Canadian Power – Key Developments in 2019, Trends to Watch for in 2020: Energy Litigation

The following is a chapter from our Power Group's fifth annual Canadian power industry retrospective Canadian Power Key Developments in 2019, Trends to Watch for in 2020. A PDF request form is available at the end of the article.

Reference re Greenhouse Gas Pollution Pricing Act [1],[2]

What are the limits of the federal government’s authority to regulate greenhouse gas emissions? The answer to this question – soon to be decided by Supreme Court of Canada (the “SCC”) – will determine how governments in Canada approach climate change policy for the foreseeable future.

At issue is the federal government’s Greenhouse Gas Pollution Pricing Act (the “Act”), which sets national standards for carbon pricing, commonly known as the “carbon tax”. Part 1 of the Act applies a levy to fossil fuels, and Part 2 sets a cap-and-trade system for output-based greenhouse gas (“GHG”) emissions for large industrial facilities to maintain competitiveness. All revenues raised are returned to the provinces in which they are levied.

Ontario and Saskatchewan challenged the constitutionality of this legislation. The courts of appeal in both provinces upheld the constitutionality of the Act in 2019.

Both courts said that the federal government has authority to set minimum GHG standards under the “peace, order, and good governance” (“POGG”) power in the Constitution, which is often viewed as a residual “catch-all” for matters not specifically defined under other sections. The courts held that regulating GHG emissions falls under the “national concern” branch of POGG, meaning it concerns the country as a whole and not just any one province. In other words, GHG reduction cannot be accomplished in a piecemeal fashion absent a national benchmark to ensure overall competition and effectiveness.

Interestingly, both courts also said that the carbon tax is not actually a tax, but a regulatory charge. This is because it does not raise general revenue, but imposes a charge for a regulatory purpose, which, in this case, is to promote and reward behaviour modification. The implication is that the Act does not create a constitutionally impermissible tax, as argued by the provinces.

One notable difference between the Ontario and Saskat­chewan decisions is the way in which the respective courts defined the federal power. The Saskatchewan Court of Appeal took a narrower approach, stating that the federal government can establish minimum national standards of price stringency for GHG emissions. The Ontario approach was more general, stating that the federal government can establish minimum national standards to reduce GHG emissions. The latter version would appear to give the federal government broader scope to legislate in this space, which could theoretically support a greater variety of policy measures in the future.

" Either way, using a “minimum national standards” approach under the POGG power appears to be a novel development in Canadian law. "

As such, we do not yet know how it might impact the balance between federal and provincial powers, and the subsequent impacts on industry.

It is now up to the SCC to determine whether the Act interferes with provincial jurisdiction, or whether the courts of appeal in Ontario and Saskatchewan were correct in finding a valid exercise of federal jurisdiction. The matters are scheduled to be heard on March 24 and 25, 2020.

It should also be noted that the Alberta Court of Appeal heard its own version of this reference question during the week of December 16, 2019. It is unclear when the court will make its ruling. It remains to be seen how the Alberta decision may impact or inform the Supreme Court proceedings in March.

For now, businesses across Canada are still required to comply with current pricing regime under the Act, or equivalent provincial statute.

National Steel Car Limited v. Independent Electricity System Operator [3]

The Ontario Court of Appeal has decided that the ongoing constitutional challenge to the “Global Adjustment” brought by National Steel Car Limited deserves a full hearing.

The Global Adjustment is a charge paid by all Ontario electricity consumers to cover the difference between the hourly electricity price and the price guaranteed to generators pursuant to their IESO procurement contracts. It is also intended to cover various infrastructure improvements and conservation programs. The amount paid by consumers, including National Steel Car (a heavy industrial user), has increased substantially since 2008, due to a number of factors including the Green Energy Act.

National Steel Car is challenging the Global Adjustment by arguing that it is actually a tax in disguise, and is therefore unconstitutional because Ontario cannot levy indirect taxes.

Last year we reported on the decision of the lower court, in which the motions judge struck National Steel Car’s applications on the basis that it was “plain and obvious” that the applications had no chance of success because the Global Adjustment was a regulatory charge and not a tax.

National Steel Car successfully appealed that decision this year. The company’s argument focuses particularly on the existing FIT contracts, which it states are not actually part of a closed regulatory system designed to promote cleaner energy sources, but instead are being used to accomplish broader policy goals unrelated to electricity generation, such as rural development.

The Court of Appeal ruled on November 29, 2019, that National Steel Car’s claim is sufficiently plausible that the lower court should not have dismissed it without a full hearing on all of the evidence. The Court of Appeal did not make any findings on the merits of National Steel Car’s arguments. The matter has been sent back to the lower court to be considered on a full evidentiary record.

It remains to be seen whether the provincial government will appeal to the SCC within the 60 day limit, but the 2018 change in government may shape the ultimate outcome. In particular, counsel for Ontario advised the Court of Appeal that the current government “does not agree with the former government’s electricity procurement policy (since-repealed)” and it feels that “[t]he solution does not lie with the courts, but instead in the political arena with political actors.” For the time being, the Global Adjustment remains in place.

Reference re Environmental Management Act (British Columbia)[4]

Can B.C. pass a law to unilaterally stop the Trans Mountain Pipeline expansion (“TMX”)? It would seem unlikely following this year’s Court of Appeal ruling in Reference re Environmental Management Act (British Columbia), 2019 BCCA 181.

