BC’s threat to limit increased flow of bitumen and Alberta’s threat to see BC in court: a constitutional showdown

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Last year, the federal government announced that it was approving the twinning of the TransMountain pipeline which, once constructed and initialized, would increase multifold the volume of Alberta’s oil sand bitumen that could be shipped out of Vancouver’s Burrard Inlet. The new NDP government in British Columbia announced on January 30, 2018 that it was considering regulations to limit any increase in diluted bitumen that could be shipped through British Columbia. This announcement was met almost immediately by a warning from a stern Alberta Premier Rachel Notley that BC was acting unconstitutionally and that it was purporting to exercise powers it did not have. The constitutional battle lines are being quickly drawn. (See the news report from CBC News from that date for a quick review of what was said by the various parties).

Let me be clear about my personal (as opposed to constitutional) views. I am completely against the twinning of the TransMountain pipelines. Even a small spill in Burrard Inlet, a place where I row with a rowing team three to four times a week and with which I am intimately familiar, will be environmentally disastrous. A spill from or a collision between oil tankers in the Salish Sea is, for me, horrifically unimaginable.  I do not care what sort of “world class” clean up schemes we put in place. As it is, the tiny spills we have had with the existing terminal in Burrard Inlet have been almost immediately detectable and noticeable.  Those are my personal views.

Now, I need to put my constitutional hat on.  And I am taken back in a time machine two decades to March 1998 when the Supreme Court of Canada released its reasons in a case called Westcoast Energy Inc. v. Canada (National Energy Board), [1998] 1 SCR 322.  The headnote to the case describes the background facts and history quite succinctly:

Westcoast Energy Inc. (“Westcoast”) owns and operates an integrated natural gas pipeline system which transports raw natural gas through its gathering pipelines from production fields located in the various jurisdictions to gas processing plants where it is processed to remove impurities.  The gathering pipelines are constructed of a steel that resists the corrosion caused by the impurities in the raw gas.  The processed gas is then transported through Westcoast’s mainline gas transmission pipeline to delivery points within British Columbia, Alberta and the United States.  The mainline pipeline is constructed of a steel that would not resist the corrosion of unprocessed gas.  The gas is also processed because of safety concerns associated with shipping it through densely populated areas.

Two separate applications were made by Westcoast to the National Energy Board (the “Board”) for certain exemption orders and certificates pursuant to the National Energy Board Act  (the “Act ”) in respect of proposed expansions of its gathering pipeline and processing plant facilities in the Fort St. John and Grizzly Valley resource areas.  The Board initially adjourned the Grizzly Valley application.  On the St. John application, a majority of the three-member Board (whose expertise was not in law) held that the proposed facilities were not federal works or undertakings under s. 92(10) (a) of the Constitution Act, 1867  and dismissed the application for lack of jurisdiction.  In rendering their judgment they found that gas processing and gas transmission were fundamentally different activities or services.

Westcoast appealed the Fort St. John decision to the Federal Court of Appeal.  It also revived its Grizzly Valley application and applied to have the Board refer jurisdictional questions to the Federal Court of Appeal.  The court dealt with the Fort St. John appeal and the Grizzly Valley reference together and held unanimously that both proposed facilities were part of a single federal transportation undertaking within the jurisdiction of Parliament under s. 92(10) (a) and that they came within the definition of “pipeline” in s. 2  of the Act .

BC Gas appealed and was supported by the respondent, the Attorney General of British Columbia.  The interveners, the Attorneys General of Alberta, Nova Scotia and Saskatchewan, also appeared in its support.  The respondents, Westcoast and the Attorney General of Canada, appeared in support of the judgment of the Court of Appeal.  The respondent Board did not participate in this appeal.  The constitutional question before the Court queried whether, given the division of constitutional authority, several sections of the Act  applied to the proposed facilities at (a) Fort St. John and (b) at Grizzly Valley.  Among the issues to be decided were the degree of curial deference owed to the Board’s finding that gas processing and gas transmission are fundamentally different activities, whether the proposed gathering pipeline and gas processing facilities came within the jurisdiction of Parliament under s. 92(10) (a) of the Constitution Act, 1867 , and, if so, whether the proposed gas processing plant facilities came within the definition of “pipeline” in s. 2  of the Act </

A majority of the Supreme Court of Canada dismissed the appeal, finding the gathering pipeline and processing plants to be part of single federal undertaking and therefore subject to federal, not provincial, jurisdiction. Justices Iacobucci and Major penned the reasons for the majority (L’Heureux-Dube, Gonthier, Cory and Bastarache, JJ concurring).

