Energy board reset faces long odds

In November, the federal Liberals appointed a five-person panel to make recommendations to fix the discredited National Energy Board. But a bigger question frames the task: Are the NEB’s problems beyond repair?
By John Greenwood

Heavy lifting: The Liberal’s NEB review is a crucial test for its point man, resources minister Jim Carr, as well as environment minister Catherine McKenna

For most of its nearly 60-year history the National Energy Board, Canada’s pipeline regulator, quietly did its job, mostly beyond the glare of the public spotlight, surfacing occasionally in the pages of the business press. Pipelines got built and people seemed satisfied. That changed a few years back. Why it changed depends on whom you talk to, but the upshot is that since the early 2000s the NEB has increasingly become the target of criticism by environmentalists and Aboriginal groups to the point that its processes became so bogged down in controversy that the NEB has been unable to carry out its function.

From a business perspective, this is unfortunate. The oil industry represents a major slice of the Canadian economy and the inability of the NEB to do its job—no major new pipelines have been built since about 2011—means producers end up paying more to transport their crude to the market, adding to the already intense headwinds players are facing, from low oil prices and economic uncertainty to public opposition to oilsands development. The Liberal government’s just-announced split decision on Enbridge Inc.’s (TSX:ENB) Northern Gateway and Line 3 pipeline proposals, as well as its approval of Kinder Morgan’s Trans Mountain pipeline in B.C., may have cleared the logjam for now. But given that the external climate is unchanged—and, if anything, could get more hostile—the NEB’s status remains a major concern for industry and the public.

Unless, of course, the Liberals have an answer there, too. In November, Jim Carr, minister of natural resources, whose office handles the NEB file, unveiled a five-person panel tasked with producing a series of recommendations on how to modernize the board and its processes, giving more weight to environmental and First Nations issues. It has until the end of March to present its report. There’s widespread support for the Liberals taking this move, but much less faith in the prospect of a successful outcome.

“There’s a lot of moving parts,” warns Patrick Kenny, an analyst at National Bank Financial. “The economic rationale is the simple part of the equation but it’s not an easy one, politically.”

That’s putting it lightly. The review will do a deep dive into the inner workings of the NEB. Everything is potentially on the table. According to the government, the review will look at the NEB’s governance and structure, its mandate, even decision-making processes.

The government of John Diefenbaker established the NEB in 1959 as an independent body to handle the regulation of pipelines and electricity transmission lines that cross provincial or international borders. Its focus has always been on major projects, and decisions—until recently—were based on straightforward economics. But a lot has changed since the NEB was formed, particularly with respect to public attitudes toward the environment and Aboriginal rights, and indeed the whole notion of public good.

As protesters started showing up in numbers at NEB hearings, many in government saw it as unwarranted interference. In 2007, the government of then Prime Minister Stephen Harper responded with rules that limited the amount of time the NEB could deliberate before delivering a verdict. The rules also gave cabinet the right to veto an NEB decision if it came down against a pipeline. The steps initially seemed to clear the bottleneck but they also bolstered the view that Harper was too close to oil industry.

By the time Trudeau arrived on the scene, the hearing process was a shambles and the NEB seemed unable to distance itself from the controversy, especially after the Supreme Court overturned its approval of Enbridge’s Northern Gateway pipeline that would have carried Alberta crude to the B.C. coast, through the Great Bear Rainforest.

But the low point came amid the TransCanada Corp. (TSX:TRP) Energy East pipe- lines hearings last spring, when it emerged that members of the project review panel had met privately with former provincial premier Jean Charest, who was then under contract to TransCanada. The panelists first denied it took place, then recused themselves from the hearings. Critics took it as proof of a culture of industry capture, and indeed it’s hard to imagine how the NEB could have done a better job of undercutting its own authority. At least that’s the popular view.

Peter Terzakian, chief energy economist and managing director of ARC Financial, has a different opinion. He argues that the NEB is suffering from an issue common across Canada. “You’re seeing an erosion of trust in federal agencies that grant approval,” says Terzakian. “This has gone way beyond pipelines. It’s a matter of, ‘Do we trust democratic institutions in this country? Do we trust the people who have been given the job of managing those institutions or not?’ The public attitude is that these people don’t know what they are doing and they are evil.”

The underlying forces driving this populist phenomenon are complex (witness the U.S. presidential election) but Terzakian believes that, as far as the NEB is concerned, there is a solution. The Liberal’s plan to set up a committee to come up with recommendations is the right strategy, he says, but it’s crucial that the panel works to hold onto the public’s attention. As member of the Alberta Royalty Review Advisory Panel, Terzakian helped craft a highly regarded report that was key in enabling the province’s newly elected NDP government to bring in a new oil and gas royalty regime last year with minimal opposition from voters. Given the controversy surrounding the issue, it could have been a lot more difficult.

According to Terzakian, the Liberals are facing a similar challenge with the NEB. The key, he says, is for the panel to ensure deliberations stay focused on high-level issues that are clearly relevant. Those panelists—environmental lawyer Hélène Lauzon; Gary Merasty, president of Des Nedhe Developments LP and former MP from Saskatchewan; David Besner, president of the New Brunswick Energy Institute; Wendy Grant-John, three-term chief of the Musqueam; and Brenda Kenny, former president and CEO of the Canadian Energy Pipeline Association—seem well chosen for the task. “If we elevate the discussion then I think people might wake up,” Terzakian says.

Most important, proceedings can’t be sidetracked by issues that only experts can understand. “If we allowed the debate to go down rabbit holes then I think people will lose interest and the point of the review will be lost,” he says.

Experts say the new Line 3 and Trans Mountain pipeline approvals help with industry’s concerns. But now the emphasis shifts to Trudeau’s capital with the environmental community. He ensured Canada was a signatory to the landmark Paris Agreement, he beefed up oil tanker safety rules and he’s promised to institute a national carbon tax. He’s betting his accomplishments will give him the social licence he needs to successfully make the new pipelines a reality and simultaneously revamp the NEB so that it can gain the respect of Canadians.

Will it be possible to convince both sides that he’s kept his promises? It’s a tall order when it demands reconciling two fundamentally contradictory views on the future of energy in this country, says Justin Bouchard, an analyst at National Bank Financial: “The mentality in Canada is no one wants to build these big pipelines. But the reality is we will continue to need oil for a long time to come.”

Photography by Chris Wattie/Reuters

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