TransCanada Sues U.S. Government For Rejecting Keystone Pipeline

Courtesy of the <a href="https://www.aer.ca/about-aer/media-centre/photos">Alberta Energy Regulator</a>

Courtesy of the Alberta Energy Regulator

On Wednesday, TransCanada filed a complaint against the United States in a federal district court in Houston alleging that the President’s rejection of the Keystone XL pipeline was invalid and unconstitutional because it was not authorized by Congress. If successful, this claim would allow construction of the pipeline.

On the same day, TransCanada filed a notice of intent to submit a claim to arbitration under the North American Free Trade Agreement (NAFTA). Even if successful, this claim would not allow construction of the pipeline, but could entitle TransCanada to money damages from the United States. The company is asking for $15 billion in damages.

Like most private lawsuits against the government, these lawsuits face long odds, but both raise important and novel legal issues that will be difficult to decide. TransCanada’s constitutional claim could change the way that the United States approves international oil pipelines. And TransCanada’s NAFTA claim could endanger the United States’ long winning-streak in NAFTA arbitrations.

TransCanada’s Constitutional Claim

The most unexpected part of TransCanada’s legal salvo was the lawsuit that it filed asking a U.S. district court to rule that President Obama’s rejection of the Keystone XL pipeline was unconstitutional. TransCanada notes that Congress has never passed a statute that gives the President authority to reject international oil pipelines and says that, without such a law, the President had no authority for his unilateral rejection of the pipeline.

Congress has never provided a legal framework for regulating oil pipelines that cross the United States’ international borders. By contrast, there are laws that establish a process for the President to decide on international natural gas pipelines and electricity transmission.

In the absence of Congressional authorization, President Lyndon Baines Johnson simply issued an executive order in 1968, Executive Order 11423, that established a process for issuing permits to proposed oil pipelines that “would serve the national interest.” Then in 2004, President George W. Bush issued a new unilateral order, Executive Order 13337 that expedited review of border crossings. Both executive orders delegate decisions on these cross-border permits to the U.S. Secretary of State.

On November 6, the current Secretary of State, John Kerry rejected the Keystone XL pipeline after seven years of review. The official U.S. Record of Decision stuck by the State Department’s controversial previous conclusion that the pipeline would improve U.S. energy security, benefit the economy, and would be unlikely to increase greenhouse gas emissions in Canada. (It also suggested that the pipeline might even decrease greenhouse gas emissions in the United States by moving oil transport from railroads to pipelines, making oil transport more efficient.) But the U.S. concluded that the pipeline was ultimately not in the national interest because it could undercut the nation’s leadership in climate talks because the pipeline was “perceived as enabling further [greenhouse gas] emissions globally.”

TransCanada’s key argument is that, in the absence of any law, the President does not have unilateral authority to reject an international oil pipeline based on this kind of consideration. Although Presidents have claimed power to decide whether a pipeline is in the national interest since President Johnson in 1968, TransCanada argues that this power has never been fully tested because the President has never rejected an international pipeline.

This creates something of a puzzle: if Congress has never passed a law governing international oil pipelines and the President does not have authority to reject an oil pipeline, then who may, in fact, regulate pipeline border crossings?

One possible answer is that international oil pipelines are primarily regulated by the states, just like domestic oil pipelines. The U.S., unlike Canada, primarily relies on state-by-state regulation for interstate oil pipelines. That is, if no law has been enacted governing international oil pipelines, then the only laws that govern them are the same ones that govern domestic oil pipelines.

President Obama’s administration will raise several counterarguments. First, it will argue that the President has inherent and unilateral constitutional authority to control the nation’s borders, so he must have some kind of ability to control international border crossings. Second, if Congress has not established any criteria for the President to use in this decision, then he is free to create his own criteria. Third, President Johnson established this process almost fifty years ago and it has been frequently used to approve pipelines so Congress has, with the passage of time, acquiesced to this process. Fourth, federal district courts have upheld the President’s unilateral decision to approve international pipelines.*

TransCanada will respond that, whatever power the President has, it does not allow him to reject a pipeline based solely on international perceptions that are inconsistent with the government’s own environmental analysis. TransCanada’s complaint also argues that, far from acquiescing in the President’s unilateral authority to reject international pipelines, recent Congresses have repeatedly sought to constrain the President’s authority, citing Congress’s frequent attempts to approve the Keystone XL pipeline. Finally, TransCanada will point to federal court decisions and executive branch opinions from nearly a century ago, which concluded that in the absence of Congressional authorization the President had, at most, limited authority to control border-crossing facilities. Though old, these opinions may remain relevant in the unusual situation where, as with oil pipelines, Congress has not established a process for permitting border crossings.

The continuing saga of the Keystone XL drama overlaid with a tangle of old and new precedents and conflicting constitutional powers will make TransCanada’s U.S. lawsuit a case to watch. If a Republican is elected President this coming November, then the issue will likely be moot because the Republican contenders say they would reverse President Obama’s decision on the pipeline. But if not, then the U.S. courts will have to resolve the thorny issues raised by TransCanada.

TransCanada’s NAFTA Claim

TransCanada’s other action, its notice of intent to submit a claim to NAFTA arbitration, alleges that the U.S. discriminated against Keystone XL’s Canadian investors, violating its obligations to afford them national and most-favored-nation treatment under Article 1102 and Article 1103 of NAFTA. TransCanada also argues that by delaying a decision on the pipeline for seven years, and then denying it, the U.S. government destroyed the value of its investment, expropriating its property in violation of NAFTA Articles 1110 and 1105.

NAFTA claims are decided by three independent arbitrators. These arbitrators are not bound by the decisions of the arbitrators that decided previous claims. Thus, it is very difficult to predict whether a NAFTA claim will be successful.

