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Implementing Smart Regulation: How are we doing?

Implementing Smart Regulation: How are we doing? [PDF 464 KB]

Presented by
Kenneth Vollman
Chairman
National Energy Board

CAMPUT Confenrence

2 May 2005

Implementing Smart Regulation: How are we doing?

It's a pleasure to be here with my friends Pat, Dionisio and Neil. Let me say first that I have such great respect for the leadership Neil has provided to us for the Banff, Halifax and today's panels, and I would be far more comfortable if you thought of us as the four amigos. That would also help distinguish us from those other three gentlemen who are also working on the amigo thing.

These CAMPUT conferences have become better each year and, for me, are a "must attend event" to update myself on regulatory and market developments. Congratulations to the CAMPUT executive for creating this opportunity. And a special thanks to our hosts this year, La Régie de l'énergie. I first had the opportunity to visit Quebec City in the 1970s and, for a farm boy from Saskatchewan, it truly made history come alive. I've been back several times since and it will always be an inspirational city for me. Besides, I need to thank the city for its gift of a vice chairman to the NEB, Mr. Gaetan Caron.

In preparing my remarks for today, I drew inspiration from two sources. The first was the Conference Goal, which is aimed at identifying priorities for action. For at least three years now, we've had conference after conference talking about the problems. I think we've defined the problems to death and it's time to move on to action. Secondly, I want to thank Neil for a list of questions he suggested we address in our presentation. They had to do with the challenges regulators face and how we individually and collectively go about addressing those challenges.

Presentation Outline

I want to begin my remarks this morning by continuing a key message from last year, that is the "protect and enable" theme, and share with you how we've followed through with action to achieve results during the past 12 months.

Secondly, I'll summarize the current market context.

Thirdly, I'll identify what I see to be the major regulatory challenges and what the NEB is doing to meet those challenges. I'm going to step a bit outside my comfort zone and assign a grade to our successes to date.

Finally, I'll finish with some concluding comments.

My remarks will have a heavy emphasis on the mandate the NEB has for regulating conventional oil, gas, and electricity matters. I would not want you to get a false impression from this. Our Board recognizes that a large part of the energy solution depends on newer alternative energy supplies and on demand reduction. However, I'll leave exploration of those possibilities to those who possess greater expertise and a mandate to implement action in those areas.

I. The Regulator's role

Last year I suggested to you that the regulator has a dual role to protect parties that are affected by infrastructure projects but at the same time to enable the development of this infrastructure when it is in the overall public interest.

It is only by carrying out both roles that we can fully serve the public interest.

I further suggested that the protection role may come to us more naturally. Much of what we hear in the course of our work are concerns from parties impacted by energy developments. We have considerable practice in listening to and responding to those concerns. Rarely, in my experience, do we receive supportive comments from the public, saying they want the projects. Accordingly, we need to focus ourselves a little harder to make sure enabling is part of our regulatory culture.

It may be that as energy prices continue to impact consumers, that the enable role will take on more importance in the public eye.

What does enabling entail?

I also spoke about what enabling entails in practice.

Ensuring that our processes meet the needs of all stakeholders is the first of what I see as 3 types of enabling.

Second, enabling in the context of policy means examining our regulatory policies to ensure that, in the absence of other public interest considerations, they facilitate the long-term efficiency of markets. This includes providing market participants with information and choice.

Lastly, once a project has been found to be in the public interest, the regulator should facilitate construction that is within approved terms and conditions.

The Board's vision...

So much for concepts and definitions. Consistent with the "Time for Action" message on your conference brochure, I want to focus on how we've been implementing the enabling concept at the NEB.

The first step is to get buy-in from our internal and external clients. We've accomplished this. The protect and enable theme is now part of the Board's Vision statement and is clearly reflected in our corporate objectives. We discussed these initiatives with a multi-stakeholder workshop last year and gained unanimous support for the changes. Our corporate publications, such as the 2004 Annual Report cover shown here, embrace the message.

