Federal Clean Electricity Standard – where is Canadian federalism headed?

October 17, 2022
Denise Mullen

This blog post was co-authored by Denise Mullen and David Bursey, Partner, Bennet Jones LLP.

Electricity is often touted as having the most promise for reducing greenhouse gases (GHGs) within the current, mainly fossil fuel-based global energy system. Since electricity represents less than one-fifth of total global energy demand, this is probably a dubious claim. Since all countries that have made significant progress in reducing GHGs have done so by moving from coal to natural gas and renewables in the electric sector, it is obvious why this idea has such widespread appeal.

Canada’s general policy direction on electrification is consistent with beliefs elsewhere. But the electricity sector in Canada is substantively different in terms of the fuel profile — 80% of Canada’s generation is from non-GHG emitting fuel sources, a position held by only a handful of other countries in the world. In B.C. this percentage is >95%. “De-carbonizing” the remaining 20% of the electric sector in Canada will be more difficult and more expensive than is the case in other countries that are starting with heavier reliance on fossil fuel-generated electricity.

Another important issue — and the focus of this commentary — is the delicate balance of powers and responsibilities between provinces and the federal government for the management of electricity in Canada. The proposed federal Clean Electricity Standard
(CES) has important implications for cooperative federalism, as well as for energy affordability and reliability for consumers.

First, some brief context to frame the comments. The Business Council has identified and analyzed several of the relevant issues in a variety of written materials, including regulatory submissions on the proposed federal CES.[1]

  • Electricity represents about 17% of Canada’s final energy demand. For B.C. the number is 16%.
  • Whether in Canada or elsewhere, the evolution of electric systems faces many difficult challenges and limitations, including market forces, available fuel choices, the influence of regulatory oversight and policy, infrastructure development requirements (timelines, investment, spatial impacts), systems operations, management, reliability, security, and affordability.
  • Electricity rates across Canada are some of the lowest in the world and a (rare) source of global competitive advantage for Canadian industry.
  • For consumers in Canada, current low electricity rates are less of a contributing factor to inflation,[2]
    unlike the situation in the European Union. There is a risk this could change with the CES.
  • Electricity is a secondary energy form. The ability to transition to electricity is often constrained in many sectors of modern economies. Not everything can be electrified, certainly not quickly.
  • The primary fuel source used for electricity generation in any jurisdiction gives rise to a host of economic, health, social and environmental issues, including reliability, cost (rate payer impacts), and spatial impacts (community acceptance).
  • Regulatory approvals in Canada (and British Columbia) for all kinds of natural resources, infrastructure and large-scale industrial projects are increasingly complex, adding to the already long lead times for electricity infrastructure development. This fact is likely to frustrate the fundamental transformation of the electric sector that federal policymakers want to see by 2035.
  • Electric infrastructure development also involves complex systems planning and coordination challenges, both within the boundaries of regional systems and between regions to the extent interconnections exist. North American electric systems are regional — not national or local. There is no Canadian or continental electric system, per se.
  • Developers of electricity generation facilities cannot simply plug in a project here and there or build a transmission facility just anywhere.
  • Utility integrated resource planning, revenue requirements, and rate making proceedings in the electric sector are also complex and lengthy. These lie wholly within the domain of provincial governments, not Ottawa.
  • More generally, in Canada, intra-provincial electricity generation and infrastructure is an area of exclusive provincial jurisdiction. In accordance with this well-recognized division of powers, the federal government’s role is limited to international power lines and import/export matters.
  • All electricity consumers bear the cost of poorly thought-out policy and regulatory interventions, no matter how noble the intentions of policymakers may appear on the surface.

The last two points deserve closer review.

Under the banner of addressing climate change, the potential for federal-provincial conflict is a central concern arising from Ottawa’s efforts to regulate electricity generation (and the oil and gas sector for that matter)[3]. With the proposed CES, the federal government is reaching deeply into areas of provincial jurisdiction, using the shared responsibility for the environment to shoehorn federal regulation into what has long been and remains a provincial domain. Yet, any proposal by Canada to expand its role in the electric sector must have a clear and direct connection to a federal constitutional head of power.[4]
This foundational principle seems to have been ignored in the development of the CES. Moreover, the use of the Canadian Environmental Protection Act (CEPA) — with the potential of criminal charges for non-compliance — is unhelpful to advance the goal of reducing GHGs in the electric sector and more generally in the economy. Despite being cloaked as a climate change initiative, the CES constrains provincial authority and responsibilities to decide the type of electricity infrastructure that best suits the needs of individual provinces. This approach also may substantially raise the cost of electricity for consumers over time.