The operative provisions of the Constitution Act, 1867 were s. 91, para. 29 and s. 92, para. 10(a). These provide:

91. It shall be lawful for the Queen, by and with the Advice and Consent of the Senate and House of Commons, to make Laws for the Peace, Order, and good Government of Canada, in relation to all Matters not coming within the Classes of Subjects by this Act assigned exclusively to the Legislatures of the Provinces; and for greater Certainty, but not so as to restrict the Generality of the foregoing Terms of this Section, it is hereby declared that (notwithstanding anything in this Act ) the exclusive Legislative Authority of the Parliament of Canada extends to all Matters coming within the Classes of Subjects next hereinafter enumerated; that is to say, —

. . .

29. Such Classes of Subjects as are expressly excepted in the Enumeration of the Classes of Subjects by this Act assigned exclusively to the Legislatures of the Provinces.

And any Matter coming within any of the Classes of Subjects enumerated in this Section shall not be deemed to come within the Class of Matters of a local or private Nature comprised in the Enumeration of the Classes of Subjects by this Act assigned exclusively to the Legislatures of the Provinces.

92. In each Province the Legislature may exclusively make Laws in relation to Matters coming within the Classes of Subjects next hereinafter enumerated; that is to say, —

. . .

10. Local Works and Undertakings other than such as are of the following Classes: —

(a) Lines of Steam or other Ships, Railways, Canals, Telegraphs, and other Works and Undertakings connecting the Province with any other or others of the Provinces, or extending beyond the Limits of the Province;

Of course, the operative words in s. 92, para. 10 are “other than”. So it follows that if the matter falls under the description under subparagraph (a), then it is an exception to provincial jurisdiction and is subject to federal jurisdiction. After reviewing the caselaw, the learned justices described the operative principles for deciding whether an enterprise was a federal undertaking or not (paras. 64-67):

64  In our opinion, the fact that an activity or service is not of a transportation or communications character does not preclude a finding that it forms part of a single federal undertaking for the purposes of s. 92(10) (a) under the first test in Central Western, supra. The test remains a fact-based one. As Dickson C.J. made clear in A.G.T supra, at p. 258:

It is impossible, in my view, to formulate in the abstract a single comprehensive test which will be useful in all of the cases involving s. 92(10) (a). The common theme in the cases is simply that the court must be guided by the particular facts in each situation. . . . Useful analogies may be found in the decided cases, but in each case the determination of this constitutional issue will depend on the facts which must be carefully reviewed. . . .

65  That is not to say, however, that it is impossible to identify certain indicia which will assist in the s. 92(10) (a) analysis. In our view, the primary factor to consider is whether the various operations are functionally integrated and subject to common management, control and direction. The absence of these factors will, in all likelihood, determine that the operations are not part of the same interprovincial undertaking, although the converse will not necessarily be true. Other relevant questions, though not determinative, will include whether the operations are under common ownership (perhaps as an indicator of common management and control), and whether the goods or services provided by one operation are for the sole benefit of the other operation and/or its customers, or whether they are generally available.

66 Because of the factual nature of this determination, evidence of the ordinary way in which business is conducted within a particular industry will not be particularly relevant. Thus, the reliance by BC Gas on the expert evidence adduced before the Board as to the typical characterization of the natural gas industry is perhaps misplaced. Although it was accepted by the Federal Court of Appeal in The Queen v. Nova, An Alberta Corporation, [1988] 2 C.T.C. 167, that the industry is generally divided into four distinct stages — exploration, production and development (including extraction, dehydration, and transportation through gathering lines to processing plants), transportation from processing plants to regions of consumption, and distribution to the ultimate consumer — and although the Board characterized gas processing and gas transmission as “fundamentally different activities”, this does not preclude the two operations from being part of the same interprovincial undertaking for the purposes of s. 92(10) (a). While this division may be convenient for industrial purposes, it has no bearing on the constitutional division of powers between the federal and provincial legislatures.

