, as requested by the applicants.

As discussed in our December 22 blog post (found here), the unfortunate result in Lemke for the landowner applicants is a consequence which was not likely intended by the legislature. 

The Lemke decision is the latest in a series of decisions from the SRB in which the impact of the BIA on the SRB's ability to exercise its powers under section 36 of the SRA is considered. Read together, while the section 36 process will not be available for unpaid lessors under surface leases where the outstanding payments have accrued prior to the operator's assignment in bankruptcy, the relief, including a direction by the SRB to the Province to pay, will be available in respect of cases involving outstanding payments that become due following the effective date of the assignment. Given the prevailing industry economic climate, these decisions have important implications for landowners who are owed surface lease payments by financially troubled oil and gas companies. 

A highly anticipated judicial decision which is expected to provide further significant insight in this area, is the ATB v. Redwater Energy Corp. application, heard by the Court of Queen's Bench of Alberta in December, from which judgment was reserved. Redwater is mentioned in our 2015 Top 10 Judicial Decisions (found here), in the context of the SCC trilogy of bankruptcy decisions released in 2015, which address federal paramountcy.

9.To be (named), or not to be (named)...Decision to Issue a Declaration Pursuant to Section 106 of the Oil and Gas Conservation Act (AER)

Under Alberta's legislative and regulatory frameworks, the Alberta Energy Regulator has at its disposal numerous and often overlapping enforcement mechanisms to address regulatory non-compliance by oil and gas companies.¹  The reach of one such mechanism, the "Actions re principals" provision found in section 106 of the Oil and Gas Conservation Act, extends beyond the defaulting company, to its principals. In this September 2015 AER decision (found here), the reader is reminded of the severity of consequences which may befall a principal of a non-compliant licensee, approval holder or working interest participant, who is named in a section 106 OGCA declaration. As acknowledged by the AER, "[t]he decision to issue a section 106 declaration is not made lightly."

Under this provision, where a licensee, approval holder or working interest participant fails to comply with an AER order, or has an outstanding debt in respect of suspension, abandonment or reclamation costs, the AER may make a declaration against one or more persons who were directly or indirectly in control of the non-compliant entity, where it considers it in the public interest to do so. In this decision, the person so named was found by the AER panel to be in control of three companies, which had failed to comply with a total of 18 regulatory orders between 2010 and 2013. 

Section 106 is a reverse onus section – once a prima facie case has been established, the burden shifts to the individual named to show why the declaration and associated order should not be made. Despite having been given numerous opportunities to do so, and after having advised that he intended to file evidence and submissions as to why he should not be named, "[u]nlike all but one previous section 106 process", the individual named in this case did not file any evidence and the hearing which had been scheduled at his request, was cancelled. The panel went on to consider whether, on a balance of probabilities, the evidence filed by the AER liability management staff satisfied the section 106 test.  

The individual named raised no issue with the first prong of the test (i.e., contravention of regulatory orders). At issue were the second and third prongs – control, and public interest. 

With respect to control, the panel identified the test to be whether the person who is named had the "authority to cause the licensee to meet its financial obligations to or administered by the AER and to comply with AER orders, regardless of title or position". The panel confirmed findings in prior decisions that a person need not be a shareholder to be in control. It was further found that while the legislature intended that directors, officers and agents of companies be presumed to be in control of their companies, a person who is named as the sole director or officer in the corporate records is not, by virtue of that fact alone, to be considered responsible for their regulatory noncompliance, given the requirement under section 106 that individuals be given the opportunity to show cause why they should not be named. As mentioned, however, the person named in this case did not lead evidence to rebut that legislative presumption. The panel referred to other indicia of control, and, on a balance of probabilities, found that the evidence filed by the AER liability management staff in support of the declaration, had established that the person named was in control of the companies at the time of the contraventions. 

Following identification of the public interest purposes of a section 106 declaration and a review of the evidence, the panel found that it was in the public interest to name the person in the declaration: "[t]he evidence and...apparent lack of respect for the regulator's processes, including this process, leads to the conclusion that it is in the public interest to name [him]." Among other things, the panel found that the person named was unable or unwilling to "to ensure that the licensees meet the most basic, yet important, regulatory obligations" (including payment of a $112.91 orphan fund levy), which considered together, "demonstrated a complete lack of care and attention to basic elements of the regulatory framework." As a result, the panel found that "it [was] not in the public interest to permit such behaviour to continue." 

The declaration that was issued (Appendix 2 of the decision): a) was indefinite; b) required the individual to provide a list of the companies in which he was involved; c) required the individual to disclose his status with any of those companies, and that a section 106 declaration was in effect against him, at any time those companies applied to the AER for specified relief; and d) stated that for any company in which the person was in control, the AER could: (i) require abandonment and reclamation deposits; (ii) suspend operations; and/or (iii) refuse to consider applications for specified relief. 

