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Enforcement Staff of the AUC Allegations Against Energy Sustain Service Ltd. and Zong Tang, Phase 1, AUC Decision 28170-D01-2023

Link to Decision Summarized

Facilities – Approval Requirement

Application

Enforcement staff of the AUC (“Enforcement Staff”), following an investigation prompted by a noise complaint, filed an application with the AUC alleging that Energy Sustain Service Ltd. (“ESS”) and Zong Tang (the “Respondents”):

  • operated a power plant from February 15, 2022, until May 31, 2022, without approval from the AUC contrary to the Hydro and Electric Energy Act (“HEEA”) and Rule 007: Applications for Power Plants, Substations, Transmission Lines, Industrial System Designations, Hydro Developments (“Rule 007”) (“Contravention 1”): and
  • the power plant operations exceeded the permissible sound levels specified in Rule 012: Noise Control (“Rule 12”) (“Contravention 2”).

Decision

The AUC found that ESS contravened s 11 of the HEEA by operating a power plant without approval from the AUC. Conversely, the AUC did not find that Zong Tang contravened s 11 of the HEEA. The AUC also did not find that a contravention of s 1.3 of Rule 012 occurred.

On receipt of an application from the Enforcement Staff the AUC will conduct a second phase of this proceeding to determine the sanctions against ESS.

Pertinent Issues

Process

The AUC established two phases for the proceeding. In this first phase of the enforcement proceeding, Enforcement Staff have the burden of proving the allegations on a balance of probabilities. In the second phase, which follows if the allegations made by Enforcement Staff are proven, the AUC will determine the appropriate remedy for the alleged misconduct established in the first phase.

Legislative and Evidentiary Framework

AUC’s Role

The purpose of the enforcement proceeding was to determine whether Enforcement Staff have demonstrated that the Respondents committed the alleged contraventions. In determining whether the Respondents committed the alleged contraventions, like a court, the AUC acts as an impartial adjudicator of Enforcement Staff’s application.

In an enforcement proceeding, Enforcement Staff has the burden of demonstrating, on a balance of probabilities, that the alleged contraventions occurred. The evidence relied upon by the parties must be clear, convincing, and cogent to satisfy the burden imposed. The AUC must scrutinize with care the evidence filed when making its decision.

Standard and Burden of Proof

In an enforcement proceeding, Enforcement Staff have the burden of demonstrating on a balance of probabilities that the alleged contraventions occurred. If Enforcement Staff does not meet its burden, the case will fail. If an alleged contravention is proven, for those contraventions to which the defence of due diligence applies, the alleged contraveners will have the opportunity to demonstrate, on a balance of probabilities, that they have met the defence of due diligence.

Assessment of Evidence

The AUC is not bound by the rules of evidence applicable to judicial proceedings. Accordingly, the AUC has discretion to determine the admissibility and weight of evidence but it cannot ignore the principles that underlie the formal rules of evidence.

The AUC noted that, while it was satisfied that the expert in this proceeding had sufficient expertise, it would have benefitted from a submission from Enforcement Staff on this point. Enforcement Staff did not file a curriculum vitae for its expert, nor did they make any submissions concerning his expertise. In addition, Enforcement Staff did not call its expert to give evidence, either by affidavit or orally in the hearing.

The AUC observed that Enforcement Staff relied on a significant amount of untested, unsworn, third-party documentary evidence. The AUC routinely admits hearsay and unsworn evidence and its weight will depend on the extent to which it was tested in the proceeding. In the absence of evidence to the contrary, the AUC does not generally discount hearsay or unsworn evidence.

In relation to available defences, the AUC proceeded in this decision on the basis that the alleged contraventions are strict liability matters, for which a defence of due diligence is available.

Summary of Facts

ESS is an Alberta business corporation. Zong Tang is the sole director and shareholder of ESS. Between February 15, 2022, and May 31, 2022, a 1.475-megawatt (“MW”) gas-powered generator (the “Power Plant”) was operated in Brazeau County (the “Site”).

Response Energy Corporation (“Response Energy”) operated a well-producing oil and natural gas that is located at the Site (the “Well”). The Well was suspended in June 2017, as the gas pipeline system that the Well was tied into discontinued operations. Response Energy could no longer access markets for the produced natural gas. As a result, the gas was considered a waste product.

In February 2022, Response Energy and ESS entered a contract according to which Response Energy sold ESS the gas produced by the Well to fuel the Power Plant. The agreement set out that ESS would supply Response Energy with some of the electricity generated by the Power Plant. The agreement also designated how various costs and responsibilities at the Site would be split between Response Energy and ESS.

Response Energy and ESS collaboratively took steps to ensure regulatory compliance for both the Well and the Power Plant. Both parties believed that there was no requirement to obtain AUC approval to construct and operate the Power Plant.

In addition to providing Response Energy with electricity at the Well, the Power Plant was used to power cryptocurrency mining machines located at the Site.