If past cases are any indication, a Canadian company like TransCanada begins at a serious disadvantage. The United States has never lost a NAFTA decision to a foreign investor. And arbitrators have sometimes gone to great lengths to avoid a finding of discrimination. In one case, California passed a law that, it admitted, used “narrowly crafted language intended to prevent approval of a specific mining project” owned by Canadian investors. But the NAFTA panel for that case held that the law was not discriminatory because, in theory, that narrowly crafted language could apply in the future if another company proposed a similar project.

On the other hand, the extraordinary facts of the Keystone XL review process could end the United States’s NAFTA winning streak. First, throughout the seven-year review, President Obama repeatedly responded to complaints from pipeline supporters by admonishing them to remember “this is Canadian oil, this isn’t U.S. oil.” And the President’s administration was, at the same time, moving to expedite domestic oil pipelines. Second, after repeatedly delaying the decision on Keystone XL and repeated environmental impact studies, the U.S. denied the permit on the basis of a perception that was not supported by the seven years of analysis it had done. It will be difficult to explain why it took seven years to analyze the pipeline if, in the end, the government chose to ignore that analysis.

Finally, TransCanada’s lawsuits may operate in tandem because one relevant set of laws that Congress has passed concerning international energy trade is the set of laws approving and implementing NAFTA. In U.S. court TransCanada will argue that even if Congress has not prescribed a specific process for international oil pipelines, it has, at least ruled out any discriminatory or arbitrary treatment of Canadian investors in those pipelines. One of the chief challenges for U.S. lawyers will be to explain why the federal government should impose a uniquely lengthy and unpredictable process on Canadian oil pipelines while expediting domestic oil pipelines.

Regardless of the outcome, TransCanada’s Keystone XL challenges set the stage for potential blockbuster decisions that will have a lasting impact on energy, constitutional, and trade law.

 

You can see more legal documents & analysis related to the Keystone XL pipeline and other North American oil pipelines at Oil Transport Tracker (Shortcut link: http://j.mp/OilTransportTracker).

 


 

*Full disclosure: Before my academic career, I worked in private practice and represented TransCanada in two of these earlier cases. 

Alberta’s New Climate Plan: Can Alberta Be a Model for Texas?

Screen Shot 2015-11-26 at 12.36.50 PM

Courtesy of the Alberta Energy Regulator

On Monday, Premier Rachel Notley announced Alberta’s new climate plan, which is supported by a detailed report from a panel of experts. The centerpiece of the plan is a $30/tonne price on carbon emissions in Alberta that is implemented through a modified tax dubbed a “carbon competitiveness regulation.” The plan also includes more targeted measures aimed at phasing out coal power, boosting renewable power, lowering methane emissions, and capping emissions from the oil sands.

The most important question about Alberta’s regulation is whether it will encourage other jurisdictions to follow suit. Alberta’s carbon emissions are just under 1% of the global total so it cannot do much to slow climate change by itself. But if Alberta can make stringent carbon regulations work in an energy-producing economy, it could stand as an important example for other energy producing jurisdictions.

As a result, Alberta’s plan may be the most important climate announcement of the year. To achieve the world’s climate goals, major energy producers around the world will have to lower their carbon emissions. But Texas and North Dakota or, for that matter, Russia and Saudi Arabia, aren’t looking to California or Europe for inspiration on climate policy. They will, however, be watching to see whether Alberta’s plan works out.

Alberta’s Announced Carbon Policy

Under the new plan, Alberta’s carbon price will rise to $20/tonne in 2017 and $30/tonne in 2018 and it will apply to anyone that burns or sells fossil fuels. The carbon tax’s design—known as the “carbon competitiveness regulation”—is more complex than its headline numbers suggest. Large industrial facilities, such as the oil sands, will receive credits from the government toward compliance and the companies that produce the least carbon-per-barrel will have more credits than they need to comply. These companies can then sell their excess credits to less-efficient companies who will snap up any credits sold at less than the headline carbon price. So even after 2018, companies may sometimes pay a bit less than $30/tonne of emissions and they will receive a substantial subsidy for their production, which will limit the net impact of the policy on industry.

On the other hand, the baseline carbon price is intended to rise over time slightly faster than inflation “as long as similar prices exist in peer and competitor jurisdictions.” About 90% of Alberta’s exports go to the United States, where there is no carbon price. So this may mean that the price will stay at $30/tonne until the U.S. takes similar action on climate.

Alberta’s proposed climate plan has other elements but the government has not yet revealed exactly how they will work. First, the province will take steps beyond the carbon price to make sure that coal-power is phased out by 2030. Alberta is targeting coal because it emits more carbon and air pollution than Alberta’s other sources of electricity. At the same time, Alberta will provide extra funding for renewable power through a “clean power call” that pays extra for sources like solar power and wind power.

Alberta also aims to cut methane emissions from the oil and gas sector 40% by 2030. The panel proposes to start cutting methane by providing offset credits to companies that find ways to reduce their emissions; these credits may be a cheaper way to comply with the carbon competitiveness regulation. After five years, the government would begin to mandate reductions to ensure that the oil and gas sector meets the 40% target by 2030.

Finally, Premier Notley also announced that carbon emissions from the oil sands would have a special 100 megatonne annual cap. (This policy is not contained in the panel’s recommendations to the government.) Right now, the oil sands emits about 70 megatonnes of carbon per year so it might eventually bump up against this cap if production continues to expand without efficiency improvements. But given lower oil prices and slower projected growth of the oil sands, emissions will probably not approach this cap for a decade, particularly because the cap includes exemptions for co-generation and crude processing. Ultimately, this supposed cap may be helpful rhetorically but it’s hard to say whether future governments would stick by it if it ever threatened to have real economic consequences.

The Big Question: Will Alberta’s Carbon Plan Encourage Action Elsewhere?

Unilateral climate regulations such as Alberta’s plan are politically challenging because they impose costs without providing any immediately obvious benefit. Clean air and clean water rules impose costs but provide citizens with the benefit of clean air and clean water. Climate change, on the other hand, is caused by global emissions so Alberta’s climate regulation will only provide tangible benefits if it encourages other provinces and countries to follow suit.

