Canada Gazette, Part I, Volume 150, Number 41: Pipeline Financial Requirements Regulations

October 8, 2016

Statutory authority

National Energy Board Act

Sponsoring department

Department of Natural Resources

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

The safety and security of Canada's energy sectors is crucial to the health of Canadians, the environment and the national economy. While Canada's energy safety record is impressive, the safety and security of energy sectors is complex and continually evolving, requiring continuous vigilance and ongoing improvement.

Public confidence in the safety and security of oil and gas sectors has been questioned in recent years due in part to incidents that have resulted in human, environmental and/or economic impacts. The Government of Canada examined the context and has enhanced the federal energy safety and security of the federal regime. This has included stronger legal frameworks and other measures, not only for pipelines, but also for the offshore, nuclear, marine and rail sectors. Changes have focused on the pillars of prevention, preparedness and response, liability and compensation.

In an effort to support the strengthening of Canada's pipeline safety regime, regulations are needed to support the establishment of the “no-fault” absolute liability regime for companies operating federally regulated pipelines.

Background

The Minister of Natural Resources is responsible for setting the policy framework for the oversight of federally regulated pipelines (i.e. those that cross provincial, territorial, or international boundaries). The National Energy Board (NEB), which reports to Parliament through the Minister of Natural Resources, is the independent federal agency that regulates cross-border pipelines. The role of the NEB is to ensure that pipeline companies meet strict requirements to keep Canadians and the environment safe.

The Pipeline Safety Act, which came into force on June 19, 2016, further enhances Canada's strong pipeline safety system based on prevention, preparedness and response, liability and compensation. The Act reinforces the “polluter pays” principle and confirms that federally regulated pipeline operators continue to have unlimited liability for an unintended or uncontrolled release from a pipeline when they are at fault or negligent. The Act also introduces a “no-fault” liability regime for companies operating federally regulated pipelines to ensure a prompt response in advance of the determination of fault and to ensure that Canadians are protected from costs and damages following an unintended or uncontrolled release from a pipeline. The Act establishes an absolute liability of $1 billion for companies operating major oil pipelines (i.e. those transporting 250 000 or more barrels per day) and provides that classes and limits for other pipelines will be set out in regulations.

The Act requires that a pipeline operator maintain financial resources to match the limit of absolute liability. It authorizes the NEB to order a company or class of companies to maintain the financial resource requirements (including a portion to be readily accessible) in specific types of financial instruments. The Act also authorizes the NEB to request information (i.e. specific proof) from companies regarding their financial capacity, if desired.

The Act also provides that regulations may be developed related to pipeline abandonment, damage prevention around pipelines, and cost recovery from industry, in the event that the NEB is authorized by the Government to take over incident response in exceptional circumstances.

Objectives

The objectives of the Pipeline Financial Requirements Regulations (the proposed Regulations) are to

Description

Absolute liability classes and limits

The Pipeline Safety Act establishes an absolute liability limit of $1 billion for companies authorized to construct or operate one or more pipelines that individually or in the aggregate have the capacity to transport at least 250 000 barrels of oil per day. The proposed Regulations will establish classes, absolute liability limits and financial resource requirements for other pipeline operators. The classes will be divided into three commodity groupings: oil, gas, and other commodities. For clarity and consistency, “oil” and “gas” have the same definitions as under section 2 of the National Energy Board Act (NEB Act). Other commodities will be defined as those commodities transported by federally regulated pipelines that do not fall within the NEB Act section 2 definitions of “oil” or “gas,” for example pulp, slurry, salt water, and carbon dioxide.