On the previous slide I said that we could think about enabling in three different senses and I'd like to turn now to specific actions the National Energy Board is taking for each of these senses.

_______________________________________

Objectives: We've establishes six broad objectives, all of which reflect the protect and enable theme.

Continue the development of goal-oriented regulation
Promote understanding of energy markets
Enable effective public participation in Board matters
Promote awareness and understanding of NEB mandate
Promote cooperation and partnerships
Promote the use of performance measures, risk-based approaches and quality management systems

Quality Management System

First is to enable in a process sense. A cornerstone of the NEB's smart regulation strategy is the pursuit of goal-oriented regulation. Among its many attributes is the promotion of management systems in companies. This has been a very positive experience for us and inevitably led to the question: "If it makes sense for regulated companies, shouldn't the regulator use management systemes as well?" I know the CRE has obtained ISO certification for elements of its agency. Whether ISO certification is sought or not, QMS and business process mapping is a powerful tool to enhance results and improve client satisfaction.

While considerable gains can be achieved by tackling known process problems in an ad hoc way, a disciplined systematic review is preferable. The systematic approach inherent in a quality management system will help us to:

Consistently focus on results aligned with public interest objectives
Identify and eliminate activities that do not add value
Apply risk management concepts to those that do
Allocate resources to where they matter
Establish clear accountabilities and service standards
Measure performance and identify improvements
Enables us to identify and organize knowledge assests

We've been busy mapping our processes and are targetting to have service standards in place for all core processes by this Fall. Adopting a Quality Management approach to everything we do will induce a strong focus on results throughout the NEB with the added benefit of greater transparency and clear accountabilities - all of which contributes to our ability to "Enable" positive outcomes for Canadians.

Cooperation and Partnerships

Still on the subject of process, we are working hard on harmonizining our processes with other regulators. We have a long list of these efforts and I've noted only a few key agreements on the slide.

Through the northern Cooperation Plan we've found a way to coordinate the work of more than a dozen regulators. We're well into the implementation of that Plan, with regulators nearing completion of Phase 2 of a 7 phase coordinated process.

The MOU with FERC, which Pat and I signed in Halifax last year, is now fully operational. Information on regulatory matters flows regularly between our two agencies now. The objective of course is to maintain a no surprise environment and to exchange knowledge and best practices. The same can be said of our regular tri-lateral meetings with CRE and the FERC.

Earlier this year, the NEB was one of the signatories to an agreement streamlining review of energy projects in Atlantic Canada.

On the federal side, for the Rabaska project, Minister Dion has sent the project for a panel review and with the Canada-Quebec agreement in place for the purposes of coordinating environmental assessments there is a potential for the Rabaska project to be reviewed under a joint process. This would be a great success and I am optimistic we will get there.

Enabling through Regulatory Policies

The second way of thinking about enabling is to ask ourselves whether our regulatory policies facilitate the long-term efficiency of markets. Our major initiative in this regard continues to be goal oriented regulation. Under this approach we identify the results to be achieved and regulated companies have flexibility to find business solutions which best fit their operating context.

We conducted our first ever pipeline shipper surveys earlier this year. These will give the market some objective information about services offered by pipelines and about adequacy of our regulatory policies.

Through our EMA program, we publish regular reports on a broad range of energy matters with a view to helping the market make informed choices.

The Board remains acutely aware of the difficulties that can arise when consultation with aboriginal people is not adequate and has, among other things, supported development of a crown consultation unit on a pilot basis.

We've been working to clarify our regulatory policy in areas of new activity such as LNG imports (information requirements for import licences and LNG safety standards) and practices related to marine seismic work. With respect to LNG imports, the Board is providing clarity in terms of what the Board will consider in assessing gas import applications. With respect to marine seismic work, the Board is providing guidance to industry on the expected practices when conducting offshore seismic work.

Enabling through Regulatory Policies (continued)

In anticipation of more exploration and production activity on frontier lands, we're doing an evaluation of the current regulatory regime to see where we can make improvements.