Premier Notley also implied that the new climate plan will have an indirect benefit by improving Alberta’s reputation in the U.S, and thus reducing foreign resistance to pipelines carrying Canadian crude such as the Keystone XL pipeline. This is a long-shot. Opposition to the Keystone pipeline was never conditional on the stringency of Alberta’s regulation. As I explain in this presentation, most U.S. opposition to the Keystone pipeline came from groups that are opposed to all new fossil-fuel infrastructure. Many Canadians favor both stronger climate regulation and better access to markets for Canadian crude; it would be pleasant to think that accomplishing one goal would lead to the other, but there is little evidence for this comforting theory.

So the success of Alberta’s carbon policy will be determined by whether it convinces other countries that its stringent carbon policy is workable in a major energy-producing economy. Like any carbon price, Alberta’s will encourage everyone in the province to burn less fuel by raising the price of electricity, natural gas, and gasoline. It will raise the average household’s cost of heat, power, and transport by about $500 a year.

Despite its costs, economists say this kind of carbon tax is the cheapest way to reliably lower carbon emissions because all carbon reduction policies have costs. But if you were a political leader in Texas or North Dakota or Russia would you follow suit? Would you be willing to impose these costs on your local economy to address a global problem like climate change?

There’s reason for hope: after all, governments raise taxes on their own businesses all the time. Carbon taxes may not be any more politically dangerous than other broad-based taxes such as a sales tax. And a carbon tax probably does less harm to the economy than common taxes such as those on corporate income. So countries or provinces can actually help both the planet and their economy by adopting a carbon tax and using the money to lower distortionary taxes like the corporate income tax. When a carbon tax is only used to replace other taxes, that’s called a “revenue-neutral” carbon tax, and it is what British Columbia has been using since 2008.

Alberta, however, chose not to take this route. Instead, Premier Notley said the government would “reinvest” much of the new revenue in green infrastructure, renewable energy, and efficiency programs. Alberta will rebate some of the costs of the program to low and middle-income consumers, but it is not yet clear how it will do this. So far, there is no indication that the government will use the revenue to reduce distortionary taxes.

Oddly, during the announcement, Premier Notley claimed that the new carbon tax would be revenue-neutral, because all the revenue will be “recycled back into the Alberta economy”—apparently she meant that the government will spend all the revenue it takes in. But that’s not what “revenue-neutral” means, and it is dangerous to call such a tax “revenue neutral.” Conservatives often point to British Columbia’s tax as an example of how climate regulation can be consistent with the small government principles that often drive policy in energy producing jurisdictions. These advocates of revenue neutral carbon taxes won’t get very far if “revenue neutral” becomes a euphemism for higher taxes and higher spending.

Alberta’s new climate policy will be one of the most carefully watched experiments in climate policy and it could change perceptions of what is possible in a major energy exporter. Much will depend on its success.

Encouraging Energy Companies to Inform Their Investors About Risks They Face From Climate Regulation

Screen Shot 2015-04-23 at 5.00.29 PMMy recent study compared what oil companies told two audiences—regulators and investors—about how new environmental rules would affect them. It showed that the companies told the two audiences two very different stories: companies warned the Environmental Protection Agency (EPA) that the rules would be unworkable but securities disclosures reassured investors that the rules would be manageable.

To give EPA industry’s honest view on whether rules are manageable, I suggested that companies should file excerpts from their securities disclosures with their comments.

But what if the comments to EPA are accurate—companies really are terrified about new regulations—and they’re just not telling their investors? After all, shareholder groups and proxy advisory firms have complained that energy companies are ignoring Securities and Exchange Commission (SEC) guidance on disclosing risks from climate regulation.

In a new post at Columbia Law School’s blog on corporations and capital markets, I explain how industry’s comments to regulators can be used to encourage companies to inform their investors of real risks that they face from regulation. Here’s the end of the post:

Investors should use company comments to identify risks that companies may be minimizing in their 10-K disclosures. And the SEC should insist that companies tell investors about any risks that they are stressing to regulators. …

In the meantime, corporate counsel should get ahead of regulators and investors by aligning comments and securities disclosures. When a company’s comments and 10-K disclosures are revealed to be inconsistent, it has put itself in a lose-lose situation. Regulators will discount the company’s pessimistic comments. But if a new rule does harm the company, investors will have evidence to support a Rule 10b-5 lawsuit. Although it is harder to sue a company for “soft” information or predictions about the future, in this case company comments would support an inference that the company did not even believe its own assurances. See Omnicare v. Laborers Dist. Council Constr. Ind. Pension Fund, 575 U.S. _ (2015) (slip op. at 6-9). And few companies would relish the prospect of having to prove in court that their dire warnings to EPA were entirely insincere.

Proactive companies could even bolster their credibility by voluntarily filing excerpts from their securities disclosures along with their comments. If they did so, regulators might be more inclined to take their concerns seriously in crafting final rules.

Thus, aligning corporate comments with corporate securities disclosures would not only improve the information available to regulators; it would also protect companies from liability and enhance industry’s credibility in notice-and-comment rulemaking.

Supreme Court Leaves Room for State Regulation of Natural Gas Sales

Yesterday, the U.S. Supreme Court held that the federal Natural Gas Act does not preempt the field of state antitrust regulation of natural gas prices, which means states can apply their own policies to natural gas sales as long as those policies do not conflict with federal law.

Vanderbilt’s Jim Rossi has just posted an analysis of the case at SCOTUSblog. As he notes, U.S. courts have been struggling with how to draw a line between state and federal authority in both electricity and natural gas markets.

Under both the Natural Gas Act and the Federal Power Act, the federal government has authority over wholesale energy sales, while the states retain authority over retail sales of natural gas and electricity. As a result, the Supreme Court’s decision on the Natural Gas Act may have important implications for electricity markets as well. And it is another important precedent in the courts’ struggles to balance state’s traditional authority over their own energy markets with increasingly integrated interstate energy markets.

