Electricity Regulation in Canada: overview
A Q&A guide to electricity regulation in Canada.
The Q&A gives a high level overview of the domestic electricity market, including domestic electricity companies, electricity generation and renewable energy, transmission, distribution, supply and tax issues. It covers the regulatory structure; foreign ownership; import of electricity; authorisation and operating requirements; trading between generators and suppliers; rates and conditions of sale and proposals for reform.
To compare answers across multiple jurisdictions, visit the energy and natural resources Electricity regulation Country Q&A tool.
This Q&A is part of the global guide to energy and natural resources. For a full list of content visit www.practicallaw.com/energy-guide.
The electricity market in Canada varies from province to province (and territory). Under Canada's Constitution, each province controls the electricity generation, intra-provincial electricity transmission, electricity distribution and market structure within its borders. However, the federal government has authority over certain aspects of the nuclear generation sector, over electricity exports, and inter-provincial transmission.
In some provinces (Manitoba is a good example) the traditional market model is vertically integrated. With this system, the large monopoly providers of bundled electricity services dominate the market, which are regulated in relation to aspects of their operations as public utilities, and have the obligation to provide a non-discriminatory service on a cost-of-service basis.
Other provinces have gone to the other extreme: Alberta, for example, has an electricity sector that is based on market competition and has a long-standing hourly wholesale energy market, a competitive retail market, and traditional cost-of-service regulation only in the distribution and transmission sectors (see Question 3, Alberta).
A very significant factor in provincial electricity markets is the degree to which the main players are owned by the respective provincial governments. In British Columbia, Saskatchewan, Manitoba, New Brunswick, Newfoundland and Quebec, the province is the owner of its dominant electricity company (BC Hydro, SaskPower, Manitoba Hydro, NB Power, Newfoundland and Labrador Power and Hydro-Québec (referred to as Crown Corporations) (see Question 3, Crown Corporations)). These provinces all, to varying degrees, use their ownership interests in their Crown Corporations to advance provincial energy objectives. Perhaps unsurprisingly, the electricity markets in these provinces have small competitive sectors at both retail and wholesale levels.
Despite the significance of provincial markets and circumstances, the electricity market in Canada as a whole can be understood as a market largely dominated by the hydroelectric sector. The majority of the electricity generated in Canada comes from hydroelectric resources, and Canada contributes about 10% of all hydroelectric electricity generated in the world (see also Question 6). The word "hydro" is commonly used to refer to electricity throughout the country.
A shift to renewable, low-impact electricity generation and demand-side management (DSM) (that is, encouraging the consumer to use less energy or to move the time of energy use to off-peak times) has been a dominant trend during the past few years, varying from province to province depending on market structure and political inclination. Even in provinces where vertically-integrated hydroelectric utilities dominate (see above, Overview), there have been significant efforts in this regard. For example, in British Columbia, the Crown Corporation BC Hydro has been investing in hundreds of millions of dollars in DSM while meeting its incremental generation needs by purchasing energy from clean, low-impact independent power producers (IPPs) under long term electricity purchase agreements.
Two centrepieces of the new (October 2015) federal Liberal government's policy platform are likely to accelerate this trend. Numerous climate action initiatives (GHG reductions) and significant proposed infrastructure investments are key elements of the federal government's plans, which seem likely to leverage off each other and increase investments in renewable energy resources.
In Canada, the regulatory framework varies depending on the particular province (and territory). Provincial regulators have jurisdiction over their province's energy generation, intra-provincial transmission, distribution, retail pricing and wholesale markets (to the extent that they exist in the particular province). Unbundling and separation of function similarly varies from province to province, with Alberta and Ontario having quite strict requirements (in relation to the generation and transmission separation, for example) while the provinces in which the Crown Corporations dominate (see Question 1, Overview), the electricity sector has few (and tend to be vertically integrated).
The heavy use of provincial ownership of Canadian electricity assets has had a limiting effect on the role of the federal government. In particular, federal regulation of inter-provincial electricity transmission and electricity exports is fairly light.
