In this article in The Tyee, Andrew Nikiforuk levels some very serious allegations with respect to the National Energy Board, suggesting that the Board has been captured (see * below for definition) by industry, that it cannot be objective because it is industry-financed, and that it does not appropriately balance the interests of energy companies with those of rural Canadians.
If you are going to level an accusation that the country’s most powerful regulatory body has been captured by industry, you would likely want to have the backup of experts in legal process, perhaps a regulatory economist (I might be biased on this one), and certainly you should be armed with a long list of citations to previous Board decisions which demonstrate your case. In this article, Nikiforuk’s primary source is Dave Core, director of federally regulated projects for the Canadian Association of Energy and Pipeline Landowner Associations (CAEPLA), described on the CAEPLA website as, “…one of Canada’s foremost and leading landowner advocates.” In other words, he works on behalf of those people who are most negatively affected by energy infrastructure – those with pipelines literally in their backyards. With that kind of backup, Mr. Nikiforuk is bringing a knife to a gunfight.
Nikiforuk’s argument that the NEB has been captured is supported with a quote from a 2000 report (which is not online) on the NEB’s effectiveness by Purvin & Gertz saying that, “there is a disturbing perception that the National Energy Board has in some sense been ‘captured’ by the western based producer and pipeline industries.” The perception of capture does not, in and of itself, imply capture, and I am sure if that report had any more damning evidence, it would have been cited. Further, as you will see below, Nikiforuk is not afraid to take a quote out of context.
Mr. Nikiforuk’s argues that the Board cannot be unbiased because, “Canadian taxpayers no longer even pay the Board’s bills,” which leads him to question whether the NEB can, “…regulate pipelines in the pubic interest when it is 90 per cent funded by private industry?”
The NEB is a cost-recovery organization by design. If you want to look at all of their audited financial statements, they are online, or you can read their Cost Recovery FAQ. The NEB collects and spends approximately $60 million annually on regulatory hearings, salaries, etc. and also have recently added a participant funding program to allow stakeholders who previously would have been without the means to take part in hearings to do so. Nikiforuk wonders whether an industry-funded Board can make truly independent decisions – well, independence is hard to prove in the abstract, so I hope the Board will challenge Mr Nikiforuk to provide proof of his accusations or retract this article. What I can point out is that, in many hearings, some of those who fund the NEB through levies will actually be on opposite sides of the hearing table. Unlike the world Mr. Nikiforuk perceives, where it’s the ENGOs and Canadians against industry, it is often industry-vs-industry in NEB and other regulatory hearings. For example, this case (and a related US case) pitted Imperial Oil and Suncor against Enbridge. Further, in the Northern Gateway case, Kinder Morgan has an alternate project proposal, and actually challenged the NEB to delay the hearing until Enbridge could demonstrate commercial demand. Not exactly the cozy little cluster of Calgary office tower dwellers that Mr. Nikiforuk would have you imagine.
Mr Nikiforuk’s call for NEB reform is based on a quote attributed to this Senate report stating that, “many Canadians felt the national energy regulatory system was broken, and that rural Canadians ‘bear a disproportionate share of the costs’ for big energy projects.” Well, that’s not exactly what that report says. I think it’s worth looking at the quotes from the Senate Report in context (I apologize for the length). The first part of the quote used by Nikiforuk is from p.43 of the report, and here is the whole section with his quote in bold:
“However, many witnesses felt that the current regulatory process was broken and not prepared to handle the new generation of challenges affecting the energy sector.
Part of the problem is that the policy jurisdiction over environmental assessments is shared between provincial and federal governments. Many witnesses felt that this resulted in unnecessary duplication of assessments adding to project cost, creating uncertainties and causing long delays.
Some witnesses welcomed the recent federal initiatives to streamline the regulatory process such as the creation of a Major Projects Management Office (MPMO), an exception list for routine public infrastructure projects and the increased authority given to the Canadian Environment Assessment Agency to streamline its decision making process and the transfer of responsibility for environment assessments to the National Energy Board and the Canadian Nuclear Safety Commission for projects falling under their respective areas of expertise.
However, the recent explosion of the Deepwater Horizon, an offshore oil rig operating in the Gulf of Mexico which left 11 workers dead and is releasing crude oil uncontrollably has brought renewed attention to regulatory/inspection safeguards and emergency response preparedness of Canada’s current and future offshore oil and gas facilities.