Professor Rossi writes:

According to the majority opinion, written by Justice Stephen Breyer and joined by five other Justices, the [Natural Gas Act] “was drawn with meticulous regard for the continued exercise of state power, not to handicap it or dilute it in any way.” Under Section 1(b) of the [Natural Gas Act], wholesale transactions fall squarely – and even exclusively — within the jurisdiction of federal regulators. For nearly seventy years, the Court has acknowledged the sharp clarity of this federal-state division of authority over wholesale and retail sales, sometimes even calling it a jurisdictional “bright line.”

… The difficult question this case presented was what to do when a practice affects both types of sales.

… Notwithstanding (somewhat confusing) language in the opinion that purports to place this matter on the state “side” of any dividing line, the majority questioned whether the [Natural Gas Act] contains any sharp dividing line at all: “Petitioners and the dissent argue that there is, or should be, a clear division between areas of state and federal authority in natural gas regulation. But that Platonic ideal does not describe the natural gas regulatory world.”

Here is Professor Rossi’s full post and here is the Supreme Court’s opinion.

Do Corporations Cry Wolf? — Comparing What Companies Tell Regulators With What They Tell Investors

6721834473_83e3b6cb95Corporations regularly complain that new regulations will harm their business and the broader economy. How seriously should we take those warnings? I’ve just posted a paper that presents a way of answering this perennial question.

It’s often said that corporations, “Cry Wolf,” falsely predicting that rules will be very costly. A prime example comes from 1970 when Ford’s President, Lee Iacocca warned that the Clean Air Act “could prevent continued production of automobiles” and was “a threat to the entire American economy and to every person in America.” So when industry says that new regulations such as the Environmental Protection Agency (EPA) Clean Power Plan will be unworkable, many suggest that regulators should just ignore those warnings.

But the problem with crying wolf is that there are wolves. That is, false alarms are dangerous because they mean we won’t respond to true threats. And from time to time, regulations really are unworkable, and industry might be the first to recognize this, which is why regulators don’t just ignore industry warnings.

So regulators face a dilemma: they need industry to tell them whether a rule is workable, but they suspect industry will exaggerate the cost of regulation. How can regulators tell how much companies really expect rules to cost?

My paper, titled “How Cheap is Corporate Talk?” compares companies’ comments on proposed rules with what the same companies told their investors about the same proposals. After all, companies have no reason to trick their investors into thinking that a rule might harm the company. In fact, they may want to reassure investors by minimizing the danger from proposed rules. So if regulators want to know how much a company worries about a proposed rule, they should compare the company’s comments on the rule with what it told its investors.

Take Lee Iacocca’s famous warning that the Clean Air Act could “prevent continued production” of cars in America. In its annual report for that year, 1970, Ford told its investors that “the automobile industry has survived and grown even in countries where government policies have made the cost of car ownership several times higher than it is in the United States” and assured them it had “no doubt that our industry will continue to grow.” Who signed that prediction on behalf of Ford’s board of directors? Henry Ford II and . . . Lee Iacocca.

This paper focuses on a contemporary example of the regulator’s dilemma: the EPA’s Renewable Fuel Standard. The Standard requires oil companies to blend ethanol into the fuel they sell, and it requires more ethanol each year. EPA proposes and sets a required percentage of ethanol annually, which gives oil companies plenty of opportunities to comment. The paper matches those comments up with contemporary Form 10-K securities disclosures from the same companies.

The study finds that oil companies made significantly more predictions about how the Renewable Fuel Standard would harm them in comments than they disclosed in their 10-K statements. For example, one oil company told the EPA that if the rules weren’t changed, they would “limit the supply of gasoline and diesel fuel” and cause “severe economic harm.” In its securities disclosure, the only thing its parent company told its investors was that rules like the Renewable Fuel Standard were creating a strong market for biofuels. And it even implied that that was a good thing because of its side business as a biofuel producer.

Regulators should ask public companies to attach relevant excerpts from their securities disclosures to their comments on proposed rules. This would help regulators assess when a proposed rule might present a true threat to an industry or the economy. In the meantime, securities regulators should scrutinize company comments to find regulatory risks that companies may be concealing in their disclosures to investors. By comparing what companies tell their regulators with what they tell their investors, we’ll all know whether to come running when a corporation cries, “Wolf!”

TransCanada’s Other Pipeline Problem: Can Provinces Impose Conditions on Energy East?

  • Guest blogger Martin Olszynski is back to discuss Ontario and Quebec’s recent pushback against TransCanada’s Energy East project, a proposed pipeline that would carry over one million barrels a day of oil from Alberta to Canada’s east coast. In the U.S., states generally have authority to approve pipelines, but in Canada the federal government has authority over interprovincial pipelines, so Prof. Olszynski considers to what extent provinces like Ontario and Quebec may influence a pipeline that will pass through their territory. This is a crucial issue because as TransCanada keeps waiting for U.S. approval of its Keystone XL project, companies are pursuing other pipeline projects designed to take crude oil to the west coast through British Columbia, or to the east coast through Quebec and Ontario. As Prof. Olszynski discusses, those provinces are pushing back.

By Martin Olszynski

On November 18th, on the heels of a unanimous vote of non-confidence by Quebec’s legislature in Canada’s national energy regulator (the National Energy Board or NEB), that province’s Environment Minister sent a letter to TransCanada (the company behind Keystone XL) outlining seven conditions that the company must meet before the province accepts the Quebec portion of the company’s proposed Energy East pipeline.

Most of the conditions are similar to those stipulated by British Columbia with respect to Enbridge’s Northern Gateway pipeline (e.g. world class emergency and spill response plans, adequate consultation with First Nations) with three notable differences. First, while Quebec insists that the project generate economic benefits for all Quebecers, unlike British Columbia it is not asking for its “fair share” (whatever that meant). Second, because Energy East involves the repurposing of an existing natural gas pipeline, Quebec insists that there be no impact on its natural gas supply. Finally, and the focus of this post, Quebec insists on a full environmental assessment of the Quebec portion of the pipeline and the upstream greenhouse gas emissions from production outside the province – essentially the analysis conducted on Keystone XL and something that the NEB has consistently refused to assess in its other pipeline reviews. The following week, Ontario joined Quebec in imposing these conditions (see here for the MOU between those two provinces). Premier Kathleen Wynne acknowledged that “Alberta needs to move its resources across the country,” but that two provinces “have to protect people in Ontario and Quebec.”