Provincial electricity regulators generally regulate on a public utility basis in relation to the non-competitive aspects of their markets, requiring "certificates of public convenience and necessity" or similar approvals for facility expansions and controlling the terms and conditions of service between the regulated utility and their customers through tariff filings and rate cases. In provinces with competitive market sectors, competition watchdogs may also exist (such as Alberta's Market Surveillance Administrator).
The environmental regulators (at both federal and provincial level) tend to be complementary to the more sector-specific energy regulators, which can be thought of as largely economic regulators. In both types of forums, environmental and economic, and at both the federal and provincial level, regulators have had to become adept in recent years in assessing whether the constitutionally-protected rights of Canada's First Nations (indigenous population) have been respected throughout the particular decision-making process. In particular, most energy (and environmental) regulators in Canada now regularly assess:
Whether the honour of the Crown in relation to the First Nations has been maintained. The "First Nations" refers in this context to Canada's indigenous peoples, whose aboriginal and treaty rights are protected under Canada's Constitution.
Whether First Nations have been adequately consulted with during the applicable decision-making process.
Some of the more significant electricity regulators in Canada are as follows.
National Energy Board (NEB). This federal agency has jurisdiction over electricity exports and inter-provincial electricity transmission. (The NEB's electricity regulation activities are dwarfed by its much more significant role as the primary federal regulator in the oil and gas sector).
Canadian Nuclear Safety Commission. This federal agency regulates safety at nuclear power plants and research facilities and the use of nuclear materials such as radionuclides.
Ontario Energy Board. This provincial regulator of the energy sector in Canada's largest province regulates all electricity market participants, including Hydro One (grid operator), Ontario Power Generation, and the Independent Electricity System Operator, as well as a myriad generators, transmitters, distributors, wholesalers, and retailers. It also actively regulates retail natural gas distribution and sales. The size, scope of operations and expertise of the Ontario Energy Board have made it a leading energy regulator in Canada.
Alberta Utilities Commission. The electricity sector in Alberta is much smaller than in Ontario, but what it lacks in size it makes up for in complexity. Built on a foundation of the first de-regulated wholesale generation market in the country, a unique (in Canada) market structure and a robust regulatory-litigation culture, the Alberta Utilities Commission has become a leading energy regulator in Canada. Like the Ontario Energy Board, the Alberta Utilities Commission regulates retail natural gas distribution and sales in addition to electricity sector activities.
See box, The regulatory authorities.
The dominant electricity companies in Canada are the Crown Corporations (BC Hydro, SaskPower, Manitoba Hydro and Hydro-Québec). These companies are the bundled utility service providers in the provinces of British Columbia, Saskatchewan, Manitoba and Quebec. Each of these companies is vertically integrated, and owns and operates the bulk of the generation, transmission and distribution assets in their respective province.
Newfoundland and Labrador Power is also a Crown Corporation notable for its massive hydroelectric investments on the Churchill River.
Ontario Power Generation is a Crown Corporation which owns about 50% of the generating capacity in Ontario (including nuclear, hydroelectric, wind, gas and biomass facilities). The other major player in the Ontario electricity market is Hydro One, the owner/operator of the provincial transmission grid and an owner/operator of the largest distribution network in Ontario. In the first of what is planned to be a series of steps toward privatisation, in 2015 Hydro One made an initial public offering of what amounts to about a 14% stake in the company, raising about Can$1.8 billion.
In Alberta, the generation sector is competitive and is comprised of dozens of different generation owners including ENMAX, Capital Power, TransAlta, TransCanada and ATCO. Notable in the Canadian context, Alberta's generation sector is dominated by coal-fired facilities, which currently generate more than 50% of the province's electricity. The decommissioning of Alberta's coal-fired generation in response to climate change concerns recently began to accelerate through a combination of federal and provincial initiatives.
The bulk of transmission assets in Alberta are owned by a handful of players (such as ATCO, Altalink, and ENMAX) but are operated collectively by the non-profit Alberta Electric System Operator, which is also responsible for transmission system planning and expansion.
There are no specific restrictions on foreign ownership of electricity companies in Canada.
However, foreign investments exceeding certain monetary thresholds are subject to federal review on the basis of a "net benefit" to Canada (Investment Canada Act). These thresholds change from time to time and will depend on the trade status of the investor's country (for example, whether the investor is a member of the World Trade Organization).