The goal should be to provide smarter regulation that can process energy project proposals in a timely fashion without compromising any aspect of the environment or health and safety of employees or the public.“
In other words, there is not a single piece of the quote that suggests that the system is broken because it favours industry…the report suggests that the system is broken because it’s too time consuming, contains too much regulatory duplication, and argued that we need smarter regulation to prepare for growth in the energy sector. To co-opt this quote to suggest that the Senate committee thinks the NEB has been captured and needs to be reformed is irresponsible at best.
The second part of Mr. Nikiforuk’s quote, again in bold (which comes on page 42 in the report, so he reversed the order) is drawn from a previous section which reads as follows:
“A balance must be struck between private costs and the public good. While it is important to create an environment that attracts private investment and risk, and to ensure that Canadians are secure in their energy needs, it must be emphasized that local residents often bear a disproportionate share of the costs, including a possible reduction in income, property value or land use. Also, there may be real or perceived health and safety risks associated with living near energy facilities.
There is no easy way around this issue because energy projects must be built.”
Again, if you read that quote in context, the Senate doesn’t come close to saying what Mr. Nikiforuk wants you to believe they do, although I don’t find it surprising that he omitted the last line of the Senate report from his article.
If you are going to go after the country’s most important regulatory body, you better have a stronger case than a couple of quotes taken out of context, a landowner advocate, and semantics about the use of the word ‘partner’.
Since I started with a movie quote, I’ll end with one. Mr. Nikiforuk, “you’re going to need a bigger boat.”
* Wondering what capture theory is? George Hoberg correctly pointed out to me that capture theory was developed by political scientist Marver Bernstein in his 1955 book Regulating Business by Independent Commission. The idea was first introduced in economics by Nobel Prize winning economist George Stigler in his 1971 seminal article, “The Theory of Economic Regulation” (my apologies for the paywall). The paper has been cited in the academic literature about 6000 times. The theory holds that if, by whatever means, firms or other interest groups are able to capture the regulator, they will be able to sway the regulator to act in a biased manner in the decisions it makes. So, if a regulator is captured by industry, you would expect more development and expect regulated firms to earn higher rates of return then they otherwise would, and vice-versa if the regulator is captured by anti-development special-interest.
Andrew Leach has taken issue with several points made in my Tyee column about the NEB and captured regulators. But his arguments are not convincing.
1.) Leach first argues that a regulatory board such as the NEB can be objective and still be financed 90 percent by industry through a system of levies based on the principle of cost recovery. Here, we simply disagree. As a journalist and landowner I remain unconvinced by his assurances that such funding formulas are all okay. Ordinary Canadians know that the guy, who pays the piper, calls the tune.
2.) Next Leach questions the authority and credibility of Canadian Association of Energy and Pipeline Landowner Associations (CAEPLA) and its founder, David Core. I think people who deal with an energy regulator everyday and must live with the consequences of the board’s policies and decisions are more informed than journalists or academics. It wasn’t’ regulatory economists that disclosed the corrupted nature of the Texas Railroad Commission or the US Mineral Management Services but good auditors and researchers. So, I invite Leach to leave his ivory tower and have an open conversation with Dave Core. (Oddly, I have yet to meet a pipeline executive or a regulatory economist that has accused a regulator of capture.)
3.) I’m not the first person to question the impartiality of the board. Nor will I be the last. I’d suggest that Leach find a library and read the 2000 Purvin & Gertz report: “Formative Evaluation of Effectiveness of the National Energy Board’s Program Delivery.” (And why isn’t this critical report on the NEB’s website?) The report raises many serious questions and I quoted the accurately and in context. The document talks about the perception of regulatory capture repeatedly. Perception is based on performance. Adds the report: “A surprisingly wide range of stakeholders with little experience with the Board, as well as regional representatives outside Alberta, mentioned this phenomenon as a major weakness that could eventually have a serious impact on the Board’s credibility…..Environmental NGOs also generally perceive the Board as being captured by industry.” It also found that the Board had “no standards on pipeline abandonment”; “no environmental policies and standards;” and “no integrated environmental information management system.” I argue that these critical deficits, which the Board has belatedly and half-heartedly tried to address, are more evidence of capture.
