Addressing the Policy Regulatory Nexus in Canada’s Energy Decision-Making

Canada faces serious challenges and crucial decisions when it comes to governing a twenty first century energy system. They are seen in ongoing controversy over siting of wind farms, pipelines, new hydro, and transmission lines; tensions between movement on climate change and other energy objectives like oil sands development, competitiveness and consumer affordability, fracking implementation, and the reform of the National Energy Board, to name but a few. Most industrialized democracies face similar kinds of controversies but Canada’s unique energy profile arguably makes these difficulties more challenging.

One of the linchpins of a modern energy system is the relationship between policy-makers and regulators when it comes to public decision-making. This paper broadly assesses the challenges that Canada faces in this area – within, and between, provincial/territorial and federal levels – and explores options for existing systems. It also addresses critical issues that affect and are affected by this relationship, including Indigenous and public involvement, and collaborative processes. It builds on the idea that restructuring our policy and regulatory systems requires informed reform, so that Canada can maintain aspects of the system that are effective, while improving areas that need it. The analysis builds on the results of a two-day workshop held in June 2017 at the University of Ottawa which featured a diverse range of senior participants from government, Indigenous organizations, industry, ENGOs, and academia.

This study focuses primarily on the relationships between and roles of policymakers and regulators. In this discussion, policymakers are defined as elected officials from the executive branch and legislature who enact policy, design regulatory agencies, and appoint regulators. They do so with the support of the public service, mainly through government departments.

Alternately, regulation is carried out by regulators (appointed officials) and their agencies, with specialized professional staff. As a general rule they are focused on non-partisan evidentiary proceedings, generally with arm’s length independence from the political level. There are wide varieties of regulatory entities across Canada and within jurisdictions in terms of scope, resources, structure, processes, independence, and responsibilities.

The paper is part of the broader Public Authorities research stream of the Positive Energy project, and is a detailed extension of the System under Stress paper released in early 2017. That paper outlines three crucial considerations in Canadian energy decision-making: 1. Who decides? The role of local authorities and how to balance local interests with broader regional, provincial and national interests;1 2. The policy-regulatory nexus (this paper) 3. How to decide? Information, capacity and engagement in decision-making processes (forthcoming).

System under Stress outlines several tension areas when it comes to policy-regulatory relations. First, it identifies the dividing line between policy and regulation in substantive and procedural terms, including the tension between regulatory independence, and the need for communication and interaction between policymakers and regulators. Second, it delineates the governance of regulators by policymakers. Third, it demonstrates the planning challenges that are increasingly emerging between broad policy frameworks and detailed regulatory arrangements. Finally, it points out the lack of clarity on the role and place of Indigenous governments in the policy/regulatory nexus.

The paper is informed by an extensive array of Positive Energy engagement and research to date. This includes a major research study undertaken with the Canada West Foundation, a review of  key literature, case study references, and expert interviews, and quantitative survey data from four case studies conducted in 2016. It also benefited from extensive input by the Positive Energy research team in consultation with senior leaders from government, industry, Indigenous interests, and ENGOs in review processes and during a two-day workshop in summer 2017. A specific set of eight recommendations derived from the broader analysis of the paper are embedded in the rest of the executive summary below.

New and Unique Challenges in Energy Governance

There are two critical underlying conditions that dramatically affect any discussion of underlying challenges in the policy-regulatory relationship. First, energy governance is more challenging now than in the past. There is extensive evidence that new challenges have emerged in energy governance. Social and technological changes have created new expectations for regulatory processes. There is greater distrust of government agencies and most institutions. Cumulative effects of different energy activities are increasing. And complex challenges like reconciliation with Indigenous peoples, “wicked problems” such as climate change, and increasing market complexities have come increasingly to the fore.

Studies undertaken by the Organization for Economic Co-operation and Development (OECD), International Monetary Fund (IMF), and World Bank, along with a plethora of scholarly work all attest to further challenges.2 These include new economic and social concerns embedded in regulatory processes, and the challenge of conflicting mandates like being more responsive to regulated industry yet less vulnerable to external influences.3 Complexity has also increased in markets, in the legal realm, and in technology. Public opinion data also shows greater distrust of regulators and increased dissatisfaction with decision-making processes. This has led to the beginnings of reform and assessment, including the current National Energy Board modernization process.4