Foreign investors who are not in excess of the above thresholds are treated the same in law as domestic (Canadian) investors. For a number of provincial energy regulatory regimes, the approval of the provincial regulator must be obtained before the controlling interest of energy utilities can be transferred, and in such cases the nationality of the new would-be owner has on occasion become a regulatory issue.
Despite the recent initial public offering regarding Hydro One by the Ontario government, it is unlikely that any of the other Crown-owned electric companies in Canada will be privatised in the foreseeable future.
Import of electricity
Canada has long been an exporter of electricity to US markets. Since around 2010:
Gross exports ranged between about 44 and 63 TWh.
Net exports ranged between 25 and 52 TWh.
Electricity exports are effected through either:
Short-term spot market trading (for example, British Columbia).
Long-term export contracts (for example, Quebec).
The difference between gross and net exports (annual imports) reflects local market conditions and the ready ability of the large hydro-based systems of the Crown utilities to economically import electricity during low-load hours and to export during high-load hours.
Persons exporting electricity generated in Canada (to the US) require an export authorisation issued by the National Energy Board, and may also require approval at provincial level. Electricity imports from the US are not subject to any specific restriction by Canadian regulators, but may require US export authorisations.
Electricity generation and renewable energy
Sources of electricity generation
About two thirds of Canada's electricity supply is already renewable, with the bulk being hydroelectric (including large hydroelectric).
The federal and (more recently) provincial regulators are accelerating the decommissioning of fossil fuel plants in the provinces where they dominate the local or regional markets (such as Alberta), thereby creating opportunities for renewables.
On a country-wide basis, wind and solar power acquisition processes in many provinces (particularly Ontario, under the Green Energy Act) are slowly but steadily increasing the proportion of renewable energy in the country's supply mix.
The majority of the electricity generated in Canada comes from hydroelectric resources, and Canada contributes about 10% of all hydroelectric electricity generated in the world. The dominance of hydroelectricity in Canada therefore limits the country-wide opportunities for (the development of other renewable energy sources). In provinces such as Alberta and Ontario, where hydroelectricity isn't dominant, there are various specific obstacles, but these generally relate to cost-competitiveness in mature markets, with many opportunities for smaller players but fewer opportunities for bigger ones.
Almost all of Canada's nuclear power generating capacity is in Ontario. No new nuclear facilities are currently being advanced in Canada, although the Ontario government recently announced a Can$12.8 billion, ten-year refurbishment of the Darlington plant to begin in late 2016. In some provinces (such as British Columbia), nuclear power has been explicitly ruled out as an option to meet future load growth.
Authorisation and operating requirements
In the vertically-integrated and traditionally regulated provinces, economic (and environmental) regulatory bodies require evidence of both demonstrable need and minimal environmental and social impact. However, in the deregulated markets, the required authorisations are largely about local permitting, including land-use and municipal permits, timber-cutting and stream-crossing permits (if applicable) and more generic environmental authorisations.
In all cases, government decision-makers must be aware of their First Nations consultation obligations and of their obligation to maintain the honour of the Crown in project decision-making.
Generally, there are no obligations in Canada to either:
Ensure new power stations are ready for CCS technology.
Retrofit existing plants with CCS technology.
However, provincial-level initiatives are expected to soon be underway in provinces such as Alberta, with its large coal-fired generation fleet.
Authorisation and permitting for the operation of electricity generation plants in Canada generally follows the specific provincial regimes regarding the construction of such plants.
Municipal and provincial land-use permits, water use and emissions permits, and more generic environmental approvals are all commonly required.
Authorisation and permitting for the connection of electricity generation plants to the transmission grid in Canada generally follow the specific provincial regimes regarding the construction of such plants (see Question 10). In addition, provincial market structures make it more or less difficult for generators to connect to the grid, depending on the degree to which the generation market is de-regulated (Ontario, Alberta) or not.
Authorisation and operating requirements
As with new generation facilities, new transmission facilities require approvals from provincial regulators. These approvals vary from province-by-province but generally require demonstration of economic need, minimal (or mitigatable) environmental impact and adequate First Nations consultation. Alberta is exceptional in that it encourages the development of merchant transmission lines such as the Montana-Alberta Transmission Line. In addition, intra-provincial and international (to/from the US) power lines require approvals from the National Energy Board.
