Background

From the small town of Smithers, British Columbia, Michael Sawyer applied to the National Energy Board (the "NEB") requesting it to determine and issue a declaratory order that the Prince Rupert Gas Transmission Project (the "Project") was properly within federal jurisdiction, and therefore subject to regulation by the NEB. The NEB found that Sawyer failed to demonstrate on a prima facie basis that the Project was a federal work or undertaking and therefore not subject to NEB jurisdiction. Sawyer applied for judicial review of the NEB's decision and the Federal Court of Appeal unanimously granted Sawyer's appeal, remitting Sawyer's original application back to the NEB for redetermination.

The judgment of Sawyer v Transcanada Pipeline Limited, 2017 FCA 159, 2017 CarswellNat 3405 [Sawyer v Transcanada] is interesting for a number of reasons:

  1. the facts demonstrate how significantly an individual may affect regulatory processes;
  2. the facts demonstrate the difficulties facing energy projects that are potentially subject to both provincial and federal regulation; and
  3. it provides a useful overview of how a court will likely consider, and how a regulatory tribunal should consider, whether or not a project is a federal work or undertaking.

The NEB's Decision

Standing

Sawyer's application was preliminary. Subsection 12(1) of the National Energy Board Act, RSC 1985, c N-7 (the "Act") grants the NEB full and exclusive jurisdiction to determine whether an inquiry is required to determine if the NEB has jurisdiction over a given project. Accordingly, the NEB held it was not necessary to apply a standing test for Sawyer at this preliminary stage. The NEB noted it "would not be in the public interest to limit" the NEB's discretion to take action under section 12 of the Act. In short, any individual may be able to apply to the NEB to argue that the NEB should inquire into its jurisdiction over a proposed project.

Decision

The NEB engaged in a constitutional analysis by opening with reference to subsection 91(29) and 92(10)(a) of the Constitution Act (1867). The NEB noted these sections govern jurisdiction over works and undertakings, such as pipelines. Further, they stated the judgment of Westcoast Energy Inc v Canada (National Energy Board), [1998] 1 SCR 322, 156 DLR (4th) 456 [Westcoast Energy] remains the applicable law in regards to whether or not a pipeline falls under federal jurisdiction.

The NEB stated Sawyer was required to establish a prima facie case to demonstrate that the NEB should hold an inquiry into its jurisdiction over the Project. The NEB held a prima facie case "is one that is made out at first appearance, until contradicted and overcome by other evidence." In its short reasons, the NEB concluded Sawyer failed to establish a prima facie case that the Project was a federal work or undertaking.

The Federal Court of Appeal's Decision

Justice Rennie, writing for a unanimous court, remitted Sawyer's application to the NEB for redetermination. In doing so, he noted the NEB "defined the public interest wholly in terms of constitutionality" (para 7), and therefore the NEB's decision attracted the correctness standard of review. The correctness standard demands that the NEB's decision will only stand if it is correct, and not simply if it is reasonable. The Federal Court of Appeal held the NEB erred in its application of the prima facie test and in its constitutional analysis (para 12). The judgment cautioned that it took no actual position on whether or not the Project was subject to the NEB's jurisdiction (para 73).

Analysis

The Prima Facie Test

Justice Rennie reaffirmed a work or undertaking may become subject to federal regulation if it satisfies either test from Westcoast Energy. However, at the preliminary stage, Sawyer only had to establish a prima facie case that the Project should be subject to federal jurisdiction. A prima facie test only asks only whether an arguable case has been established (para 27). However, the NEB erred as it "did not ask whether an arguable case had been made out – it answered the underlying question" (para 28).

The Constitutional Analysis

With reference to the law established in Westcoast Energy, a pipeline may be a federal work or undertaking where (paras 41, 42):

  1. the local (provincial) work or undertaking is part of a federal work or undertaking in the sense of being functionally integrated and subject to common management, control, and direction [Westcoast Energy, para 49]; or
  2. the local work or undertaking is essential, vital, and integral to a federal work or undertaking [Westcoast Energy, para 46].

Justice Rennie noted three issues in the NEB's constitutional analysis and application of Westcoast Energy. First, the NEB determined the Project was "functionally different" from the federal works it connected to. Justice Rennie corrected the analysis, emphasizing that the consideration is whether the parts of the Project are functionally integrated. One must ask how the parts work together and for what purpose (para 44). The NEB failed to define the relationship between the Project and the federal works: "[t]he Board looked at where the pipeline was, and did not ask what it did" (para 47). Examining this relationship between works involves a holistic analysis, and the NEB failed to consider the "symbiotic relationship" between the Project and what it connected to.

The second issue related to how the NEB focused on the commercial and billing relationship of the Project rather than the operation the Project actually performs. The NEB was required to go further and examine the inter-relationship between the activities and services of the Project in order to determine if they had a common direction and purpose. This would suggest they form a single undertaking (para 63). In sum, a mere examination of the commercial relationship will not suffice.

The third issue related to the common management, control, and direction of the works. The NEB held the Project and other works were managed by different teams but did not elaborate further. There was significant evidence regarding the management, control, and direction of the works that the NEB did not address. Justice Rennie therefore inferred that the NEB did not understand the test. It was not how the NEB handled the evidence, but that it appeared to not consider a significant portion of evidence before it.

Finally, Justice Rennie emphasized that substance trumps form, and one should not simply examine the "commercial costume worn by the entities involved" (para 68; quoting Alberta Government Telephones v Canadian Radio-Television & Telecommunications Commission, [1989] 2 SCR 225 at para 87, 61 DLR (4th) 193). The NEB was to answer whether or not the Project and the works or undertakings it integrated with were subject to the common management, control, and direction of Transcanada Pipeline Limited. There was significant evidence before the NEB to suggest Transcanada Pipeline Limited had common management, control, and direction (para 70), but the NEB did not address it.

Conclusion

Sawyer v Transcanada reaffirms the test established in Westcoast Energy as to whether or not a work or undertaking will be subject to federal jurisdiction. However, in order for the test to properly be applied, a tribunal or court must:

  1. examine the functional integration of the relevant works or undertakings, and this requires a holistic analysis. Where a local work is functionally integrated into a federal work, it is more likely the local work will fall under federal jurisdiction;
  2. examine the operation of the work or undertaking as it relates to other works and not simply consider their commercial relationship. Where a common direction and purpose exist amongst the separate works, it is more likely the local work will fall under federal jurisdiction; and
  3. examine the substance, not the form, of the management, control, and directing authority of the works. Where, in substance, the works are managed, controlled, or directed by the same authority, and that authority is subject to federal jurisdiction, it is more likely the local work will fall under federal jurisdiction.

Sawyer v Transcanada exemplifies the regulatory complexities facing modern energy projects and underscores how significantly a single individual may influence the regulatory process. We will blog about any further developments, as the NEB determines Sawyer's application following the guidance provided by the Federal Court of Appeal.