67  Whether the Westcoast gathering pipelines, processing plants and mainline transmission pipeline constitute a single undertaking depends on the degree to which they are in fact functionally integrated and managed in common as a single enterprise. What is important is how Westcoast actually operates its business, not how it might otherwise operate it or how others in the natural gas industry operate their businesses: see Winner, supra, at pp. 581-82. The fact that the natural gas industry is typically divided into the four sectors described above is beside the point, as is the fact that producers typically own gathering pipelines and processing plants. As discussed below, it is precisely because Westcoast’s business is exceptional that we conclude that it comprises a single federal undertaking. We also emphasize that the manner in which participants in the natural gas industry typically describe the industry cannot dictate the characterization for constitutional purposes. Finally, the fact that this description of the industry was adopted in Nova, supra, is irrelevant for the purposes of this appeal since that case dealt with the unrelated matter of the appropriate capital cost allowance classification of certain pieces of yard pipe, metering pipe and valves for income tax purposes.

The functional integration of the operation of Westcoast was central to the majority’s determination that this was a federal undertaking and therefore subject to federal jurisdiction (paras. 69-74):

69 It is apparent that the Westcoast facilities and personnel are subject to common control, direction and management, and are operated in a coordinated and integrated manner. Westcoast management personnel in Vancouver control and direct the field personnel who operate the gathering pipeline, processing plant and mainline transmission pipeline facilities. The gathering pipeline facilities and the mainline transmission pipeline facilities, and the associated compressor facilities, are operated by the same field personnel. Both sets of pipeline facilities are serviced by common field offices, pipe storage yards, warehouses, compression repair facilities and measurement and pipeline maintenance shops. Employees in Vancouver are responsible for monitoring and controlling the flow of gas through both the gathering pipelines and the mainline transmission pipeline. Although the operation of the processing plants is carried out by different persons at each plant, this is done under the direction and supervision of management located in Vancouver. Finally, the gathering, processing and transmission facilities are connected by a sophisticated telecommunications system.

70 This functional integration is underscored by the fact that the primary purpose of processing the raw gas at the Westcoast processing plants is to facilitate its transmission through the Westcoast mainline transmission pipeline. As discussed above, the raw gas that is extracted at the production fields often contains impurities, including hydrogen sulphide and carbon dioxide. These impurities must be removed from the gas before it is delivered into the mainline transmission pipeline for two reasons. First, the combination of sulphur dioxide and carbon dioxide is corrosive. While steel used in the gathering pipelines is designed to withstand this corrosion, the steel used in the mainline transmission pipeline is not. Second, hydrogen sulphide is toxic and poses unacceptable safety and environmental risks. As such, gas which contains hydrogen sulphide cannot be transported through the heavily populated areas through which the mainline transmission pipeline runs.

71 BC Gas argued that these concerns are incidental to the primary purpose of processing, which it characterized as the transformation of the raw gas into commercially useful products, including residue gas and other useful byproducts like sulphur. In our opinion, this purpose is irrelevant to Westcoast’s business. It is true that the raw gas must be processed to remove impurities before it can be used by the ultimate consumer. However, what is important from the perspective of Westcoast is that this processing occur before the gas is delivered into its mainline transmission pipeline because of the design, safety and environmental concerns set out above.

72 In addition, processing is provided by Westcoast almost exclusively in respect of gas which is subsequently delivered into the Westcoast mainline transmission pipeline. While some raw gas is delivered to Westcoast’s processing plants by means of gathering lines owned and operated by others, virtually all of the residue gas that is processed at the Westcoast processing plants is delivered into the Westcoast mainline transmission pipeline for transportation onward. This residue gas consists primarily of methane, which comprises approximately 80 percent of the raw gas prior to processing. Westcoast does not offer processing as an independent service in respect of gas that it does not transport in its mainline transmission pipeline.

73 In our view, this dedication of the Westcoast processing plants to the operation of the mainline transmission pipeline is analogous to that of the underground storage caverns to the pipeline undertaking in Dome Petroleum, supra, and to that of the hypothetical railway hotel to the railway undertaking described by the Privy Council in Empress Hotel, supra. As well, the functional integration between the Westcoast gathering pipelines and processing plants on the one hand, and the Westcoast mainline transmission pipeline on the other hand, demonstrate that these facilities cannot be compared to the quarry and the railway in Nor-Min, supra, as previously discussed.

74 It is significant that, except for some small quantities, Westcoast does not own or deal in the natural gas that it transports. The fact that processing the gas transforms it into a commercially useful state and produces byproducts which are also commercially valuable may be relevant to the owners of these substances, but it is irrelevant to Westcoast. Its only interest is in providing transportation and processing services to the owners of the gas and its byproducts.