Only authorized in-service pipelines will be considered in the determination of a company's absolute liability class, with the following being excluded:

Companies operating federally regulated pipelines will be divided into absolute liability classes, with the absolute liability limit as follows:
Absolute Liability Class Details Absolute Liability Limit
Oil class 1 Companies that are authorized to operate one or more pipelines transporting at least 250 000 barrels of oil per day (bpd). (Established in the Pipeline Safety Act.) $1 billion
Oil class 2 Companies that are authorized to operate one or more pipelines transporting at least 50 000 bpd but fewer than 250 000 bpd of oil. $300 million
Oil class 3 Companies that are authorized to operate one or more oil pipelines transporting at least 1 bpd but fewer than 50 000 bpd of oil. $200 million
Gas class 1* Companies that are authorized to operate one or more pipelines that have a risk value of at least 1 000 000. $200 million
Gas class 2* Companies that are authorized to operate one or more pipelines that have a risk value of at least 15 000 but less than 1 000 000. $50 million
Gas class 3* Companies that are authorized to operate one or more pipelines that have a risk value of at least 1 but less than 15 000. $10 million
Other commodities (i.e. other than oil or gas) class 1 Companies that are authorized to operate one or more pipelines carrying other commodities in a liquid state by land or a watercourse or in a semi-solid state across a watercourse. $10 million
Other commodities (i.e. other than oil or gas) class 2 Companies that are authorized to operate one or more pipelines carrying other commodities in a gaseous state by land or a watercourse, or in a semi-solid state by land. $5 million

* The classes for absolute liability for companies transporting gas via federally regulated pipelines are based on the highest risk value of their respective pipeline systems. There is no single variable that reasonably represents the risk and associated cost of a natural gas pipeline incident, as is the case with crude oil and liquids (i.e. throughput). The relationship between pipeline diameter, pipeline operating pressure, and the proximity to a populated area is considered the primary factor in a natural gas pipeline incident. Since there are existing class location standards that place operational requirements on pipeline companies operating in particularly high-risk areas (such as populated areas), pipe diameter and maximum operating pressure are deemed to be the best variables for pipeline classification. Risk value for natural gas pipelines will be calculated as follows:

outside pipeline diameter in mm2 × maximum operating pressure in megapascals (MPa)

The operations of federally regulated pipeline companies can be complex and vary greatly. To address this complexity, the Regulations provide the following additional clarifications related to determining a company's absolute liability:

Acceptable financial instruments

The Pipeline Safety Act authorizes the NEB, if it chooses to do so, to order a pipeline company to maintain the required financial resources in one or more specific types of financial instruments, to be articulated in regulations. It is proposed that the Regulations prescribe the following list of acceptable financial instruments:

Readily accessible portion

The Pipeline Safety Act provides authority to make regulations governing the amount of financial resources a pipeline operator must hold in a readily accessible form so that the company can respond quickly to an incident, as well as the specific types of financial instruments an operator could be ordered by the NEB to use.

The proposed Regulations will establish that all federally regulated pipeline operators (irrespective of their class of absolute liability) must maintain at least 5% of the applicable financial resource requirement in readily accessible form. It is further proposed that the acceptable financial instruments, which the NEB could order a company to use, would be one or more of the following for the purposes of the readily accessible portion:

Pooled fund

The Pipeline Safety Act provides that industry can elect to create and participate in a pooled fund to allow each participant to demonstrate it meets its financial resource requirements.

The establishment of, and participation in, an industry-led pooled fund is voluntary — a fund or funds would only be created and maintained if there is interest on the part of pipeline operators.

The Act provides that regulations are to set out the parameters of a pooled fund. The proposed Regulations will establish parameters for a pooled fund as follows:

A fund administrator must

If desired, industry may decide to operate more than one pooled fund, as long as each fund meets the requirements established in the Act and the Regulations.

“One-for-One” Rule

The “One-for-One” Rule does not apply as the proposed Regulations do not result in new administrative costs for business. Industry was consulted on the regulatory proposals, including potential costs. Companies already voluntarily maintain financial resources in a variety of forms, some of which have carrying costs (e.g. insurance). Until such a time as the NEB might choose to order a company to use specific financial instruments, companies are free to choose how they meet the financial resource requirements (i.e. no incremental costs until such a time).

