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Jurisdiction over the Coastal GasLink Pipeline Project, (NEB Decision MH-053-2018)

Link to decision summarized

Lack of Federal Jurisdiction Over Pipeline Project


In this decision, the NEB considered whether to assert jurisdiction over the Coastal GasLink Pipeline Project (“CGL Pipeline” or “Project”).

The NEB concluded that the Project was not properly within federal jurisdiction, finding that:

(a) the Project did not form part of a single indivisible undertaking with the NOVA Gas Transmission Limited (“NGTL”) System or any other federal undertaking under the first branch of the Westcoast test; and

(b) the Project was not essential, vital, or integral to a core federal work or undertaking under the second branch of the Westcoast test; and

(c) the Project was a local work and undertaking properly regulated by the Province of British Columbia (“BC”).

Given this decision, the NEB refused to issue a declaratory order that the Project was subject to regulation by the NEB.

The Project

LNG Canada is a joint venture comprised of five companies (collectively, the “LNG Partners”): Shell (40 percent interest), North Montney LNG (25 percent interest), Diamond (15 percent interest), PetroChina (15 percent interest), and Kogas (5 percent interest). The LNG Partners were building an LNG export terminal to export liquified natural gas via tanker to international markets.

LNG Canada entered into a Project Development Agreement with TransCanada Pipelines Limited (“TCPL”) to develop, build, own, and operate the CGL Pipeline, to transport natural gas from an area in BC near the gas supply of the LNG Partners to the LNG Terminal, in Kitimat BC. TransCanada PipeLines Limited (“TCPL”) formed a wholly-owned subsidiary, CGL, to undertake the Project.

The Application for Review of Jurisdiction

On July 30, 2018, the NEB received an application from Mr. Michael Sawyer, requesting that the NEB, pursuant to subsection 12(1) of the National Energy Board Act (“NEB Act”), determine and issue a declaratory order that the CGL Pipeline was properly within federal jurisdiction and subject to regulation by the NEB.

The Project would be within federal jurisdiction if it formed part of a federal work or undertaking under section 92(10)(a) of the Constitution Act, 1867.

In its October 22, 2018 letter, the NEB indicated its usual practice for questions regarding jurisdictional matters is to first determine whether a prima facie case exists, such that setting down a full jurisdictional process would be warranted. The NEB determined that there was a prima facie case that the Project may form part of a federal undertaking on the basis of an indication of functional integration and common management, control, and direction of the CGL Pipeline and the existing federally regulated NGTL natural gas system (“NGTL System”). Like CGL, NGTL was a wholly-owned subsidiary of TCPL, which was in turn a wholly-owned subsidiary of TransCanada Corporation (“TCC”).

The Board therefore decided to hold a process to fully consider the jurisdictional matter.

Jurisdictional Analysis

Summary of the legal test under section 92(10)(a) of the Constitution Act, 1867

In United Transportation Union v Central Western Railway Corp. the Supreme Court of Canada set out a two-branch framework that described the manner in which federal jurisdiction could be established under section 92(10)(a) of the Constitution Act, 1867, either directly (first branch) or derivatively (second branch), stating as follows:

There are two ways in which Central Western may be found to fall within federal jurisdiction (…). First, it may be seen as an interprovincial railway and therefore come under s. 92(10)(a) of the Constitution Act, 1867 as a federal work or undertaking. Second, if the appellant can be properly viewed as integral to an existing federal work or undertaking it would be subject to federal jurisdiction under s. 92(10)(a). …For the former, the emphasis must be on determining whether the railway is itself an interprovincial work or undertaking. Under the latter, however, jurisdiction is dependent upon a finding that regulation of the subject matter in question is integral to a core federal work or undertaking.

The two-branch test from Central Western was affirmed and further refined by the Supreme Court of Canada in Westcoast Energy Inc. v. Canada (National Energy Board) (the “Westcoast test”).

Some of the key indicia described by the majority in Westcoast regarding a potential finding of direct jurisdiction (first branch) are as follows:

… [T]he primary factor to consider is whether the various operations are functionally integrated and subject to common management, control and direction. The absence of these factors will, in all likelihood, determine that the operations are not part of the same interprovincial undertaking, although the converse will not necessarily be true. Other relevant questions, though not determinative, will include whether the operations are under common ownership (perhaps as an indicator of common management and control), and whether the goods or services provided by one operation are for the sole benefit of the other operation and/ or its customers, or whether they are generally available.