Every provincial government should care about the shift in cooperative federalism reflected in the CES.

"Federalism is a foundational principle of the Canadian Constitution. Its objectives are to reconcile diversity with unity, promote democratic participation by reserving meaningful powers to the local and regional level and foster cooperation between Parliament and the provincial legislatures for the common good. … Federalism recognizes that within their spheres of jurisdiction, provinces have autonomy to develop their societies. Federal power cannot be used in a manner that effectively eviscerates provincial power."[para. 2]

Under the national concern doctrine, "… Canada must show that the proposed matter has a scale of impact on provincial jurisdiction that is reconcilable with the fundamental distribution of legislative power under the Constitution. The purpose of the scale of impact analysis is to protect against unjustified intrusions on provincial autonomy and prevent federal overreach." [para. 17]

Source: Supreme Court of Canada, References re Greenhouse Gas Pollution Pricing Act, 2021 SCC 11

It is dangerous and unhelpful for the federal government to use the environment, a shared role, to intrude into the provinces’ jurisdiction. This effort will conflict with and frustrate existing robust provincial regulatory oversight of electric utilities (mostly Crown-owned). At a minimum, it will duplicate provincial regulation and add to the regulatory burden by creating a CES compliance gatekeeper role for the Canadian Energy Regulator. This increase in regulatory burden will inevitably add substantial costs to domestic electricity consumers across the country, without any direct political accountability. Under the CES, the federal regulator has no role in the supervision of utilities or in ratemaking in the electric sector, which disconnects the CES from the implications of the proposed standard at the operational or consumer end.

The Business Council supports, as part of smart policy for reducing GHGs, the pursuit of opportunities to fuel switch both in the electric sector and within industrial processes, where switching makes technical and economic sense. But this outcome cannot be achieved by federal regulatory fiat. More generally, we are concerned about an ever-increasing regulatory burden that not only tramples on provincial jurisdiction but also uses a punitive regulatory model — instead of incentives like those in the United States — to achieve change.

Further, the current hefty list of at least 15 major federal GHG-related policy and regulatory actions adopted since 2015 has yet to mature and produce results. The unilateral approach taken by Canada in the electric sector will cause regulatory conflict and confusion and further discourage investment in the sector and more generally. Electricity is one of the last industrial inputs that remains reasonably priced in Canada and is one of the only sectors where this country still enjoys comparative and competitive advantages in the North American context.

Canadians want and should have access to affordable and reliable energy, now and in the future. This foundation is critical for prosperity and for maintaining our standard of living. Given the local and regional nature of electricity, the provinces, not the federal government, are best positioned to assess the economic consequences of electricity policy and investment choices, to make decisions about how to manage the evolution of electricity systems, and to look after the interests of all ratepayers.

The proposed federal clean electricity standard is unnecessary and, in our view, represents an unconstitutional over-reach of federal jurisdiction. Canada can help by working cooperatively with provinces to support investments in new generation and transmission in the electric sector in the coming decades. Adding its technical and financial resources and working collaboratively with the provinces for the common good — rather than undermining provincial authority — would be a more productive path forward for the national government.

[1] https://bcbc.com/dist/assets/submissions-and-presentations/submission-proposed-frame-for-the-clean-electricity-regulations/2022_08_08_BCBC_Clean-Electricity-Regulations.pdf, https://bcbc.com/dist/assets/submissions-and-presentations/submission-clean-electricity-standard-ces-discussion-paper/2022_04_13_BCBC-Submission-on-CES-Paper.pdf, https://bcbc.com/dist/assets/publications/trading-in-organized-lightning-electricity-the-b-c-hydroelectric-system-advantage/EEBv13n1.pdf, https://bcbc.com/dist/assets/publications/hail-electricity/EEBv11n3.pdf, https://bcbc.com/insights-and-opinions/energy-transitions-and-the-things-we-never-talk-about, https://bcbc.com/insights-and-opinions/do-canadians-dream-of-electrification.

[2] https://www.hydroquebec.com/data/documents-donnees/pdf/comparison-electricity-prices.pdf.

[3] https://bcbc.com/dist/assets/submissions-and-presentations/submission-proposed-oil-and-gas-cap-discussion-paper/20220929_BCBC_OGCapDiscussionPaper.pdf.

[4] https://www.canada.ca/en/environment-climate-change/corporate/transparency/briefing-materials/corporate-book/jurisdiction-duties-authorities.html.

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