The unanimous panel of five judges held that the B.C. government’s attempt to defeat TMX by restricting possession of “heavy oil” was unconstitutional. The provincial law was found to interfere with the federal government’s exclusive jurisdiction over federal undertakings, which includes interprovincial pipelines. The result is a clear victory for pipeline proponents, and a positive affirmation of Parliamentary authority in this area.

In 2018, the B.C. government introduced amendments to the Environmental Management Act (“EMA”) prohibiting anyone from possessing heavy oil in quantities greater than that possessed between 2013 and 2017, unless they obtained a hazardous substance permit. Commonly known as the “turn off the taps bill”, the amendments were clearly and specifically targeted at TMX, a project which involves twinning an existing pipeline and increasing the quantities of oil flowing through B.C.

The B.C. government asked the Court of Appeal to weigh in on the amendments in a constitutional reference which pitted B.C. against Ottawa and Alberta. No fewer than nineteen intervenors submitted arguments.

In support of its legislation, the B.C. government argued that the purpose of its amendment was not to regulate an interprovincial pipeline, but to regulate the release of hazardous substances into the environment. It stated that the effect on TMX is merely incidental. They also underscored the importance of environmental stewardship to both levels of government, the “disproportionate” impacts of TMX to B.C., and that law-making is often best achieved by the level of government closest to those affected (a principle known as subsidiarity).

The Court of Appeal nevertheless found the EMA amendments to be unconstitutional. It held that the “pith and substance” (or dominant characteristic) of the law was “to place conditions on, and if necessary, prohibit, the carriage of heavy oil thorough an interprovincial undertaking”, which is beyond B.C.’s jurisdiction. The Court found that the amendments would “actually apply only to Trans Mountain’s heavy oil”, thus confirming Canada’s assertion that the law was designed to frustrate the pipeline.

Having found that the law related in substance to a federal head of power, this was “the end of the matter”. Accordingly, the Court noted that unless an undertaking is contained entirely within a province, “federal jurisdiction is the only way in which it may be regulated”.

The Court was quick to add that its decision does not reflect a “sea change” (or decisive shift) in the law away from cooperative federalism. Rather it reflects the constitutional allocation of certain powers exclusively to only one level of government.

The B.C. government has exercised its automatic right of appeal on constitutional reference questions – the matter is scheduled to be heard by the SCC on January 16, 2020.

Also of note are the ongoing proceedings in the Federal Court of Appeal challenging the federal government’s decision in June 2019 to re-approve the TMX expansion (after its previous approval was quashed by the Court in August 2018). Several First Nations are arguing that Canada has again failed in meeting its duty to consult with Indigenous Peoples.

" While the TMX project continues to make headway, uncertainty resulting from ongoing legal proceedings persists. "

EPCOR Water Services Inc., EL Smith Solar Power Plant[5]

Alberta self-generators who export their surplus power to the grid are coping with regulatory uncertainty following a decision of the Alberta Utilities Commission (the “AUC”) early in 2019. At issue was whether EPCOR Water Services Inc. could benefit from an exemption in Alberta’s Electric Utilities Act (“EUA”) that would allow it to consume a portion of self-generated power on site, while exporting the rest.

In a departure from its earlier practice, the AUC determined that such an arrangement was, in EPCOR’s circumstances, inconsistent with the EUA and that the exemption did not apply.

In AUC Decision 23418-D01-2019 (“Smith”), EPCOR Water filed applications with the AUC to build a 12 MW solar installation at its water treatment facility in Edmonton. EPCOR planned to use about 70% of the electricity to power its water treatment systems and to export the remaining 30% to the grid to be sold on the wholesale market. This aligned with EPCOR’s commitment to replace a portion of conventional power consumption with locally-produced renewable energy.

The EUA requires that all electric energy entering or leaving the grid must be exchanged through the power pool. In other words, unless EPCOR could access an exemption, it would be required to offer 100% of the electricity from its solar installation for sale on the wholesale market (not just the 30% it intended to offer).

In EPCOR’s view (which aligned with previous AUC approvals), the EUA exemption for electric energy produced and consumed solely by the generator on their own property was applicable. The AUC disagreed. After conducting an analysis of the broader legislative scheme and attempting to reconcile the wording of the exemption with the intent of the legislature, the AUC determined that the exemption was intended to apply in “very limited” circumstances, which were not met in this case.

It is important to note that, while the legislation provides numerous exemptions to the offer/exchange requirement, none were held to apply to EPCOR.

In concluding, the AUC acknowledged that its change of direction “may have ramifications for existing approval holders and future applicants”.

This was borne out in two subsequent AUC decisions: Advantage Oil and Gas Ltd., Glacier Power Plant Alteration, Decision 23756-D01-2019, and International Paper Canada Pulp Holdings ULC, Request for Permanent Connection for 48-Mega-watt Power Plant, Decision 24393-D01-2019.

The upshot of all three cases is that unless self-generators can access another specific exemption (e.g. an industrial system designation), they must either consume 100% of the energy on site, or exchange 100% of the energy through the power pool. As a result, existing self-generators will need to carefully assess their positions going forward.

Please refer to our Alberta regional overview on page 18 of the Canadian Power Key Developments in 2019, Trends to Watch for in 2020 publication for additional commentary on these cases, the existing exemptions and subsequent developments.

Click here to request a PDF copy of the publication: McCarthy Tétrault’s fifth edition of Canadian Power 

[1]       2019 ONCA 544

[2]       2019 SKCA 40

[3]       2019 ONCA 929

[4]       2019 BCCA 181

[5]       February 20, 2019, Decision 23418-D01-2019

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