In this post, I consider whether this state of affairs is consistent with the current approach to the regulation of interprovincial pipelines in Canada. Readers should note, however, that following a visit from the Premier of Alberta, the Premiers of Ontario and Quebec have since backpedalled and are no longer demanding an assessment of the pipeline’s upstream greenhouse gas emissions (as was carried out with respect to Keytsone XL), although they are still insisting on their own environmental assessment.

Not All Conditions Are Created Equal

As noted by my University of Calgary Faculty of Law colleague Professor Nigel Bankes in the context of the Northern Gateway pipeline, the “general proposition is that a province will not be permitted to use its legislative authority or even its proprietary authority…to frustrate a work or undertaking which federal authorities…consider to be in the national interest.” The question thus becomes what kind of conditions might amount to frustration? Fortunately, we have a recent decision of the NEB, in the context of Kinder Morgan’s equally contentious Trans Mountain pipeline application, which sheds some useful light on this issue.

Briefly, Kinder Morgan has applied to the NEB for a certificate of public convenience and necessity (section 52 of the National Energy Board Act RSC 1985 c. N-7) for the expansion of an existing pipeline from Alberta to British Columbia. This past summer, the company indicated that its preferred corridor had been revised and that its preferred routing was now through Burnaby Mountain, which is located in the municipality of Burnaby, British Columbia, and which happens to be a conservation area. Consequently, the NEB determined that additional geotechnical, engineering and environmental studies needed to be completed before it could make its section 52 determination. Although section 73 of the NEB Act gave the company the power of entry required to carry out these studies, Kinder Morgan sought Burnaby’s consent to enter upon the relevant lands to do the work, which included borehole drilling and some site preparation (e.g. the removal of some trees and brush). Burnaby refused to give its consent. In fact, its mayor has long staked out a position of opposition to the pipeline.

After a month of failed correspondence, Kinder Morgan began its work on Burnaby Mountain. Several days into that work, its employees were issued an Order to Cease Bylaw Contravention and a bylaw notice for violations of the Burnaby Parks Regulation Byalw 1979 (Parks Bylaw, which prohibits damage to parks) and the Burnaby Street and Traffic Bylaw 1961 (Traffic Bylaw, which amongst other things prohibits excavation work without consent). Subsequently, Kinder Morgan filed a motion, including a notice of constitutional question, seeking an order from the NEB directing the City of Burnaby to permit temporary access to the required lands.

The NEB granted the order, on both “paramountcy” and “interjurisdictional immunity” grounds. Briefly, federal paramountcy is a Canadian constitutional doctrine that sets out the circumstances when a provincial or municipal law will be rendered inoperative in the face of a conflicting federal law. After summarizing the relevant jurisprudence (at p 11), the NEB concluded that there was a “clear conflict” between the Parks Bylaw and Traffic Bylaw on the one hand, and paragraph 73(a) of the NEB Act on the other. With respect to the Parks Bylaw, for example:

…Section 5 [contains] a clear prohibition against cutting any tree, clearing vegetation or boring into the ground, regardless of whether minimal tree clearing is necessary where the trees would create a safety risk for the drilling work that must occur. While the Board accepts that the Parks Bylaw has an environmental purpose, the application of the bylaws and the presence of Burnaby employees in the work safety zone had the effect of frustrating the federal purpose of the NEB Act to obtain necessary information for the Board to make a recommendation under section 52… (at p 12)

The NEB made the same finding with respect to the Traffic Bylaw: dual compliance was impossible, such that the doctrine of paramountcy applied and the bylaws were inoperable to the extent that they prevented Kinder Morgan from carrying out the necessary work. The NEB made clear, however, that this did not mean that “a pipeline company can generally ignore provincial law or municipal bylaws. The opposite is true. Federally regulated pipelines are required, through operation of law and the imposition of conditions by the Board, to comply with a broad range of provincial laws and municipal bylaws” (at p 13).

With respect to interjurisdictional immunity (IJI), which the NEB considered in the alternative, after acknowledging that its usage “has fallen out of favor to some degree,” the NEB observed that “it is still an accepted doctrine for dealing with clashes between validly-enacted provincial and federal laws” (at p 13). The effect of the doctrine is to “read down” valid provincial laws where their application would have the effect of impairing a core competence of Parliament or a vital part of a federal undertaking. Impairment is key: provincial laws may affect a core competence of Parliament or a federal undertaking (to varying degrees), but this is not sufficient. Applying this test to the facts before it,

The Board finds that the Impugned Bylaws impair a core competence of Parliament… the routing of the interprovincial pipeline is within the core of a federal power over interprovincial pipelines. Actions taken by Burnaby with respect to enforcing the Impugned Bylaws impair the ability of the Board to consider the Project and make a recommendation regarding on the appropriate routing of the Project. The Board requires detailed information from surveys and examinations in order to make a recommendation to Governor in Council and to complete an environmental assessment. Similar to the location of aerodromes being essential to the federal government’s power over aeronautics, detailed technical information about pipeline routing is essential to the Board.

Thus, when considering Quebec’s (and Ontario’s) conditions, the following principles ought to be kept in mind. Generally speaking, provincial laws apply to federal undertakings such as pipelines. Such laws will only be vulnerable to the extent that they conflict with or frustrate the purpose of the NEB Act (federal paramountcy), or impair a core competence of Parliament of vital part of the federal undertaking (IJI). Another point worth keeping in mind is specific to environmental laws. In both Canada and the United States, environmental laws are primarily procedural, not substantive, in nature. At their core they merely confer decision-making authority (e.g. to authorize activity that would otherwise be a contravention of the law), although they do seek to improve that decision-making by imposing certain “guideposts,” such as conducting environmental assessment (see A. Dan Tarlock, “Is There a There There in Environmental Law?” (2004) 19 J Land Use & Envtl L 213). This suggests that it will be very difficult, if not impossible, to conclude whether environmental laws frustrate a federal law or impair a federal undertaking until an actual decision has been made.