The required authorisations for the operation of transmission facilities again generally follow the provincial regimes regarding construction of transmission lines or systems. Municipal and land-use permits, crossing permits (streams, highways) and more generic environmental permits are generally required across the different provinces.
Charges for electricity transmission vary depending on the province. Open access transmission tariffs that follow a common model developed by the US federal Energy Regulatory Commission over 20 years ago are employed in some provinces such as British Columbia, Manitoba and Quebec. Alberta, with its unique markets structure, has a transmission pricing regime that allocates transmission costs directly to load customers (with the exception of certain costs such as those associated with line losses borne by generator).
Authorisation and operating requirements
The construction of electricity distribution systems is completely dominated by provincial (and to a large extent, sub-provincial) entities that preclude generalisations in a Canada-wide context. However, municipal and land-use permits, crossing permits, and more generic environmental permits are typical across the provinces. In addition, certificates of public convenience and necessity are typically required by public utility regulators such as the BC Utilities Commission.
The operation of electricity distribution systems is completely dominated by provincial (and to a large degree, sub-provincial) entities that preclude generalisations in a Canada-wide context. For typical examples, see Question 17.
Distribution charges and conditions associated with electricity distribution are completely dominated by provincial (and to a large degree, sub-provincial) entities that preclude generalisations in a Canada-wide context. However, in virtually all cases distribution charges are assessed on a cost-of-service basis, even in provinces with de-regulated market structures.
Authorisation and operating requirements
In most provinces of Canada, the supply of electricity is indistinct from the generation, transmission and distribution functions of the various entities, with the exception of de-regulated provinces where bare suppliers require approvals from regulators such as the Alberta Utilities Commission.
Trading between generators and suppliers
Electricity trading markets are regulated at the provincial level. Deregulated provinces such as Alberta and Ontario enjoy robust wholesale markets, while vertically-integrated provinces such as British Columbia have a significant independent power producer (IPP) sector which relies on long-term electricity purchase agreements with incumbent utilities.
Electricity price and conditions of sale
At consumer level, electricity prices are regulated by provincial regulators, generally on a cost-of-service basis. Only a few provinces such as Alberta and Ontario offer end-use customers the choice of longer-term fixed price arrangements with non-utility suppliers.
Wholesale electricity pricing follows the market structure of the different provinces and in particular the manner in which electricity is traded (see Question 21).
Purchase price allocation is often a challenging exercise in an asset sale. The sale of assets in the electricity sector is no exception.
One area of particular concern is whether goodwill can arise in a regulated industry. If so, a seller may receive effective capital gains treatment for the goodwill. In the recent Transalta decision, the Federal Court of Appeal agreed with Transalta that goodwill can arise in a regulated industry context. Subsequently, the federal government amended the provision of the Income Tax Act relating to goodwill, although not specifically to eliminate the ability to allocate a portion of the purchase price to goodwill. Determining the allocation of the purchase price to goodwill remains a challenging exercise.
The depreciation system for tax purposes has several classes of assets with rapid deprecation rates. These classes include various renewable energy assets. Qualifying for these classes can significantly improve the financial model of a project. Generally, these classes include:
Wind energy conversion systems.
Systems that generate electricity from solar energy.
For many years the natural resource sector has benefitted from the ability to use the flow-through share structure. Under this structure, expenses incurred by a corporation are renounced to its shareholders and deducted by the shareholder. The flow-through share structure has been expanded to corporations, incurring Canadian Renewable and Conservation Expenses. Typically, costs incurred before commercial operation dates are eligible. Examples include expenses incurred to determine the extent, location and quality of a renewable energy resource. Flow-through shares have been used to help finance the development of run-of-the-river hydro-electricity facilities. In addition to rapid depreciation for wind and solar, rapid deprecation is also available for this class of expenses.
Proposals for reform of regulation in the electricity sector are largely driven by the increased focus on renewable energy, with a number of provinces exempting various renewable energy resources from economic decision-making processes (for example, Ontario has a Feed-in-Tariff that largely avoids any independent regulatory scrutiny, while BC Hydro's Standing Offer Program is similarly unregulated).