On March 8, 2022, Enforcement Staff received a noise complaint regarding loud noises from the Site starting on February 21, 2022. Based on the information in the complaint, Enforcement Staff believed that Response Energy ran the Power Plant and was responsible for the Site. Enforcement Staff first became aware of ESS’ involvement with the Power Plant in July 2022. On March 19, 2022, Enforcement Staff informed Response Energy of the investigation and requested that Response Energy conduct a comprehensive sound level (“CSL”) survey. On May 31, 2022, Response Energy shut-in the Well voluntarily at the request of Enforcement Staff.

Assessment of the Alleged Contraventions

The AUC noted that, in alleging that Zong Tang has also committed the same contraventions as ESS , Enforcement Staff were effectively asking the AUC to pierce the corporate veil and find that the responsibilities and acts of ESS were also responsibilities and acts of Zong Tang.

Contravention 1: Did ESS Construct or Operate a Power Plant Without an Approval from the AUC Contrary to Section 11 of the HEEA?

The AUC did not understand Enforcement Staff to have alleged that Zong Tang constructed, operated or was otherwise responsible for the Power Plant in his personal capacity. The AUC noted that, if Enforcement Staff made this allegation, it was not proven and, on that basis, Enforcement Staff did not prove Contravention 1 as against Zong Tang on a balance of probabilities.

The AUC considered that Contravention 1 contained two related components: construction and operation the Power Plant without prior approval from the AUC; and whether that was contrary to s 11 of the HEEA. The AUC determined that this contravention occurred. ESS did not obtain approval to operate the Power Plant pursuant to s 11 of the HEEA, and it did not demonstrate that the conditions for an exemption, set out in s 13 of the HEEA and Rule 007, were met. The AUC determined that, given the nameplate capacity of the 1.475 MW of the Power Plant, the small Power Plant exemption did not apply.

ESS operated the Power Plant and supplied some of the electricity generated to Response Energy. However, the AUC found that the own-use exemption cannot apply, as Response Energy and Zong Tang are two separate and distinct legal entities that used the electricity generated by the Power Plant. As a result, Response Energy did not commit any violations.

The AUC determined the ESS did not demonstrate on a balance of probabilities, that the defence of due diligence was met. Generally, mistakes of law cannot ground a due diligence defence. No exception from this principle was alleged by ESS. The AUC found ESS’ erroneous belief that the Power Plant fell under the own-use exemption is a reasonable belief in a mistaken fact, which is not a ground for the defence of due diligence.

Contravention 2: Did the Noise from the Power Plant Exceed the Permissible Sound Level Contrary to Section 1.3 Of Rule 012?

The AUC found that Contravention 2 was not proven on a balance of probabilities because there was insufficient evidence to determine that noise from the Power Plant, measured cumulatively with noise from the Well and well-related infrastructure exceeded the permissible sound level (“PSL”) set out in Rule 012.

The AUC found that the crypto-mining facility is neither a “facility” nor an “energy-related facility,” as defined in Rule 012. As a result, to comply with the requirements for a CSL survey in Rule 012 either the CSL measurements should have been taken when the crypto-mining facility was shut down or noise from the crypto-mining facility should have been removed from the measured CSL data. It appears that neither of these steps occurred. For the purposes of Rule 012 in this proceeding, the crypto-mining facility was treated as a non-energy facility. Including noise from the crypto-mining facility may have contributed to a determination that the noise exceeded the PSL.

The AUC, nevertheless, commended Response Energy and ESS for treating the three operations at the site as one “facility” for the purposes of assessing and mitigating the noise impacts to the neighbours, particularly given the level of integration between the different operations.

Is it Appropriate for the AUC to Pierce the Corporate Veil?

Enforcement Staff made four main arguments why it was appropriate for the AUC to pierce the corporate veil and find Zong Tang liable for the alleged contraventions. First, ESS is a single-purpose corporation with Zong Tang as the sole director and shareholder. Second, Zong Tang is the alter ego of ESS as Zong Tang is ultimately responsible for ESS’ costs and is the recipient of financial benefits from ESS. Third, ESS is not a bona fide corporation but was only established to shield Zong Tang from the consequences of wrongful conduct. Finally, if the AUC finds that only ESS has committed contraventions, it will be unable to fulfill its mandate because any penalty or disgorgement that might be ordered will never be paid by ESS because ESS has been deliberately structured to have no assets.

The AUC noted that it has the powers of a King’s Bench judge and the legal authority to “pierce the corporate veil” at common law. The AUC, however, determined that it was not appropriate to lift the corporate veil in this case. The AUC stated that Enforcement Staff have not proven the alleged contraventions against Zong Tang. ESS and Zong Tang are separate legal persons. The Business Corporations Act provides for a corporation to establish a separate corporate personality from its shareholders. The concept of the separate corporate personality has been an essential part of corporate law for over a century. The AUC did not find that extraordinary circumstances (such as fraud or improper purpose) existed that would provide a basis for piercing the corporate veil, notwithstanding that a sole shareholder receives an economic benefit from or provides funding to a corporation. Enforcement Staff provided no evidence that ESS was incorporated to shield Zong Tang from the consequences of wrongful conduct or that that ESS was deliberately structured to have no assets. The AUC concluded that ESS was incorporated for legitimate business purposes and that it was not appropriate to lift the corporate veil.

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