Condition 2: Comprehensive EA including Upstream Greenhouse Gas Emissions

In its letter to TransCanada, Quebec states that an EA of the Quebec portion of the pipeline is required pursuant to para 2(j) of the Regulation respecting environmental impact assessment and review, ch. Q-2, r. 23 (“the construction…of more than 2 km of oil pipeline in a new right-of-way”). Seemingly unsure of itself, however, it also suggests that it is in TransCanada’s “interest to respect the will of Quebecers” (my translation) – not that it must. The desired result was a comprehensive assessment of those portions of the project situated in Quebec, which until last week included a marine terminal and storage facility at Cacouna, before Quebec’s EA agency, le Bureau d’audiences publiques sur l’environnement (BAPE). As of last week, however, TransCanada announced that the marine terminal plans are on hold in light of the continuing deterioration of the St. Lawrence Beluga whale population, presumably leaving just the pipeline to be assessed for the time being.

The results of this assessment will “serve to inform Quebec’s decision and in this way its position before the NEB” (my translation). The letter does not state which “decision” it is referring to, but the answer would seem to lie in sections 31.1 and 31.5 of Quebec’s Environmental Quality Act CQLR c Q-2:

31.1. No person may undertake any construction, work, activity or operation…in the cases provided for by regulation of the Government without following the environmental impact assessment and review procedure and obtaining an authorization certificate from the Government.

31.5. Where the environmental impact assessment statement is considered satisfactory by the Minister, it is submitted together with the application for authorization to the Government. The latter may issue or refuse a certificate of authorization for the realization of the project with or without amendments, and on such conditions as it may determine…

Viewed this way, it does not seem unreasonable to suggest that “Quebec’s government has had enough and has taken control of the process in the province,” and that “the proceedings before the [NEB], replete with 30,000 pages of unilingual English text, are now very secondary.” Does such a situation conflict with, or frustrate the purposes of, the NEB Act?

I don’t think it does. Environmental assessment has long been understood in Canada as “simply descriptive of a process of decision-making” (Friends of the Oldman River Society v. Canada (Minister of Transport [1992] 1 S.C.R. 3). There is no conflict between the requirements of the NEB Act and the CEQ; Trans Canada can comply with both. Doing so may seem duplicative but that is a matter of policy, not constitutional imperative. And even as a matter of policy this argument is weak in light of recent changes to the federal environmental assessment regime (including restrictive standing rules and a restricted definition of environmental effects) and the decision by the NEB to exclude upstream greenhouse gas emissions from its own review.

Nor does such a condition impair a core competence of Parliament or a vital part of a federal undertaking, for as old as is the understanding of environmental assessment as process so too is the recognition that jurisdiction with respect to the environment is shared between the federal and provincial governments. And while not determinative, it’s worth noting that the current chair of the NEB would seem to agree that there is room for both levels of government here, having recently suggested that the NEB’s primary environmental concern is to ensure the proper construction and operation of pipelines, and that it is up to the provinces and the company to look after broader issues around climate change.

That being said, what Quebec can actually do with the results of its environmental assessment is another matter entirely. The short answer is probably not very much. It might be able to secure some modifications to the project (e.g. that certain standards or ‘best practices’ be applied during construction and operation), but if the NEB makes a positive recommendation to the federal Cabinet then outright refusal of a certificate of authorization would seem off the table (or would be rendered inapplicable). One might reasonably then ask: why go through all the trouble in the first place? The answer is rooted in the procedural nature of environmental law referred to above. With respect to environmental assessment specifically, while the process is certainly intended to improve governmental decision-making, it is also intended to enable political accountability through the full disclosure of the tradeoffs being made (see e.g. Bradley C. Karkkainen, “Toward a Smarter NEPA: Monitoring and Managing Government’s Environmental Performance” (2002) 102(4) Columbia Law Review 903 at 912; Ted Schrecker, “The Canadian Environmental Assessment Act: Tremulous Step Forward, or Retreat into Smoke and Mirrors?” (1991) 5 CELR 192). Indeed, it is the potential for political accountability that at least partially drives better decision-making.

This dynamic provides a reasonable explanation for why Alberta and Saskatchewan appeared so uncomfortable with the mere idea that upstream greenhouse gas emissions be assessed, which initially prompted Ontario’s Energy Minister to ask what they were so afraid of. And while an upstream assessment of Energy East’s greenhouse gases appears to be off the table for now, time will tell whether that position is deemed consistent with the expressed will of the Quebec legislature. In the meantime, the result is that not a single Canadian jurisdiction – neither Alberta, the federal government (through the NEB), nor any of the other provinces – is assessing the upstream greenhouse gas emissions associated with the various pipeline projects currently being proposed.

An earlier version of this post originally appeared on ABlawg, the University of Calgary Faculty of Law’s Blog.

The Shale “Revolution” Is About Gas *Prices* & Oil *Production*

I’d like to make a quick point about the “shale revolution,” which may be old news to those immersed in North American energy policy but might be helpful to those just starting to think about the wider implications of increased North American production of oil and gas.

Increased production of oil & gas from shale formations using hydraulic fracturing and horizontal directional drilling is often referred to as North America’s shale revolution because of the way it has transformed oil & gas production, reserves, production, and pricing. But the “revolutionary” part of these changes mostly boils down to two big changes: 1) natural gas prices, which were rising, are now falling, and 2) oil production, which was falling, is now rising.