Small business lens

The small business lens does not apply to this regulatory proposal as nationwide cost impacts are less than $1 million annually. However, a number of small businesses will be required to implement the Regulations. Feedback from preliminary consultations led by Natural Resources Canada suggested that compliance costs associated with the readily accessible portion of the financial resource requirement could be potentially burdensome for some small businesses (approximately eight small businesses have been identified). It should be noted that compliance costs would not be generated unless and until such time as the NEB issues an order directing a company to use a specific financial instrument. Otherwise, how a company chooses to meet its financial resource requirements under the Pipeline Safety Act and the Regulations will be a business decision. For example, a company could choose to meet its financial requirements by using a combination of cash on hand and an existing insurance policy.

There are no incremental administrative requirements associated with the proposed Regulations, including for small businesses.

Consultation

Between December 2015 and April 2016, Natural Resources Canada conducted preliminary engagement activities with a variety of key stakeholders including industry, government, non-governmental organizations and Indigenous communities to inform the draft Regulations. Stakeholders were engaged through a variety of mechanisms including in-person meetings, teleconferences, and email communications. A discussion paper outlining the basis of preliminary regulatory proposals was used as the foundation for engagement activities and stakeholders were asked to provide feedback on the preliminary proposals including benefits, potential impacts and potential barriers to implementation.

The main themes from feedback on the regulatory proposals included the following:

Key changes to the regulatory proposals, following preliminary engagement, are as follows:

Natural Resources Canada also received feedback regarding implementation of elements of the Pipeline Safety Act itself. Feedback on the Act has been noted and shared with the NEB as the regulator responsible for implementing the Act and associated financial regulations.

Rationale

Absolute liability classes and limits

Analysis of historical pipeline releases and pipeline characteristics and operations suggests that there are very different risk factors associated with oil, gas and other commodities. For oil, the key risk factor was determined to be throughput capacity, i.e. how much of the product was being transported through the pipeline. For gas, the key risk factors were determined to be the diameter of the pipe and the operating pressure. Finally, for other commodities, the key risk factors were determined to be the physical state of the commodity (liquid, semi-solid, gaseous) and the terrain through which the pipeline passes. Thus, it was determined that absolute liability classes should be divided into oil, gas and other commodities.

The proposed classes of operators (basis of absolute liability limits) are based on historical analysis, statistical analysis and cluster analysis of pipeline incidents (in Canada, the United States and internationally) and their estimated or actual cleanup costs. The key policy objectives for establishing specific limits and associated financial requirements were to

These objectives are underpinned by the principle that the operators' liability should be commensurate with the level of risk associated with their respective operations.

The determination of a company's absolute liability class will be based on NEB authorized activity, which will ensure that financial requirements are commensurate with risk. However, the following activities are excluded:

There may be situations where an operator's pipelines are not fully utilized. This may be due to changes in supply or market conditions in either an origin or a destination of a pipeline, changes to the service of a pipeline because of economic, environmental protection or safety conditions, or competition from other methods of energy supply or transportation, e.g. switching to or from natural gas for electricity generation. The NEB's determination of a company's absolute liability class will depend on the facts of each case.

Under the authorities included in the National Energy Board Act, the NEB wrote to request baseline capacity information from all federally regulated pipeline operators. This communication also indicated which companies most likely fell into the major oil class, based on NEB data. The information from the operators will be used to determine the absolute liability class for each operator. The NEB will communicate the absolute liability class to each company. For major oil pipeline operators, this was completed in advance of the coming-into-force date of the Pipeline Safety Act.

Acceptable financial instruments

It should be emphasized that the purpose of the list of acceptable financial instruments in the proposed Regulations is to provide the NEB with options for situations when it chooses to order a company to use specific financial instruments to maintain its financial resource requirements, e.g. in a scenario where the NEB may be concerned with the financial condition of the company. Unless and until such time as the NEB orders a company to maintain its financial resource requirement in one or more specific financial instruments, a pipeline operator may maintain its required financial resources as it sees fit (business decision). For example, a company could choose to hold its financial resources in cash and an insurance policy.