4.) Leach doesn’t address some of my column’s most important charges because they prove my point about capture. If the Board is an independent and impartial body than why does it call itself a industry “partner”? (Leach suggests it is simply a matter of semantics; but I would argue that it really describes the actual mechanics.) And if the NEB is such a responsible and transparent agency, then why does it reply to information requests about industry lobbying and partnerships with 300 blank pages? And if it is concerned about public safety than why does it wait weeks before telling Canadians that it has forced companies to reduce pressure in their pipelines to avoid another Michigan-like Enbridge fiasco?
5.) Last but not least, Leach takes umbrage with two quotes in the column taken from a Senate report on energy. Because I provide links and sources in the interests of accountability and debate, Leach smartly checked them. And here I frankly agree with one of his criticisms. One of the quotes was, indeed, taken out of context. I made a mistake and I’ve removed it from the article. But that error doesn’t subtract from the essence of my argument: the NEB does a great job for pipeline companies but a poor one for Canadians and landowners.
6.) Leach humorously suggests that I need to marshal more evidence for regulatory capture and get a bigger boat. May I suggest that regulatory economists such as Leach pay more attention to who runs and funds our regulatory boats as well as what ordinary sailors have to say about their navigation. The evidence I presented in my column raises critical questions about the agency’s performance and transparency. I stand by my column.
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Andrew,
Thanks for reading and responding to my comments, and for your kind words with respect to this blog on The Tyee website. I also appreciate your willingness to change your article in response to my comments – many would not. I think you mis-read or mis-interpreted some of my comments, and I think perhaps some of my language was not clear. Below, I’ll respond to each of your individual points. I may also write a second blog post with some follow-up.
Regarding your #1, I think you need to acknowledge that very little of the NEB’s work, although admittedly some of their more controversial files, allow for the NEB to take the side of “industry”. Certainly in toll hearings, the clients on either side of the table are both under the “industry” umbrella. This is also true in cases like Northern Gateway or Keystone XL. While you and I both work in the environmental space, and so put our emphasis on these aspects, the first pass for the regulatory hearings is on whether a project is needed – assessing whether commercial demand is there for the pipeline. In these cases, it is often the case that two or more industry players will be opposed, as I have shown with my Gateway example, because transportation volumes are essentially zero sum. Kinder Morgan is well aware that a refusal to permit Gateway makes it more likely that their TransMountain expansion will be approved, thus allowing them to grow their asset base. In these cases, the NEB can’t simply choose to side with industry.
In the “industry-vs-ENGO” or “industry-vs-Henry-and-Martha” cases, I don’t see any reason to support your capture-by-funder hypothesis. In order to be able to leverage their status as a funder, a party has to be able to threaten to remove funding. Unless you think that Kinder Morgan is going to the NEB and saying, “If you turn down my project then I will shut down my existing regulated assets in Canada and stop paying levies and you’ll be out of a job,” then I don’t see how they can leverage funding to sway decision making. You paint it as analogous to an employer-employee relationship, which it really isn’t.
Re: your #2, it was not my intention to question either the authority or credibility of CEAPLA or David Core, whom I have not met. My intention was to point out that they represent those people who, as you point out in your article, bear the direct cost and risks energy infrastructure. In other words, even a project which is in the broad public interest is not in the interest of the landowners directly affected, and the regulatory process is designed so that individual landowners don’t have the power to hold up projects. My point was that it is not surprising to me that this group feels that the NEB does them a disservice whenever a project is built. I’d have the same critique if you only cited Total’s view on capture at the ERCB. It’s not a reflection on the group, but a reflection of their position relative to the issue you bring up.
As for leaving my ivory tower, I’d be more than happy to meet and talk with David Core (or you, incidentally) any time.
Your second comment that you have yet to meet a regulatory economist who would accuse a regulator of capture is astounding. Regulatory economists (and political economists and regulatory law experts) work on these questions constantly. Among the 6000 or so papers that cite Stigler’s seminal paper on regulatory economics, a significant proportion are either looking at evidence of capture, or regulatory design to mitigate capture. If you want a (now a little dated) paper on the economic theory and empirical evidence, this one is pretty good http://oxrep.oxfordjournals.org/content/22/2/203.short.
Re: your comment about pipeline Executives, had you attended Hal Kvisle’s speech at our Canadian Business Leader Award Dinner a couple of years ago, you would have heard him suggest that the regulatory boards were captured by special interest, and that it had made building energy projects prohibitively time consuming and risky. Ironically, his view of what should change was similar to the conclusion of the Senate report you cited – more streamlining.