Increased production of natural gas has had a dramatic effect on natural gas prices because natural gas is hard to transport. If you can’t send natural gas by an existing pipeline to an existing market, your next best option may be to cool it into a liquid at −162 °C, load the liquid onto a giant, insulated, quarter-billion dollar vessel and ship it across the ocean, where it can be regasified and burned. This is an expensive process, so when natural gas production rises, prices fall quickly because there is little use for the excess gas in the markets it can reach. Prices will keep falling until 1) gas is so cheap that energy users reliant on alternatives like coal and heating oil switch to gas, 2) gas is so cheap that it can be profitably liquefied and sent overseas, or 3) gas is so cheap that it’s no longer worthwhile to keep expanding production. In the United States, there has been a bit of all three: 1) utilities and manufacturers have started to use more gas, 2) companies are planning several projects to export liquefied natural gas to Asia and Europe, and 3) there has been a bit of a slowdown in investment in new shale gas production. But natural gas prices can fall pretty far before any of these stabilizing factors kick in.

In contrast, despite all the recent controversies about oil pipelines and rail transport, oil is still relatively cheap to transport because you can send it by train or boat. And there is an integrated, worldwide market in oil so world oil prices tend to move in tandem. This means that increased production in the U.S. has little effect on U.S. oil prices. But a stable price means that oil producers can keep ramping up production at every possible opportunity and keep earning large profits. That’s why the shale revolution in oil has been about production levels, not prices. And it’s also why incomes have risen much faster in states with shale oil than states with shale gas.

So that’s why I say the shale revolution is mostly about 1) gas prices, not gas production, and 2) oil production, not oil prices. The following four charts show oil & gas production and prices from 1997-2013. They show that the shale revolution in the US has turned around rising natural gas prices and falling oil production. You can also see a more gradual increase in natural gas production. Finally, you can see that U.S. oil prices show little impact from all that increased production.

 

 

With increased challenges to crude transportation and growing liquefied natural gas markets, gas and oil markets may become somewhat more similar over time. But for now they are very different. So when you talk about the shale “revolution,” keep in mind whether you are discussing oil or gas and prices or production. It will help you make sense of many of the developments in energy markets and policy and will help you sort out some of the talking points from those arguing that the shale “revolution” changes everything and those arguing it changes nothing.

 

 

Keystone XL Final Supplemental Environmental Impact Statement: GHG Analysis & Next Steps

The Final Supplemental Environmental Impact Statement & Next Steps

On January 31, the United States State Department issued its Final Supplemental Environmental Impact Statement (EIS) on the Keystone XL pipeline, which is designed to transport oil sands bitumen from Hardisty, Alberta to Steele City, Nebraska.  The environmental impact statement was issued to comply with the National Environmental Policy Act, 42 U.S.C. 4321 et seq., which requires agencies to consider the environmental impact of major federal actions.

As noted in a previous post on Ablawg, President Obama raised the stakes for this environmental impact statement in June when he stated that he would only approve the pipeline if it would “not significantly exacerbate the problem of carbon pollution.”  As described below, the final EIS suggests that Keystone XL meets this standard, but does not entirely rule out a contrary decision.

Now President Obama must decide whether the pipeline is in the “national interest” under Executive Order 13337, which governs cross-border pipelines.  But first there will be 105 days of comment periods for federal agencies and the public.  A further wildcard is that the State Department’s Inspector General is imminently expected to issue a report on whether the independent contractors that performed the environmental impact assessment on Keystone XL had a conflict of interest.

The President’s decision on the pipeline is delegated to Secretary of State John Kerry.  If other US federal agencies object to his decision, then the President will have to decide himself whether to overrule Secretary Kerry’s decision.  If the pipeline is approved, environmental groups will challenge this decision in U.S. court.

State Department’s Analysis of the Greenhouse Gas Impact of Keystone XL

The State Department concludes that Keystone XL, like “any one crude transport project . . . is unlikely to significantly impact the rate of extraction in the oil sands” and thus unlikely to increase greenhouse gas emissions.  State Department, Final Supplemental Environmental Impact Statement at ES-16.  And it goes further, stating that even if “new east-west and cross-border pipelines were both completely constrained, oil sands crude could reach U.S. and Canadian refineries by rail.”  State Department, Final Supplemental Environmental Impact Statement at ES-12.  As a result, the State Department estimates that rejecting the pipeline would actually lead to higher greenhouse gas emissions than approving it, due to the higher energy requirements of shipping crude by rail—“28 to 42 percent” higher.   State Department, Final Supplemental Environmental Impact Statement at ES-34 &Table ES-6.

The State Department’s estimate that rejecting the pipeline would mean 28 to 42 percent higher emissions due to rail is a significant increase from its earlier assessment that rejecting the pipeline would increase emissions by “about eight percent.”  State Department, Draft Supplemental Environmental Impact Statement 5.1-26.  That being said, the State Department’s conclusion that the pipeline is “unlikely to significantly impact” oil sands extraction is a slight retreat from its Draft report, which concluded there would be “no substantive change in global GHG emissions.”  State Department, Draft Supplemental Environmental Impact Statement 4.15-107.  And the State Department also acknowledged that, if global oil prices fell significantly (West Texas Intermediate under $75 a barrel), then rejecting the pipeline could decrease greenhouse gas emissions because “higher transportation costs could have a substantial impact on oil sands production levels.”  State Department, Final Supplemental Environmental Impact Statement at ES-34 &Table ES-12.

Moving forward, a crucial question will be if other U.S. federal agencies support the State Department’s analysis.  When the State Department released its draft environmental impact statement, the U.S. Environmental Protection Agency critiqued its treatment of crude-by-rail.  It requested “a more careful review of . . . rail transport options,” because it thought that, if the pipeline was not approved, high crude-by-rail costs might slow oil sands production and thus, greenhouse gas emissions.  U.S. EPA Keystone XL Project Comment Letter (Apr. 22, 2013).  In response, the State Department expanded its climate change, oil market, and rail transport analysis.  State Department, Final Supplemental Environmental Impact Statement at ES-34 &Table ES-1.  It remains to be seen whether agencies like the Environmental Protection Agency will be satisfied with the expanded analysis or remain skeptical of the State Department’s mostly unaltered conclusions.