Second, energy policymaking and regulation have unique characteristics that make them more politically challenging and complex than many other areas of regulation. Energy operates under a “triple” constraint of market and economic imperatives, environmental protection, and concerns for differing forms of security.5 Energy markets, for example, vary in type and situation to an enormous degree. They include hybrids of monopoly regulation and pure market competition across the entire supply chain, and throughout all forms of energy supply and infrastructure. Complex and differing subsidies are at play, and some forms of energy (e.g., electricity) must be constantly balanced in real time. Finally, recent scholarship and public responses have added a fourth imperative of social acceptance or equity to this complicated set of constraints.6

Best Practices

A variety of best practices gleaned from domestic and international practice should be considered in the Canadian context. Policymakers have to create, design, and fund strong regulatory agencies, including essential rules for operation.7 Incorporated into regulatory design is the need to implement many of the best practices summarized below into those structures. Second, policymakers also must conduct oversight of regulators, and third, they must develop policies that guide the actions of regulators. Ideally, policy development is informed by interaction between policymakers and regulators; regulators in turn help inform the policy development process, particularly in areas where their expertise and knowledge of conditions on the ground is useful. Finally, much regulatory development and implementation, while the responsibility of the regulator, has the effect of producing de facto policy outcomes.

An important concern in the policy-regulatory relationship is regulatory independence, which is tied to the need for procedural integrity and the adjudication role that regulators perform.8 While policymakers operate in the political system, responding to a variety of interests and values, regulators are intended to be sheltered from short term and partisan political interests and instead to make decisions in an independent manner using evidence established by technically informed, expert analysis, but following the broad mandates of policies under which they operate, the rule of law, and the public interest.

Concerns over procedural integrity arise when there is political interference during regulatory processes, or when policymakers alter regulatory decisions after the fact. There are parallel concerns for undue influence in regulatory decision-making by outside parties (industry, interest groups), or that lead to the perception or reality of regulatory capture (when a regulator is biased they are said to be captured by industry or interest groups). Objective and independent judgements and processes are critical to successful regulation. The Canadian experience has shown that there are lapses in these areas.9 All of these concerns occur in a context in which regulators must regularly interact and communicate with government, regulated entities, interested parties, and the public. R1. Enhance interaction and dialogue between policy-makers and regulators in relevant circumstances and jurisdictions while still maintaining appropriate regulatory independence.

Governance and Accountability. An extensive scholarly and professional literature body describe the plethora of optimal expectations for governance and accountability that accompany the concern for regulatory independence. The OECD describes many (relatively obvious) best practices, and they are summarized immediately below.10 Several aspects of these issues are discussed in greater detail later in the paper as well:

  • Clear responsibilities for ministers
  • Clear articulation of policy goals
  • A national oversight body for regulation
  • Assessment of regulatory efficacy prior to implementation
  • Principles of open government: transparency, clarity, participation, public interest, plain language
  • Regulatory coherence
  • Integration of regulatory approaches across jurisdictions, and across jurisdictional levels (national, provincial, regional, local)
  • Information sharing across agencies, and between all levels of government and regulators

 

Good governance requires clarity. Policymakers and ministries need clear and well-articulated responsibilities. Policy goals and policies need a degree of intelligibility and detail so that regulation is appropriately guided. This has been particularly problematic in terms of clear national energy policy. Even when energy policies exist in Canada (and similarly in the U.S.), they are notoriously limited in their scope (for example, provincial energy policies are often limited to electricity systems) and often suffer from lack of clarity or internal coherence. Second, detailed policy on controversial issues is often avoided by policymakers. Thus, detailed specifics on how Canada will balance climate obligations and other pivotal energy objectives such as fossil fuel development, sustainable development, energy affordability and consumer equity, are still vague. Similarly, little clarity exists on how national public benefits of energy development can be balanced against burdens on local communities. R2. Integrate detailed policy goals (with market mechanisms) into the regulatory process.

The OECD also suggests that a quasi-independent body designed to oversee, assess, and guide regulatory practices across the federal and sub-federal levels be put in place. Such an agency would presumably provide reports on regulatory effectiveness, best practices, and activities throughout a jurisdiction. It would also address regulatory coherence across jurisdictions, and across regulatory agencies.

The structure itself of regulatory agencies can be designed to strengthen impartiality. This can include guidelines for board representation, or threshold limits or requirements in terms of industry, environmental, consumer interests, diverse ideological representation, etc., to ensure balance, with an emphasis on scientific expertise. There is a compelling case for stronger coordination, sharing, and the development of guidelines that reflect Canadian circumstances; and for vigorous projection of those principles into the public debate in Canada. R3. Implement ongoing ex ante and ex post assessment of regulations, regulatory design, institutional design, and regulatory effectiveness. The implementation of institutions or formal mechanisms to do so would strengthen this process.11

The 6 c’s: Communication, Coherence, Comprehensiveness, Cumulativeness, Capacity, Collaboration. Further best practices focus on The 6 c’s. Two of these (Communication, Collaboration) have critical relevance for Canada.