We have under development an integrated compliance project which will allow us to focus attention on companies with a poorer track record. We have also been identifying and removing unnecessary processes that no longer serve the public interest. For example, we are reducing the up-front regulatory burden for small projects where there are no technical, environmental, or third party issues.

I have been encouraging our staff to improve their networking skills, to meet more frequently with all of our stakeholders and to build relationships on a professional level as well as on an organizational level. We have recently reviewed our code of conduct and are making it clear to staff that they have an obligation to reach out to stakeholders and to stay current in their area of expertise. As of April 1, the Board created a new business unit that will be responsible for coordinating the Board's strategic initiatives, including its stakeholder engagement program. The new business unit will also be responsible for coordinating our strategic plan and ensuring that we are being pro-active in meeting our challenges.

And we have been allocating more resources to CAMPUT work because of the role we believe it can play in addressing issues that cut across jurisdiction.

Facilitate Construction of Approved Projects

Finally, the third way of thinking about enabling is that once a project has been found to be in the public interest, the regulator should facilitate construction that is within approved terms and conditions. Often the conditions attached to approvals are an obstacle in themselves: because they're not clear; because compliance cannot be assessed; or the condition was written in a way that attainment was not achievable. We've just completed a major review of conditions attached to approvals between 2001 and 2003 and have derived some significant internal learnings. Expect to see more of our future conditions to have a goal-oriented flavour. Companies now have mature/maturing sustainable development strategies. SMART conditions which focus on outcomes should permit the NEB and companies to achieve the Desired End Results in partnership.

We've been investing more time lately in working with other regulators to better understand our mutual roles and responsibilities. This should pay dividends in coordinating condition compliance.

Finally, we've been looking at different kinds of construction projects to identify the best way for us to carry out our regulatory mandate with minimum burden on companies. For example, in the future we will not require applications for most operations and maintenance work.

II. Current Market Context

I will not spend much time on the market context because, quite frankly, it is largely unchanged from last year. In fact, I looked at the presentations made in Banff two years ago, and the issues were the same then. The key issues which you could take away from almost any energy conference in the past two years are:

High and volatile prices
Supply lagging growing demand
Except for some demand side adjustments, the end of incremental solutions and the need to make choices about major new projects.

In response to this market context, industry is developing an impressive list of projects. The projects we have on our radar screen include:

10 oil pipeline projects
6 gas pipeline projects
8 LNG projects
4 international power lines

One might expect only half or less of these projects to proceed, but that is still dramatic given the absence of any major projects for several years.

It's in that context that I want to address the questions Neil asked us about regulatory challenges.

Location of Major Projects with NEB Involvement

Well, you might be asking yourself, that's your set of problems, how does it affect me? As this slide shows, virtually no part of Canada will be unaffected by major projects over the next decade. And this slide shows only those projects that have some NEB jurisdictional aspects. It does not include, for example, power generation and interprovincial transmission lines. If you've not yet been affected by the duplication and over lap of review process, stay tuned, there'll be a project coming to a hearing room near you.

Introducing the Players and Drivers

Regulatory review of major projects needs to consider diverse interest of several groups of stakeholders. This is a highly simplified view of the players and their interests, but in reality there are divisions of interest within the categories shown. For example, public would include landowners, aboriginal people, NGOs, to name but a few.

As I see it, none of the public institutions has been created to deal with all of the public and industry drivers. The result is that, while each agency pursues its own mandate, there is the potential for overlap and duplication, as well as the potential for some important aspects of project review to fall through the cracks or at least not receive appropriate attention. Thus, the nice alignment we see here leading to shared Desired End Results is very problematic in practice.

With the regulatory review split into many steps, often with Boards having, a narrower mandate in respect of a project, we can lose sight of the larger public interest. My worry is that infrastructure projects that are in the Canadian public interest will not proceed because they have been blocked on narrower grounds.