As is apparent, the impact of a section 106 declaration is significant. A person named can be impeded from conducting transactions in the oil and gas industry and, indeed, be precluded from earning a livelihood. In this decision, the panel appeared intent on providing every opportunity to the individual to avoid being named, and stressed the importance of companies working with the regulator when challenges are encountered. The panel specifically stated that "[i]n this case, it would prefer to incent [the person] to address impacts resulting from the noncompliance and demonstrate his ability to be a responsible operator." The panel also held that if the person "addresses impacts and his ability, the restrictions imposed by this decision could be suspended by the AER on recommendation by [the AER liability management staff] to the AER." 

In the current economic climate, it is critical to be cognizant of section 106 of the OGCA, and to ensure ongoing compliance with AER orders to avoid the potential fate of being named in a section 106 declaration. 

10.Parched...Technical Deficiencies and Flawed Consultation: Chief Gale v Assistant Regional Water Manager & Nexen (BC EAB)

In this September 2015 decision (found here), the British Columbia Environmental Appeal Board revoked a water license which had been issued to Nexen Inc. in May 2012, after having found serious technical flaws in the scientific evidence upon which the license had been granted, as well as defects in the consultation process with the Fort Nelson First Nation (or FNFN). The license had been granted by the British Columbia Ministry of the Environment  in May 2012 for a five and a half year term. It authorized Nexen to divert water from the North Tsea Lake into storage dugouts for the purpose of oilfield injection (i.e., shale gas fracking) and storage.

On appeal by the FNFN, the BC EAB found that the license was technically flawed in both concept and operation, and revoked the license. Among other things, the withdrawal scheme was not supported by scientific precedent, appropriate modelling or field data, and the withdrawal rate (which, in some years, was as high as 14% of the North Tsea Lake) was arbitrary, lacked scientific basis, and could not be rationalized by either the Ministry or Nexen. Data that became available after the license was issued led the BC EAB to conclude that the authorized withdrawals could cause adverse effects on aquatic and riparian species.

With respect to the flawed consultation process, it was found that the Ministry had incorrectly determined the level of consultation owed to the FNFN, based on the mistaken premise that granting the license would not impact the environment or the FNFN's treaty rights. The BC EAB stressed that the FNFN need not establish that there would be an adverse impact but, rather, only a potential, non-speculative, impact. Because of the intended large consumptive use of the diverted water, the BC EAB found that there existed a logical causal relationship between the withdrawal of the water, and the potential for adverse effects on species and habitat upon which the FNFN depended for the exercise of their treaty rights. 

The BC EAB also found that the consultation process lacked transparency and the requisite clarity as to the need and expectations of each party. The Ministry should have: a) had a consultation agreement in place with the FNFN; b) proposed a consultation framework or informed the FNFN that it would be following the Provincial Consultation Policy; c) kept the FNFN informed of the process or the status of Nexen's application; and c) expressly or impliedly delegated procedural aspects of the consultation to Nexen. 

Perhaps most significantly, the BC EAB found that the Ministry had not engaged in consultation with the FNFN in good faith. The BC EAB's determination in this regard focused on its finding that after two years of consultation with no hard deadlines, during a teleconference call between the Ministry and Nexen, the Ministry concluded that while the "technical side of the assessment was complete," and a license would be achievable within a couple of months, "consultation remained a 'major hurdle'". Following this, the Ministry issued a letter to the FNFN, arbitrarily imposing a 30-day deadline for consultation. Internal Ministry correspondence indicated that the Ministry intended to grant the license and had no intention of substantively addressing any FNFN concerns raised during this time. The EAB concluded that the Ministry did not consult in good faith and had not upheld the honour of the Crown.

Revocation, as opposed to suspension of the license, is a serious remedy. That said, the BC EAB found that Nexen had used the license for 3 out of the 5.5 years that it had been issued, and that it had installed works prior to its issuance under short-term approvals. As a result, Nexen could not claim that it had relied on the license when it incurred those costs.

While the AER, and not the Alberta EAB, issues water licenses for oil and gas developments in Alberta, the decision is nonetheless of interest to oil and gas companies with Alberta-based operations. The technical deficiencies found by the BC EAB are insightful in terms of water license applications, regardless of where they are brought. Further, the BC EAB's in-depth discussion regarding the duty to consult is a useful reminder as to the substantive and procedural factors that are likely to be considered in connection with any energy development that has the potential to impact treaty rights. 

This decision is also a reminder of the dire consequences which can flow from a flawed consultation process. In order to best protect its interests, it is absolutely critical for industry participants to ensure that a fair and comprehensive consultation procedure is established early on – one that is compliant with all legislative and regulatory framework requirements.