One of the most critical components of the policy-regulatory relations is interaction and exchange of information. In the absence of strong communication, poor regulation can result, processes can become biased or incomplete, and the public can lose trust. Communication has many manifestations:

  1. Policymakers must communicate clear policy goals to regulators.
  2. Interaction between regulators and policymakers should occur on a regular basis.
  3. Regulators need to correspond with other regulators.
  4. Policymakers and regulators need to effectively exchange accessible and pertinent information with the public and all relevant stakeholders in their processes.

R4. Provide improved and effective information and communication of regulatory oversight, responsibility, and process to the public. Ensure this is occurring with (and between) policymakers, regulators, and developers.

The literature also argues for regulatory coherence: differing regulatory agencies and different jurisdictions (federal-provincial; province to province) should be governed by policies that achieve some level of integration, harmonization, or coordination. This is not the same as uniformity, which is neither possible nor desirable, especially in the context of federalism, but is an argument for the consideration of regulatory interactions across the context of different kinds of markets, and different provinces. R5. Develop a stronger commitment to cross institutional and cross jurisdiction regulatory coherence.

Both policymakers and regulators face a need for policy direction and regulatory processes that are comprehensive and cumulative. Policies need to address all areas of concern, and must include regulatory oversight when it comes to the regulatory impact of a given policy or a specific form or area of development.12 For example, in the context of siting major projects, these can include all aspects of environmental impacts (air, soil, health, toxics, viewshed, resource use, etc.), community impacts, safety, future risk, remediation, community and social cohesion or quality, economic benefits and impacts, including on competitiveness, investment and innovation, and cumulative impacts and risks from multiple projects.13 R6. Ensure regulatory oversight is both comprehensive and cumulative, while still balancing local impacts with a commitment to economic efficiency and public good outcomes.

Finally, with respect to capacity, there is a need for an appropriate level of support for effective Regulation. This means that policymakers and government are effectively training, supporting, and funding regulatory institutions such that they can perform their work with expertise and in a timely way. R7. Ensure regulatory institutions have appropriate capacity: funding, and access to high levels of human capital and expertise to regulate effectively.

Unique Challenges and Next Practices

Canada faces a number of unique challenges in its energy decision-making:

  1. linear projects
  2. Indigenous authority
  3. policy clarity
  4. public understanding

Two of these concerns, linear projects and indigenous rights, are of particular concern to Canada. Canada’s geographic size and the remote location of large scale hydro and fossil fuel projects mean that long run linear projects may occur more often in Canada, and are a cornerstone in the success of the energy system.

Second, indigenous rights have a unique place in Canada because of recent Court rulings affirming treaty obligations and higher levels of input and consideration. These rights are even more important given the hundreds of indigenous authorities in Canada and the fact that so many energy resources and infrastructure are found on or under, or traverse native lands. Several of the ‘c’s direct us to next practices that can help to address them (communication, clarity, and collaboration).

Linear projects such as transmission lines or pipelines are a challenge because they cover so many jurisdictions and communities, and because it is rare that benefits can accrue to every community whose land they cross.14 Canada’s specific geography and energy economy context mean that it has more than its share of these concerns. They require careful consideration of the balance between national need and local, regional, or provincial interests. A variety of innovative approaches have been used with some success and should be considered both in Canada (and abroad) for linear projects. These include the designation of transmission corridors, backstop siting authority, partnership approaches, and focused, early, comprehensive engagement. Clear guidelines from policymakers are needed for these forms of infrastructure.

Indigenous Authorities and rights in Canada are complex. They are far stronger than in the past, include unique legal protections and considerations, and to further challenge decision systems, are highly variable across the country.15 In some cases, a communities’ legal status creates tensions with traditional notions of the policy-regulatory relationship. Policymakers need to more explicitly consider Indigenous rights in regulatory design and operation, including next practices forms of regulatory governance (e.g., joint reviews, co-development and co-management, or partnerships).