First branch of the Westcoast test – Is the CGL Pipeline part of a federal work or undertaking?

The NEB emphasized that determination under section 92(10)(a) of the Constitution Act, 1867, must be made on the factual circumstances of the particular case.

The NEB found that the facts did not support a finding that the CGL Pipeline was or could reasonably be expected to become functionally integrated with the NGTL System as part of a single interprovincial TCC undertaking. Rather, the CGL Pipeline was designed primarily to serve the interests of the LNG Partners, and not those of TCC or its affiliates. In the NEB’s view, these underlying interests were evident in the structural differences between the CGL Pipeline and the NGTL System. The NEB found that the two systems did not share a common purpose and they were not dedicated to, dependent on, or interdependent of each other. Rather, they would function as separate enterprises, with separate business models. Despite a probable physical connection and the related potential for a commercial relationship, the two systems were not functionally integrated.

The NEB found that the overlap of many directors and officers and overlap regarding items such as websites, manuals, annual reports, and financial statements suggested some level of common management, control, and direction. However, the structure of the NGTL Code of Conduct and the fact that CGL (rather than TCPL) would operate the CGL Pipeline, and would have its own dedicated field staff, provided some separation in the management, control, and direction by TCC and its affiliates over the CGL Pipeline. However, more significantly, was the evidence regarding the substantial control and direction of LNG Canada and the LNG Partners over the design, construction, day-to-day operation, access to the capacity, and potential expansion of the CGL Pipeline.

The NEB found that the LNG Partners first exerted significant control and provided significant direction through the tender request for proposal process for a pipeline to transport natural gas from an area near the gas supply of Shell and its joint venture partners to the then-proposed LNG Terminal. While TCPL (through CGL) was chosen to provide transmission pipeline service through the CGL Pipeline, LNG Canada and the LNG Partners retained significant control and the ability to provide significant direction throughout the pipeline’s construction and operations phases. This was completely distinct from the NGTL System, which was wholly under the management, control, and direction of NGTL and its corporate affiliates. The substantial level of control and direction of LNG Canada and the LNG Partners is was key consideration in the Board’s conclusion that the CGL Pipeline and NGTL System were not subject to common management, control, and direction as part of some larger TCC undertaking.

Second branch of the Westcoast test – Is the CGL Pipeline integral to a federal work or undertaking?

The NEB explained that derivative jurisdiction under the second branch of the Westcoast test was dependent upon a finding that the provincial work or undertaking at issue was essential, vital, or integral to a core federal work or undertaking.

The NEB noted that in the case of Tessier, the Supreme Court of Canada provided its summary of the standard under the second branch of the Westcoast test as follows:

In short, if there is an indivisible, integrated operation, it should not be artificially divided for purposes of constitutional classification. Only if its dominant character is integral to a federal undertaking will a local work or undertaking be federally regulated.

The NEB found that based on the evidence in this proceeding, it could not conclude that the NGTL System was dependent on the CGL Pipeline in any way. The operation of the NGTL System would not be affected if and when the CGL Pipeline connected to it. The NGTL System would continue to function as it currently does, as an integrated natural gas gathering and transmission network, irrespective of whether a connection was ultimately made to the CGL Pipeline. Therefore, the NEB concluded that the CGL Pipeline was not essential, vital, or integral to the NGTL System under the second branch of the Westcoast test.

Conclusion

The NEB concluded that the Project was not properly within federal jurisdiction. This was on the basis that the CGL Pipeline did not form part of a single indivisible undertaking with the NGTL System or any other federal undertaking under the first branch of the Westcoast test. The CGL Pipeline was likewise not essential, vital, or integral to a core federal work or undertaking under the second branch of the Westcoast test. The Project was a local work and undertaking properly regulated by the province of BC.

Given the Board’s decision, the NEB refused to issue a declaratory order that the Project is properly within federal jurisdiction and subject to regulation by the NEB.

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