The regulatory authorities
National Energy Board (NEB)
Address. 517 Tenth Avenue SW, Calgary, Alberta T2R 0A8
T +1 403 292 4800
F +1 403 292 5503
Main responsibilities. The NEB regulates:
The construction, operation, and abandonment of pipelines that cross international borders or provincial boundaries, as well as the related pipeline tolls and tariffs.
The construction and operation of international power lines and designated inter-provincial power lines.
Imports of natural gas and exports of crude oil, natural gas liquids, natural gas, refined petroleum products, and electricity.
Oil and gas exploration and production activities in specified areas that are not regulated under joint federal/provincial accords.
Most of the NEB's responsibilities are set out in the National Energy Board Act, Canada Oil and Gas Operations Act and the Canada Petroleum Resources Act. The NEB also performs an environmental assessment when it reviews applications for facilities and activities. For certain projects, an environmental assessment is also required by other federal laws such as the Canadian Environmental Assessment Act 2012, the Mackenzie Valley Resource Management Act, the Inuvialuit Final Agreement or the Nunavut Land Claims Agreement.
Some NEB inspectors are also health and safety officers for the occupational health and safety of pipeline company field staff. These health and safety duties are usually combined with other inspections.
The NEB also monitors aspects of energy supply, demand, production, development, and trade which the federal government controls. The NEB reports to Parliament through the Minister of Natural Resources.
Canadian Nuclear Safety Commission (CNSC)
Main responsibilities. The CNSC regulates the use of nuclear energy and materials to:
Protect health, safety, security and the environment.
Implement Canada's international commitments on the peaceful use of nuclear energy.
Disseminate objective scientific, technical and regulatory information to the public.
The CNSC's Commission has up to seven appointed permanent members whose decisions are supported by more than 800 employees. These employees review applications for licences according to regulatory requirements, make recommendations to the Commission, and enforce compliance with the Nuclear Safety and Control Act, regulations, and any licence conditions imposed by the Commission.
Ontario Energy Board (OEB)
Main responsibilities. The Ontario Energy Board Act 1998 sets out guiding objectives for the OEB to:
Protect the interests of consumers with respect to prices and the adequacy, reliability and quality of electricity service.
Promote economic efficiency and cost effectiveness in the generation, transmission, distribution, sale and demand management of electricity and to facilitate the maintenance of a financially viable electricity industry.
Promote electricity conservation and demand management in a manner consistent with the policies of the Government of Ontario, including having regard to the consumer's economic circumstances.
Facilitate the implementation of a smart grid in Ontario.
Promote the use and generation of electricity from renewable energy sources in a manner consistent with the policies of the Government of Ontario, including the timely expansion or reinforcement of transmission systems and distribution systems to accommodate the connection of renewable energy generation facilities.
In the electricity sector, the OEB sets transmission and distribution rates, and approves the Independent Electricity System Operator's (IESO) budget and fees. The OEB also sets the rate for the Standard Supply Service for distribution utilities that supply electricity (commodity) directly to consumers.
The OEB licenses all market participants including the IESO, generators, transmitters, distributors, wholesalers and retailers. Board approval is required for the construction of electricity transmission lines longer than two kilometres. In addition, the OEB is responsible for approving specific business arrangements involving the regulated parts of Ontario's electricity industry.
The OEB also monitors markets in the electricity sector and reports to the Minister of Energy on the efficiency, fairness and transparency and competitiveness of the markets as well as reporting on any abuse or potential abuse of market power. The Board may also be asked to review the IESO market rules and consider appeals of IESO orders.
The OEB does not regulate competitive services. Competitive services for electricity are all business activities other than distribution, transmission and providing Standard Supply Service.
Alberta Utilities Commission (AUC)
Main responsibilities. The AUC is an independent, quasi-judicial agency of the province of Alberta. It is responsible for ensuring that the delivery of Alberta's utility service takes place in a manner that is fair, responsible and in the public interest.
The AUC regulates investor-owned natural gas, electric and water utilities and certain municipally owned electric utilities to ensure that customers receive safe and reliable service at just and reasonable rates. In addition, the AUC ensures that electric facilities are built, operated and decommissioned in an efficient and environmentally responsible way. The AUC also provides regulatory oversight of issues related to the development and operation of the wholesale electricity market in Alberta as well as the retail gas and electricity markets in the province.