Public Understanding and Trust. Public understanding of the regulatory process is poor, there are higher degrees of skepticism about its validity, and increased distrust of government. These create a toxic mix for the regulatory process. Public dissatisfaction can occur if regulatory processes are faulty, if it seems that decision-making occurs in the political arena, or if the public misunderstands where their concerns should be expressed. Findings from recent Positive Energy/Canada West Foundation case studies of community satisfaction with energy project decision-making show high levels of distrust and concern about the independence of regulatory processes.16 Thus, there is an opportunity for regulators and policymakers to initiate next practices that more effectively communicate how and what they do, and to identify and strengthen practices to increase trust.

Collaborative Processes, with Limits. There is likely an important role for collaborative processes that veer from traditional regulator roles that simply arbitrate. Extensive evidence suggests that these processes can improve chances for more positive outcomes with a higher degree of stakeholder and public approval if well designed and managed.17

Examples of these processes include the co-development of regulations, co-management of monitoring, the encouragement of cooperative partnerships, impact benefit agreements, or community co-production with developers. These practices can be used in a variety of contexts, whether it be a project approval, electricity system planning, or ongoing monitoring of company operations. Importantly, they still require timelines, and though they may improve processes and satisfaction, they will not always satisfy all parties, or may still result in a “no” to a specific infrastructure development.

R8. Develop more fluid, interactive, and collaborative processes (that require more time, resources, and expertise) to address particularly challenging areas of energy governance: linear projects, indigenous jurisdictions, national policy clarity, and reduced public trust and understanding.18

Conclusion

Clearly Canada has an effective and robust system of energy governance, but there are areas of concern, particularly in an era of great challenge in the energy arena. In particular, Canada needs to focus on high quality institutions across the regulatory policy nexus. The following recommendations demonstrate a series of actions that provinces and the federal government could take to improve on the policy and regulatory relationship, and the various contexts that are affected by it.

  1. Enhance interaction and dialogue between policy-makers and regulators in relevant circumstances and jurisdictions while still maintaining appropriate regulatory independence.
  2. Integrate detailed policy goals (with market mechanisms) into the regulatory process.
  3. Implement ongoing ex ante and ex post assessment of regulations, regulatory design, institutional design, and regulatory effectiveness. The implementation of institutions or formal mechanisms to do so would strengthen this process.
  4. Provide improved and effective information and communication of regulatory oversight, responsibility, and process to the public. Ensure this is occurring with (and between) policymakers, regulators, and developers.
  5. Develop a stronger commitment to cross institutional and cross jurisdiction regulatory coherence.
  6. Ensure regulatory oversight is both comprehensive and cumulative, while still balancing local impacts with a commitment to economic efficiency and public good outcomes.
  7. Ensure regulatory institutions have appropriate capacity: funding, and access to high levels of human capital and expertise to regulate effectively.
  8. Develop more fluid, interactive, and collaborative processes (that require more time, resources, and expertise) to address particularly challenging areas of energy governance: linear projects, indigenous jurisdictions, national policy clarity, and reduced public trust and understanding.

Canada has a strong tradition of sound policymaking and regulation, but recent stresses in energy decision-making systems point to the growing need for reform. This includes, importantly, the relationship between policymakers and regulators. The challenges in the Canadian context are extensive, but if sufficient investment is made in processes of “informed reform,” the prospects for improving the energy decision-making landscape, particularly when it comes to the public authorities who oversee it, can bring extensive benefits to Canada along all energy imperatives: economic, environmental, security, and social acceptability. The recommendations are oriented in this direction.

* Dr. Stephen Bird is Associate Professor of Political Science at Clarkson University (New York) and Senior Fellow at the Centre on Governance & Research Faculty Affiliate at Positive Energy at the University of Ottawa. Contact: [email protected].

This paper has benefited from the input of the Positive Energy Research Group; many thanks to Marisa Beck, Mike Cleland, Stewart Fast, Monica Gattinger, Rafael Ponce, and Louis Simard. Thanks also to members of the Positive Energy Advisory Board for their review. I am also grateful to Patricia Larkin and Rafael Dezordi for extensive editing assistance. Finally, this paper is extensively derived from a broader research piece with a similar name available at https://www.uottawa.ca/positive-energy/research-publications. Any errors are the author’s.

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  11. In Canada the Canadian Association of Members of Public Utility Tribunals (CAMPUT) does this to some degree, but it only addresses some forms of regulation, a broader approach is needed.
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  18. Further discussion of the specifics of these processes are available in the third report from the Public Authorities research stream: “How to Decide? Engagement, Information, and Capacity, which is forthcoming from Positive Energy.”

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