III. Current Challenges

In response to Neil's questions, I've decided to focus on six challenges. Neil also asked us to say what is being done to address the challenges and what the barriers are to removing them. I will cover that as I discuss each challenges, along with my own self-assessment of the grade we deserve. We'll see how this grade thing works out, but I thought it might be an effective way to get your feedback during the conference on whether we see progress with the same coloured glasses.

Fragmented Responsibilities of Approval Agencies

The first challenge I've called regulatory fragmentation. The problem with regulatory complexity simply continues to grow. The numbers of regulators in the north are documented in the Northern Cooperation Plan, but the problem exists across Canada. Although we, as regulators, did not create the situation, most of us do feel a responsibility to show leadership in finding a way to navigate through the regulatory maze. In some sense, while it may not be fair, many parties hold us accountable for the inevitable process inefficiencies and inability to reconcile overlapping mandates.

The NEB has over 20 cooperation agreements in place and several initiatives to harmonize underway, a couple of which I've listed in this slide. The cooperative arrangements ensure that environmental assessment and regulatory issues are dealt with in a coordinated manner, reducing process duplication and creating a single hearing window for applicants and participants. The agreements also allow us to share resources, thereby lowering the overall cost of regulation.

While we are working hard on coordinating regulatory processes, each agency has its own mandate and this fragmentation of responsibilities makes it difficult to make integrated decisions on projects that reflect the overall public interest. Thus, while we can address process issues through good faith negotiations, the underlying issues of jurisdictional uncertainty and overlap remain. If I were grading the efforts of regulators I would give a high mark here, but if I grade the results we have delivered to stakeholders, the C minus is probably generous. In my view, significant improvements in this grade will not be achieved until the underlying issue of mandates is addressed. In that respect, I am encouraged by statements that Government will work to consolidate federal environmental assessments and will work with the provinces and territories toward a unified and more effective assessment process for Canada.

"Enabling" Processes and Policies

I'll be more brief on the second challenge which has to do with enabling projects which are in the public interest. The slide is a recap of matters I discussed earlier.

I'm very encouraged with the way in which our Board has embraced the enabling concept. My grading here is conservative because of the importance we place on results. We have yet to deliver in a major way but ask you to keep the faith, help support our initiatives, and the payoff will be worth it. I see no major barriers here Neil, it's just a matter of getting the job done.

Alignment of Regulatory Policy and Energy Policy

In the late 1980s, major changes occurred in energy policy, with governments deregulating markets and prices. Consequential changes were made to regulatory policies in the ensuing years. This compatibility served Canadians well for over a decade. Recently however, regulators are presented with applications which sometimes cause them to establish regulatory policy in advance of energy policy. As regulators, we are the ones most aware of these circumstances.

We've recently had a debate among CAMPUT Chairs about advising governments on the need for policy change. Clearly, to retain our reputation for independence and neutrality, it is important that regulators always remember that our primary role is to act as an independent arbitrator and that governments make policy. However, I believe there is considerable scope for regulators to inform policy makers about emerging issues and the implications of alternative policy options. In my view, regulators are well placed to provide key input into the policy-making process for the reasons listed on the slide.

However, Chairs have expressed varying degrees of comfort in having a direct relationship with policy makers. But how about CAMPUT playing a bigger role? I think I'm at liberty to tell you that the CAMPUT has agreed to see what sort of role there might be for your Association to play. Subcommittees have been established to formulate recommendations and report back to the Association. Your executive will be considering these matters on Wednesday, so if you have views or just want more information, please approach one of them during the conference. Meanwhile, I'll rate the alignment with a grade of C.

Matters Beyond Our Control

Regulatory hearings provide a forum for concerned citizens to address matters that are important to them. In some cases these concerns could be more appropriately dealt with more effectively by other means, or should be dealt with by standards. I've listed examples of both matters on the slide.

In both cases, the exercise is frustrating for the intervenor, the applicant and the regulator because the matters are beyond the control of the Board to resolve. A low grade is certainly warranted here.