Financial instruments were examined based on a number of factors: degree of liquidity, level of security, protection of funds from creditors, administrative complexity, and the cost of carrying to the company. The identified list provides an array of options from which the NEB could choose. The list of acceptable financial instruments provides options that balance the interests of the Government (e.g. cash and cash equivalents are highly liquid) and the interests of industry (e.g. parental guarantees and insurance have lower carrying costs for companies but are less liquid). The list of eligible financial instruments is, for the most part, consistent with similar regulations under the Canada Oil and Gas Operations Act, pursuant to the Energy Safety and Security Act.

Readily accessible portion

To determine the required level of readily available resources, historical pipeline incident data was examined to isolate the short-term costs related to incident response for various commodities. An initial proposal of 10% of the financial resource requirement was reduced to 5% based on feedback from stakeholders regarding how immediate and short-term incident response costs are handled (i.e. cash on hand is often used in the interim until insurance claims are processed). A re-examination of historical spill incident data determined that a level of 5% of the financial resource requirement would have adequately covered short-term response and cleanup costs.

The readily accessible portion is calculated as a percentage of the financial resource requirement, as opposed to the absolute liability limit, to account for the fact that the Act provides the NEB with the authority to increase a company's financial resource requirement.

The financial instruments proposed for the readily accessible portion have been chosen for their high degree of liquidity.

Pooled fund

Establishing the parameters for the use of a pooled fund as an alternative or complement to other financial instruments will provide added flexibility to federally regulated pipeline operators in that it will allow companies to benefit from leveraging the contributions of other operators. A pooled fund would meet the policy intent of the Act by ensuring that funds are available to respond to a potential incident.

The creation of one or more pooled funds is at the discretion of industry. Due to the optional nature of the pooled fund, there are no administrative or other costs that result directly from the proposed Regulations. Any administrative or other costs associated with the creation and maintenance of a pooled fund would be borne by industry participants.

A minimum fund balance of $250 million is proposed based on an analysis of data from historical pipeline releases. Based on NEB data from 2007 to 2014, the largest estimated cost of a release is $137 million for a spill of 6 227 barrels of oil. The estimated cost of the second largest release is $42.2 million for a spill of 1 918 barrels of oil. Individual companies have paid for the cleanup of their releases and have not declared bankruptcy due to the cost of a release. A minimum balance of $250 million is considered a reasonable amount for speedy response, in the event of a release.

This aligns with requirements contained in similar regulations under the Canada Oil and Gas Operations Act, pursuant to the Energy Safety and Security Act, which require a minimum amount of $250 million for a pooled fund to be used as proof of financial responsibility for the drilling for, or the development or production of, petroleum in offshore areas regulated by the NEB, the Canada–Newfoundland and Labrador Offshore Petroleum Board and the Canada-Nova Scotia Offshore Petroleum Board. There are no other known industry pooled funds.

Implementation, enforcement and service standards

The provision of a firm timeline for the coming into force of the regulatory provisions would provide clarity to pipeline operators regarding when they must be in compliance.

Some provisions of the proposed Regulations will be brought into force shortly after publication in the Canada Gazette (i.e. 10 days)

Twelve months is suggested as a reasonable amount of time to allow other (non-major oil pipeline class) companies, in particular smaller companies, to demonstrate that they can meet their financial resource requirements (subsections 2(1) to (5) of the proposed Regulations). The proposed 12-month period will help to ensure companies have adequate time to comply, given market volatility in energy sectors that may limit the availability of financial instruments. Establishing shorter coming-into-force timelines may be challenging for these companies, given that some or all elements may take longer to implement; as a result, the Government of Canada and operators facing a deadline could inadvertently find themselves in non-compliance with the Act and regulations.

