The National Energy Board (NEB) has been regulating interprovincial and international hydrocarbon pipelines and international power lines for almost 60 years.

Its enabling legislation, the National Energy Board Act (NEB Act)¹ instructs it to satisfy itself that, before approving facilities, it must take into account whether they are and will be “required in the public convenience and necessity”² and, on an ongoing basis, to satisfy itself that the prices charged for their services (tolls) are “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.”³

For much of its history interest in the Board’s activities and participation in its hearings was confined to energy producers and transporters and utilities serving processors and consumers of energy commodities.  In recent years, however, the Board’s deliberative processes have become much more contentious.

Professor Jeffrey Church, in a recent C.D. Howe Institute Commentary “…. attribute[s] the turmoil around regulation – both its institutions, processes and decisions – to a fundamental misunderstanding of the rationale for regulation and, hence, a failure to define, or correctly identify, the objectives of regulation.  Many of the concerns regarding regulatory decisions and the regulatory process would vanish, or be minimized, if governments clearly articulated in law that regulators should base their decisions solely on economic efficiency grounds.  With this change in law,  regulators would instead focus their efforts on economic efficiency rather than on the usual appeal to the public interest, which is typically undefined, and other vague objectives found in existing legislation, such as ‘just and reasonable tolls’.”⁴

That turmoil exists there can be no doubt:

• Environmentalists maintain, with respect to pipelines, that the NEB should take account of the environmental effects of the production of the commodities transported by regulated pipelines (upstream effects) and of the use of those commodities by households and industries downstream of pipelines.
• Aboriginal people object to pipelines’ use of land to which they either lay claim or use.  Further they maintain that the judicially sanctioned consultations by governments have been either non-existent or inadequate.
• Landowners on proposed routes object to either or both of the environmental effects and the measures proposed to ensure safe operation of proposed pipelines.
• An Ekos Research poll⁵ conducted in early 2016 found, inter alia, that “just one in ten Canadians (10 per cent) express a great deal of confidence [in the NEB], while one-third say they have ‘some’ confidence (33 per cent) or a ‘little’ confidence (33 per cent).  One in six (17 per cent) have no confidence at all.”⁶
• The Ekos findings were recently echoed and elaborated on in studies by the Canada West Foundation⁷ (CWF report) and in the Report of the Expert Panel on the Modernization of the National Energy Board⁸ (Expert Panel report) that was appointed by the Federal Government.

The CWF and Expert Panel reports both recommended a number of changes in the structure and modus operandi of the federal energy regulatory regime and the government has recently issued a Discussion Paper in response to the Expert Panel’s recommendations⁹.

The Discussion Paper proposes a number of changes to the governmental decision-making framework with respect to major energy projects.  These changes have the effect of explicitly removing from the ambit of the NEB consideration of environmental matters not directly related to energy transmission projects and of consultations with Indigenous Peoples.  Such considerations would be matters for Ministers and the Governor in Council and the proposed changes would have the desirable effect of ‘ring fencing’ the NEB from matters not properly within its mandate.  As Church correctly notes, “regulators are not the appropriate bodies to consider environmental goals and the definition and scope of Aboriginal rights outside of the efficient allocation of resources”.

In addition, the Discussion Paper proposes two legislative changes related to the objectives of regulation:

• With respect to the Canadian Environmental Assessment Act 2012¹⁰, it is proposed that the scope of assessment be broadened “to include environmental, economic, social and health impacts to support holistic and integrated decision making,”¹¹ and
• With respect to the NEB’s mandate under its enabling legislation, it is proposed to change “the wording to determining public interest to explicitly include environment, safety, social and health considerations.”¹²

In view of these developments the time is ripe for a reconsideration of the NEB’s mandate and Church’s Commentary provides an important contribution to the discussion.  He argues that:

Many of the concerns regarding regulatory decisions and the regulatory process would vanish, or be minimized, if governments clearly articulated in law that regulators should base their decisions solely on economic efficiency grounds.  With this change in law, regulators would instead focus their efforts on economic efficiency rather than on the usual appeal to the public interest, which is typically undefined, and other vague objectives found in existing legislation, such as ’just and reasonable tolls’.

It is poor institutional design for legislatures to allocate responsibility for other important issues that may arise in regulatory decisions to the regulators, in particular a decision’s income-distribution implications…. There should be an institutional division of labour. Legislative branches should be responsible for determining public policy matters, such as appropriate income distribution, and implementing policy measures to that effect.¹³

This statement regarding the division of labour between legislatures and regulators is, in my view, correct.  As I will argue below, however, it is one thing to limit regulators’ de jure consideration of matters of income distribution; it is quite another for them – regulators – to avoid de facto distributional consequences of their decisions.

Environment, safety, social and health considerations directly related to a regulated entity are all legitimate matters of public concern and, therefore, must be considered by regulators.  And this is recognized by economists generally and Church in particular.  Were ‘economic efficiency’ to replace ‘public interest’ as the legislated criterion for regulatory decision-making, how would such non-economic factors be taken into account?

As Church states:

 … the NEB is concerned with the exercise of monopoly power by pipelines, but its regulatory scope also extends to safety and environmental concerns associated with pipelines.  These issues, and not whether tolls are too high, are more likely the concern of landowners and communities near proposed facilities regulated by the NEB.  However, such a safety or environmental objection fundamentally misunderstands the nature of efficiency analysis.  Efficiency analysis addresses differences in values over resource use by translating differences in preferences and intensity of preferences into dollars.  Determining whether a pipeline should be permitted to cross a river or the appropriate thickness of a pipeline’s walls should not be viewed as a ‘clash of values’ requiring mediation by regulators or politicians.  Instead these issues should be viewed as questions regarding resource allocation and resolved by the regulator determining efficient use.