Again, I'm wondering if there is scope here for CAMPUT to identify areas where standards are required or where other resolution mechanisms should be developed?

Regulatory Capacity

An ongoing concern for Board chairs is maintaining regulatory capacity. The NEB has fared well over the years in terms of having competent people appointed as Board Members. But I have to tell you that this is becoming an increasingly difficult task. Compensation levels for Board members are far below what people with similar backgrounds would make in industry. In addition, Members must divest "controlled assets", be free from conflict of interest, agree to limitations on outside activities, and they must reside in Calgary. The appointment of competent people to our Board, and to all regulatory Boards, is a prerequisite to doing all the other things right.

The same can be said for many of our staff, particularly those possessing specialized expertise. The ability to recruit, retain and reward highly skilled staff when constrained by public service programs and compensation packages has a definite impact on our ability to execute our mandate.

Finally, the federal government is acting to prevent future recurrence of the types of abuses of financial and other authorities we have all read about in the newspapers. For agencies such as the NEB, I can see that this will impact us negatively through more controls, oversight and loss of operating flexibility. Some of these impacts have already been felt and we will do our best to ensure no deterioration in client service. However, as controls are imposed the potential for decreased responsiveness is substantial.

To date however, I am satisfied with our capacity.

Maintaining Respect for Regulatory Process and Decisions

Parliamentarians have made regulators trustees of the public interest and have given us considerable powers to carry out that responsibility within prescribed mandates. We must carry out that mandate every day in a way that maintains our independence, impartiality and fairness. Among other things, we do that through our hearing procedures, through our Reasons for Decision, and the general way in which we conduct our business.

But beyond that, I believe that our stakeholders need assurance that we understand their interests and this cannot happen solely through the hearing room. I believe we have been doing a fairly good job in getting out and talking to the full spectrum of our stakeholders. The Board now has a culture of incorporating consultation plans for all of its regulatory improvement projects. Last fall we held a one-day regulatory improvement workshop with over 60 stakeholders that provided a great forum for an open and frank exchange of views on ways of improving regulatory approaches. Staff are encouraged to maintain and build on their professional networks. We have recently reviewed our code of conduct to make this obligation clear and to allow these contacts to happen within acceptable guidelines. As of April 1, the Board created a new business unit that will be responsible for coordinating the Board's strategic initiatives, including its stakeholder engagement program.

I recognize that this is one of those areas, however, in which you are always judged on your last action. We need to be constantly in communication with all of our key stakeholders. This is an ongoing challenge given the nature of the Board as a quasi-judicial agency. Given these constraints, I'd give us about an A minus on this one.

IV. Summary Comments

Let me now summarize the key messages from my presentation. While Canadians recognize the need to encourage development of alternative energy supplies and pursue demand side efficiencies, in the near future the Board expects to see a number of applications for large energy supply infrastructure projects driven by the increasing demands of Canadians for energy.

Companies make investments in energy infrastructure with a long-term view, and they are interested in stability and predictability over the long-term. Once an investment starts, they are driven by the need to bring projects on line, both to meet the needs they are designed for and to generate cash flow as soon as possible.

Public concerns have a number of drivers which can be global in nature, such as concerns about environmental sustainability, air quality, and inter-generational equity. On the other hand, they can be very local, such as concerns about a pipeline right of way going on their land. In all cases, the public looks to the regulator to protect their interests. The availability of energy to maintain lifestyle is customarily taken for granted.

The job of the regulator is to balance these interests and to do so they need to recognize their roles as both protectors and enablers.

Summary Comments (continued)

I think we understand the challenges facing us and I think we are doing a pretty good job of addressing them. I look forward to your feedback as to how we can improve on a go-forward basis.

In conclusion, I would like to return to the ultimate theme of this conference, which challenges us to identify priorities for action. We have assembled in this Conference the experience and intellect of over 40 speakers and nearly 400 delegates. Together we need to create a plan for action. As well as an overall plan, I urge each of you to commit to having a personal plan of action when you leave here. Together we will make a difference.