The NEB has an existing toolbox of mechanisms it can use to address non-compliance, for example, the issuance of warnings, orders or fines. The NEB is currently examining its compliance tools to determine those that would be most appropriate to apply in the case of non-compliance with the regulations, including how enforcement actions should escalate in the case of continued or repeat non-compliance. Guidance will be issued to companies well in advance of the coming into force of the proposed Regulations.

Contact

Christine Siminowski
Director
Energy Sector
Natural Resources Canada
Telephone: 343-292-6272
Email: Christine.Siminowski@canada.ca

PROPOSED REGULATORY TEXT

Notice is given that the Governor in Council, pursuant to subsections 48.12(6) (see footnote a), 48.13(7)(see footnote b) and 48.14(3)(see footnote c) of the National Energy Board Act (see footnote d), proposes to make the annexed Pipeline Financial Requirements Regulations.

Interested persons may make representations concerning the proposed Regulations within 30 days after the date of publication of this notice. All such representations must cite the Canada Gazette, Part I, and the date of publication of this notice, and be addressed to Christine Siminowski, Director, Energy Systems Management, Energy Sector, Natural Resources Canada, 580 Booth Street, Ottawa, Ontario K1A 0E4 (tel.: 343-292-6272; email: christine.siminowski@canada.ca).

Ottawa, September 29, 2016

Jurica Čapkun
Assistant Clerk of the Privy Council

Pipeline Financial Requirements Regulations

Interpretation

Definitions

1 The following definitions apply in these Regulations.

Act means the National Energy Board Act. (Loi )

authorized, in respect of a pipeline, describes a pipeline whose construction and operation have been authorized under Part III of the Act, but not

Limits of Liability

Limits for classes of company

2 (1) The following amounts are prescribed for the purposes of paragraph 48.12(5)(b) of the Act:

Calculation of risk value

(2) For the purposes of paragraphs (1)(c) to (e), the risk value is calculated by multiplying the square of the pipeline's outside diameter, measured in millimetres, by the maximum operating pressure, measured in megapascals, and if the company operates two or more pipelines, the risk value is that of the pipeline with the highest risk value.

Multiple commodities

(3) If a company operates an authorized pipeline that transports two or more commodities, and the limits of liability in respect of those commodities are not the same, the limit of liability applicable to the company is determined in accordance with paragraph 48.12(5)(a) of the Act and subsection (1) as if the company were transporting only the commodity that results in the highest limit of liability.

Multiple varieties — same commodity

(4) If a company operates an authorized pipeline that transports two or more varieties of the same commodity, the limit of liability applicable to the company is determined in accordance with paragraph 48.12(5)(a) of the Act and subsection (1) as if the company were transporting only the variety that results in the highest limit of liability.

Multiple unconnected pipelines — different commodities

(5) If a company operates two or more authorized pipelines that are unconnected and transport different commodities, the limit of liability applicable to the company is determined in accordance with paragraph 48.12(5)(a) of the Act and subsections (1) to (4) as if the company were operating only the pipeline that results in the highest limit of liability.

Financial Resources

Financial resources

3 For the purposes of subsection 48.13(2) of the Act, the Board must choose from among the following types of financial resources:

Readily accessible financial resources

4 (1) A company must maintain at least 5% of the amount of financial resources referred to in subsection 48.13(1) of the Act in types that are readily accessible.

Financial resources

(2) If the Board specifies the types of financial resources that must be readily accessible to a company, it must choose from among the following types:

Pooled Funds

Requirements of pooled fund

5 (1) For the purposes of subsection 48.14(1) of the Act,

Administrator of the pooled fund

(2) The administrator of a pooled fund must

Coming into Force

10th day after publication

6 (1) The following provisions come into force on the 10th day after the day on which these Regulations are published in the Canada Gazette, Part II:

First anniversary after publication

(2) The following provisions come into force on the first anniversary of the day on which these Regulations are published in the Canada Gazette, Part II:

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