Re your #3, we should all question the impartiality of the Board, and I am by no means discouraging anyone from doing so. I also wish the report you cited was available on-line. The point of my article was to suggest that, with the research background you have, I am sure you can do a better job of it, and I encourage you to do so. The challenge that anyone has in doing so is that it’s difficult to do without instead asking the question of whether the Board represents your perception of the public interest. I’ve been very critical of some of the decisions of the ERCB for exactly that reason – I don’t think they reflect what is in the best interests of this province. Whether that means they are biased in their view or I am biased in mine is in the eye of the beholder, and I am not sure how you prove it.
I agree with your comment on abandonment standards and requirements – there is no question that those should be in place. That said, you have to ask who is capturing the Board to keep these at bay. If you believe it is the project proponents (Enbridge, TRP, etc.), they would be agnostic to abandonment costs as long as those costs are deemed into the rate base and are not sufficiently large as to make the project commercially non-viable. The proponents would bear the liability if the pipeline is not properly abandoned, so they want it in their rate base, or else it increases their risk which utility shareholders don’t want. Talk to anyone at a pipeline company and they will likely tell you the same thing. The shippers are interested in low rates, and so for them to have to pay abandonment costs is a bad thing. So, if you think the Board is captured by the proponents, I am not sure that supports your argument. It’s very possible that the Board does not see the broad value of maintenance, redundancy, and reclamation, and this is the subject of my forthcoming column in Alberta Oil Magazine.
Re your #4, if you re-read my post, I didn’t say that you were wrong, nor did I ever say that I believed the Board to be impartial. I said that you were not making your case well. Here, the fact that they use the word ‘partner’ seems pushed way too far. You can go into the NEB documents and find some much more direct statements. For example, here on the Gas and Oil Pipelines slide, you will find a quote from the NEB chair that says, “I want to emphasize the importance of enabling the development of infrastructure as a key goal of a regulatory agency.” Enabling development is not really the right way to describe the mandate of the NEB in my view. So, again, to re-emphasize, I said that if you are going to go after them, bring a better case – don’t confuse that with my saying you shouldn’t challenge the Board’s impartiality.
Re your #5, I thank you again for changing your article. I think that your use of the word Canadians in your comments still doesn’t quite get at what I (and the Senate report) was saying – even if a project is in the public interest, that does not mean it makes everyone better off. Part of the NEB mandate, and arguably the most important part, is to balance those interests. If you think they aren’t doing so on a broad basis, cite a decision or two, deconstruct who wins and who loses, and make the case that the losses outweigh the gains, or that the compensation doesn’t cover the losses even if it’s in the broad public interest.
Re your #6, I hope you find that I do pay a great deal of attention to regulatory decisions both here in Alberta and nationally. While my preferences and yours may not align on every issue, I think we agree on the need for vigilance. I think the funding issue is a red herring though – I don’t see how the funders have any leverage. If you look at the paper I cited, and something called the Regulatory Revolving Door, that’s closer to where my concerns would lie – whether or not board members are personally connected through career histories to the industries they are now asked to regulate.
Apologies for writing an essay in response to a comment. Thanks again for reading.
Andrew Nikiforuk has indeed replied, and for my money, convincingly.
David, I have replied to Andrew’s comments above. Thanks as always for reading and commenting.
Very interesting debate.
The point Leach makes about the non-retractability of industry funding is very, very important. The funding absolutely cannot affect impartiality because a company cannot refuse to pay.
Lately, I have been reading a lot about the problems with the MMS leading up to the Macondo well blow out for a project I am working on, and it seems that MMS funding (from all sources) flatlined in real terms as offshore oil activity in the US increased dramatically. During the same period, the mandate of the MMS also increased significantly. MMS was underfunded and thus could not retain or even attract enough technical experts to properly fulfill all of its mandates. MMS was forced to rely much too heavily on the technical expertise of the oil companies. Many of the problems with MMS could have been solved if MMS was allowed to keep a fixed percentage of the revenue it collected on behalf of the US government.
IMO there is a problem if the NEB is relying too heavily on industry analysis due to funding issues; but as long as the funding from industry is non-retractable and will increase with the need for regulatory activity, I see no funding source problem. The MMS provides a good example that government funding can easily be flatlined or cut in real terms.
Joel
I would be happy to prove Andrews point. Pretty clear to me from what I saw. regardless of your gender, religion political bent, this is a nation of laws. Hal should have followed them