Eighty percent of success is showing up: Or “How a pro se farmer won a default against the United States in his suit to invalidate the permit for half of Keystone XL (& why it probably won’t last)”

On April 25, Michael Bishop, a farmer acting pro se, filed a lawsuit in the U.S. District Court for the Eastern District of Texas to revoke TransCanada’s permit to construct the southern half of the Keystone XL project.  This part of the project, known as the “Gulf Coast Project” or “Phase III”, travels from Cushing, Oklahoma to the Gulf Coast.  Bishop sued the Army Corps of Engineers and its Commanding General, Thomas Bostick, because the Army Corps issued the permit to TransCanada.  The complaint that Bishop filed asked the court to order the Army Corps to revoke Keystone’s permit. Bishop then served this complaint on the Army Corps of Engineers, its officers, and the Attorney General of the United States.

Now, you might not like the chances of a pro se farmer aligned against the U.S. Attorney General, the Army Corps of Engineers, and TransCanada.  But as Sheriff Bell would say: “even in the contest between man and steer the issue is not certain.”  And, as it turns out, no one showed up to contest the lawsuit.  Even though the permit at issue belonged to TransCanada, it is not a defendant.  It was up to the government, and the government did not show up.  As a result, on Wednesday, the clerk entered a default against the Army Corps and its officers.
Mr. Bishop had won, and national news stories trumpeted his victory–e.g. Bloomberg “Texas Farmer Wins Entry of Default in Keystone Lawsuit“.  He told Bloomberg, “Tomorrow I’m going to ask the judge for everything I had in my original petition. I’m going to ask him to revoke the permit and effectively shut this pipeline down until they comply with the law.”
The victory will likely prove short-lived, however. On Thursday, the U.S. Attorney’s office for the Eastern District of Texas filed an emergency motion to vacate the clerk’s entry of default.  Although acknowledging that the AG, Army Corps, and officers had been served, the government pointed out that the U.S. Attorney’s office had not been served, a requirement under Federal Rule of Civil Procedure 4(i).  As a result, the government also suggested that the complaint itself should be dismissed “due to failure of service.”
In the end, it seems unlikely that a lawsuit of this importance will end in a default.  But it’s an important reminder of three things: 1) the variety of legal venues and strategies available to environmental plaintiffs looking to slow the flow of oil, 2) the difficulty of keeping track of the myriad resulting lawsuits, and 3) the importance of showing up.

Cross posted on ABlawg: The University of Calgary Faculty of Law Blog.

Obama Climate Speech Sets New Standard for Keystone Pipeline

On June 25, President Obama unveiled a Climate Action Plan in a speech at Georgetown University (see here). This plan highlighted upcoming U.S. greenhouse gas standards for fossil-fuel power plants, directing the U.S. Environmental Protection Agency to issue new proposals for both new and existing power plants.  But the speech is making the most news for an unexpected reference to the Keystone XL pipeline, which is designed to transport oil sands bitumen from Hardisty, Alberta to Steele City, Nebraska.

The surprising reference to Keystone XL came in the middle of the President’s speech when he said:

I do want to be clear:  Allowing the Keystone pipeline to be built requires a finding that doing so would be in our nation’s interest.  And our national interest will be served only if this project does not significantly exacerbate the problem of carbon pollution (Remarks by the President on Climate Change).

Under Executive Order 13337 the President approves a cross-border pipeline when it is in the “national interest.” So President Obama’s words seemed to prescribe a new standard for the pipeline:  even if the pipeline would provide benefits in terms of oil prices or energy security, it would only be approved if it would not “significantly exacerbate” greenhouse gas emissions.

This new standard places significant pressure on the U.S. State Department, which is responsible for assessing the environmental impact of the project under the National Environmental Policy Act, 42 USC 4321 et seq.  In March 2013, the State Department issued a draft environmental impact statement for the pipeline, which addressed the concern that approving the pipeline would cause increased development of the Canadian oil sands, which would, in turn, lead to more greenhouse gas emissions.  The State Department rejected this analysis, concluding that the pipeline would cause “no substantive change in global GHG emissions.”  (See State Department, Draft Supplemental Environmental Impact Statement 4.15-107).  This is because rejecting the pipeline would merely “force more crude oil to be transported via other modes of transportation, such as rail.”  (See State Department, Draft Supplemental Environmental Impact Statement 1.4-1).  Thus, in the State Department’s view, the oil sands would be developed with or without the pipeline.

Pipeline opponents have attacked this conclusion, arguing that other transportation options would be more expensive, so stopping the pipeline would slow oil sands production.  For example, the National Resources Defense Council along with other environmental groups formally asked the State Department to submit a new draft environmental impact statement because of subsequent analysis that, they claimed, showed “there are high cost and technical and logistical barriers to rail transport.”  (See Natural Resource Defense Council et al., Request for Supplemental Environmental Impact Statement for the TransCanada Keystone XL Pipeline Based on Significant New Information (June 24, 2013)). The U.S. Environmental Protection Agency itself laid the groundwork for this critique, telling the State Department that it “recommend[s] that the Final EIS provide a more careful review of the … rail transport options,” and suggesting that “recognizing the potential for much higher per barrel rail shipment costs” could affect “the level and pace of oil sands crude production.”  (See U.S. EPA Keystone XL Project Comment Letter (Apr. 22, 2013)).

Ultimately, President Obama’s words suggest that the Keystone XL pipeline will only be approved if the State Department largely stands by its analysis that the pipeline will not significantly increase global emissions.  This raises the stakes for the State Department’s final environmental impact statement, which does not have a firm due date, but will be released after the State Department reviews the hundreds of thousands of comments that were submitted on its draft impact statement.  (See Update, New Keystone XL Pipeline Application).

Cross-posted at ABlawg, the University of Calgary’s Law Blog: http://bit.ly/18h6pdG

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