The AUC's regulatory functions are carried out through both written and oral proceedings and representative groups are encouraged to participate in the process. Participation helps to ensure that the AUC is informed of the issues and that decisions are made in the public interest.
Canadian Environmental Assessment Agency (CEAA)
Main responsibilities. The CEAA is a federal body accountable to the Minister of Environment and Climate Change. It provides environmental assessments (EAs) that contribute to informed decision making, in support of sustainable development. The CEAA is the responsible authority for most federal EAs. The Canadian Nuclear Safety Commission (CNSC) and the National Energy Board (NEB) are the authorities responsible for federal EAs of projects they regulate.
The CEAA, through its delivery of EAs, serves Canadians by helping to eliminate or reduce a project's potential environmental effects. The CEAA:
Manages the environmental assessment process for projects that may require an EA and do not fall under the mandate of the CNSC or the NEB.
Provides opportunities and funding to support public participation in EAs.
Serves as the co-ordinator for consultation with Aboriginal groups during the EA for projects it manages.
Works to ensure that mitigation measures are applied and are working as intended.
Promotes uniformity and co-ordination of EA practices across Canada through research, guidance and ongoing discussion with stakeholders and partners.
Works with a range of international jurisdictions and organisations to exchange best practices in EA.
Justice Laws website
Description. Government-maintained website has all Canadian federal statutes and regulations, kept current, official versions in both English and French.
Natural Resources Canada
Description. Website of federal government department Natural Resources Canada, including energy and electricity, kept current, in both English and French.
Canadian Electricity Association
Description. Website of the Canadian Electricity Association, an industry advocacy group, kept current, in both English and French.
Jeff Christian, Partner
Lawson Lundell LLP
Professional qualifications. British Columbia, Northwest Territories and Alberta, Canada, Barrister and Solicitor
Areas of practice. Electricity and oil/gas regulation, including project approvals, revenue requirements, tolls and pricing, and market structure; public utilities and common carrier litigation.
Non-professional qualifications. Bachelor of Applied Science (Hons), Geotechnical Engineering, University of British Columbia, Canada; Recognised by Chambers, Best Lawyers, Lexpert, Martindale-Hubbell and Benchmark.
Counsel to BC Hydro in regard to rate design, project approval and revenue requirement proceedings (2003 – present).
Counsel to participants in Alberta's deregulated wholesale electricity markets.
Counsel to customers' and ratepayers' associations in Northwest Territories.
Counsel on cross-border energy litigation.
Professional associations/memberships. Law Societies of British Columbia, Northwest Territories and Alberta.
Case Comment: BCUC Decisions regarding Natural Gas Vehicles, Energy Regulatory Quarterly, Volume 1, Fall Edition (10 January 2014) (www.lawsonlundell.com/resources-news-662.html)
Energy Law Bulletin: Administrative Penalty Powers Given to BC Utilities Commission (16 November 2012) (www.lawsonlundell.com/resources-news-553.html)
Energy (Electricity) Recent Developments of Importance (4 January 2011), Co-Author (www.lawsonlundell.com/resources-news-125.html)
Lana Shipley, Partner
Lawson Lundell LLP
Professional qualifications. British Columbia, Canada, Barrister and Solicitor
Areas of practice. Corporate/commercial; energy and aboriginal law.
Non-professional qualifications. Bachelor of Applied Science, Bio-Resource Engineering, University of British Columbia; recognised by Chambers
Counsel to hydroelectric utility in relation to impact benefit agreement negotiations with First Nations and general commercial matters, including matters relating to the negotiation of power purchase and other related agreements, tariff arrangements with industrial load customers and advice on corporate governance matters and best practices.
Counsel to a western North American energy marketer with general commercial matters, including negotiating and drafting commercial energy contracts with Canadian and US counterparties and agreements to purchase and sell "green attributes", renewable energy credits and GHG credits from renewable generation.
Counsel to a public utility developing a 40 to 50 MW hydroelectric project in partnership with a First Nation.
Professional associations/memberships. Law Society of British Columbia; Canadian Bar Association.