The learned justices then considered the effect of s. 92A, a provision passed with the 1982 amendments to clarify provincial jurisdiction over natural resources (a provision that, interestingly enough, Alberta pressed hard for in 1982). Section 92A provides:

92A. (1) In each province, the legislature may exclusively make laws in relation to

(a) exploration for non-renewable natural resources in the province;

(b) development, conservation and management of non-renewable natural resources and forestry resources in the province, including laws in relation to the rate of primary production therefrom; and

(c) development, conservation and management of sites and facilities in the province for the generation and production of electrical energy.

(2) In each province, the legislature may make laws in relation to the export from the province to another part of Canada of the primary production from non-renewable natural resources and forestry resources in the province and the production from facilities in the province for the generation of electrical energy, but such laws may not authorize or provide for discrimination in prices or in supplies exported to another part of Canada.

(3) Nothing in subsection (2) derogates from the authority of Parliament to enact laws in relation to the matters referred to in that subsection and, where such a law of Parliament and a law of a province conflict, the law of Parliament prevails to the extent of the conflict.

(4) In each province, the legislature may make laws in relation to the raising of money by any mode or system of taxation in respect of

(a) non-renewable natural resources and forestry resources in the province and the primary production therefrom, and

(b) sites and facilities in the province for the generation of electrical energy and the production therefrom,

whether or not such production is exported in whole or in part from the province, but such laws may not authorize or provide for taxation that differentiates between production exported to another part of Canada and production not exported from the province.

(5) The expression “primary production” has the meaning assigned by the Sixth Schedule.

(6) Nothing in subsections (1) to (5) derogates from any powers or rights that a legislature or government of a province had immediately before the coming into force of this section.

The Sixth Schedule referred to by s. 92A(5) provides in part:

THE SIXTH SCHEDULE

PRIMARY PRODUCTION FROM NON-RENEWABLE NATURAL RESOURCES AND FORESTRY RESOURCES

1. For the purposes of section 92A of this Act,

(a) production from a non-renewable natural resource is primary production therefrom if

(i) it is in the form in which it exists upon its recovery or severance from its natural state, or

(ii) it is a product resulting from processing or refining the resource, and is not a manufactured product or a product resulting from refining crude oil, refining upgraded heavy crude oil, refining gases or liquids derived from coal or refining a synthetic equivalent of crude oil;…

Justices Iacobucci and Major held that s. 92A was of no help in establishing provincial jurisdiction: the enactment of s. 92A did not derogate from the pre-existing powers of Parliament (para. 82):

82 In our view, those comments apply with equal force to Parliament’s jurisdiction over interprovincial transportation undertakings under s. 92(10) (a). Section 92A does not derogate from Parliament’s jurisdiction under s. 92(10) (a). Federal jurisdiction under s. 92(10) (a) is premised on a finding that an interprovincial transportation undertaking exists. Subsection 92A(1) (b), on the other hand, is not concerned with the transportation of natural resources beyond the province, but rather with the “development, conservation and management” of these resources within the province. As discussed above, the Westcoast gathering pipelines, processing plants and mainline transmission pipeline constitute a single interprovincial undertaking which transports natural gas from production fields in the Yukon, Northwest Territories, Alberta and British Columbia to delivery points in Alberta, British Columbia and the United States. We fail to see how s. 92A(1) (b) could extend provincial jurisdiction to include the regulation of the transportation of natural gas through these facilities across provincial boundaries.


(Emphasis added)

This twenty year old decision makes it clear that British Columbia has an uphill battle in making its case for jurisdiction to regulate the amount of bitumen that can flow through an interprovincial pipeline that traverses its territory. The drafters of the proposed BC regulation will have to be very creative and crafty to make provincial jurisdiction stick.

Where I see a more solid obstacle to the construction of the TransMountain pipeline is not in provincial jurisdiction but rather in the assertion and proof of aboriginal title. If local Indigenous nations can establish that the lands through which the proposed pipeline will pass are their ancestral lands over which they possess proven aboriginal title, the way forward for the pipeline will be far more difficult (and please note that I am not talking about the constitutional duty to consult aboriginal peoples here – I am talking about proof of aboriginal title.)

More to come on this issue, of that I am sure.

I remain,

Constitutionally yours

Arthur Grant

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