Concerns over environmental impact often arise because of the imposition of costs on others through the use of resources that are not priced.  But there is no reason why, in principle, these ‘external costs’ cannot be incorporated into a regulator’s efficiency analysis.  If, for example, the presence of high-voltage transmission lines reduces property values, then an efficiency mandate requires the regulator to take that loss into account in determining the social costs of those lines.  And when it does so, it may be in a position to determine the compensation to those whose resources would be used, or whose value would be reduced, and require that compensation be paid, leaving both the proponents of the project and those harmed by its environmental consequences better off.¹⁴

This is the generally accepted method of dealing with ‘externalities’ in economic analysis.

One does wonder, however, whether, given the subjectivity involved in valuing such factors as health, safety and local environmental effects, it makes sense to attempt to put a monetary value on them as opposed to making a more qualitative judgment.¹⁵

In any event, it is at best naïve to think that, in practice, attempts to put a price on externalities removes de facto issues of income distribution from regulatory decision-making.  Proponents of regulated entities will engage in ‘rent seeking’ – i.e. they will seek to maximize their income – as will other interested parties such as landowners along energy transmission routes.  The evaluation of externalities is subject to much uncertainty and dispute and can verge as much on the subjective as the objective.  This is not to say that regulators should be governed by issues of income distribution, just that they will inevitably have to reckon with them, if only indirectly, as part of their decision-making process.

Moreover, it seems clear that the concept of ‘externalities’ and methods of accounting for them are not well understood by the general public. Thus any move to incorporate economic efficiency as the key objective of regulation would have to be accompanied by a clearly stated explanation of its meaning and methods of implementation.

With respect to the pricing of regulated utilities’ services, application of the criterion of ‘economic efficiency’ is more straightforward and, arguably, should be the defining criterion.  But, even here, analytical judgments can and will differ with respect, for example, to the appropriate rate of return on regulated entities’ assets.

Church argues that a further “advantage to society of an economic-efficiency mandate for regulators is that it enhances the likelihood that the regulator will not hold up regulated companies who invest in sunk capital.  That is, the regulator can more readily resist demands that, in the short run, have immediate benefits for some, but in the long run destroy the incentive for investment and wealth creation.”¹⁶

As Church notes, a good example of so-called ‘regulatory holdup’ within the NEB’s ambit occurred when the Board approved the Alliance natural gas pipeline.  “The effect of this approval resulted in the transfer of large volumes of natural gas from TransCanada’s mainline to the Alliance pipeline and the creation of substantial excess pipeline capacity.  The result was an extended regulatory battle between the NEB and TransCanada over tolling changes to the mainline that would reduce the non-recovery of investments in the mainline.”¹⁷

Whether an ‘economic efficiency’ mandate would reduce the probability of so-called regulatory holdup is debatable, as is the proposition that such holdup is necessarily economically inefficient.  It is possible, as some would argue, that, in the Alliance/TransCanada case, such ‘holdup’ resulted in a long run improvement in dynamic efficiency in the Canadian natural gas pipeline network.

Church’s commentary makes a well-argued case for clarifying the mandates of regulatory agencies.  It deserves discussion and serious consideration by regulated industries, governments and the general public.  It is especially timely with respect to the NEB, the mandate of which is currently being reviewed by the Government of Canada.

*Peter Miles is a retired economist.  For several years he served on the staff of the NEB where he was responsible for overseeing economic analysis.

1. National Energy Board Act, RSC 1985, c N-7.
2. Ibid, ss 52.1, 58.16.
3. Ibid, s 62.
4. Jeffrey Church, Defining the Public Interest in Regulatory Decisions: The Case for Economic Efficiency, Commentary No. 478 (Toronto: CD Howe Institute, 2017) at 3, online:<https://www.cdhowe.org/sites/default/files/attachments/research_papers/mixed/Commentary_478.pdf >.
5. Ekos Research Associates, Canadians Attitude towards Energy and Pipelines: Survey Findings (Ottawa: Ekos Research, 2016), online: <https://assets.documentcloud.org/documents/2764857/024-16-Survey-Findings.pdf>.
6. Ibid at 16.
7. Michael Cleland et al, A Matter of Trust: The role of communities in energy decision-making (Calgary: Canada West Foundation & University of Ottawa, 2016), online: <http://cwf.ca/research/publications/a-matter-of-trust-the-role-of-communities-in-energy-decision-making/>.
8. Expert Panel on the Modernization of the National Energy Board, Forward, Together: Enabling Canada’s Clean, Safe, and Secure Energy Future (Ottawa: 2017), online: <https://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/pdf/NEB-Modernization-Report-EN-WebReady.pdf>.
9. Government of Canada, Environmental and Regulatory Review, Discussion Paper (Ottawa: June 2017) online: <https://www.canada.ca/content/dam/themes/environment/conservation/environmental-reviews/share-your-views/proposed-approach/discussion-paper-june-2017-eng.pdf>.
10. Canadian Environmental Assessment Act 2012, SC 2012, c 19.
11. Supra note 9 at 18, emphasis added.
12. Ibid at 20.
13. Supra note 4 at 3.                                                       
14. Supra note 4 at 7-8. As Church also notes: “a focus on efficiency requires that those who benefit could compensate those made worse off, not that they must”; a proposition unlikely to sit well with ‘losers’ – or with regulators!
15. Indeed, one wonders how far one should go in attempting to put a monetary value on all amenities. For example Michael Sandel, in his book What Money Can’t Buy: the Moral Limits of Markets (New York: Farrar, Strauss and Giroux, 2012) cites a case in which surveys indcated that support for location of a Swiss nuclear waste facility declined in a neighbouring community when citizens were offered monetary compensation as opposed to simply regarding acceptance as a civic duty!
16. Supra note 4 at 11.
17. Ibid.