When the gentlemen writing the British North America Act divided up powers between federal and provincial governments in Canada, no one expected them to anticipate its impacts on the electricity system. For that matter, there were no electric utilities in 1867. With a federal election just completed and energy issues rising in importance, this is a good time to assess what the options are for closer co-ordination between federal and provincial energy policy.
Make no mistake about it: Canadians pay dearly for the separation of federal and provincial powers in the energy sector. As a starting premise there is little doubt that in a country as diverse and geographically extensive as Canada, highly centralized administration would often be insufficiently sensitive to regional differences. Some kind of separation of powers between federal and provincial levels is therefore essential. However, the almost complete separation of functions leads to a range of counter-intuitive and sometimes costly results. For example:
1. Each province/territory, as well as the federal government, has its own energy legislation, its own energy ministry and its own energy regulator. Many of these are quite similar one to the next, and it’s fair to ask if the commonalities might be significant enough in some cases to justify shared services at a minimum, if not outright amalgamation. This is sensitive territory of course, and care would need to be taken to ensure that each province retains meaningful control over energy policy, during each of the inevitable iterations.
2. Split incentives and revenue leakage thwart countless viable infrastructure investments. Split incentives occur when the financial rewards from an investment in infrastructure (say additional heat recovery at a power plant) tend to be split amongst the customer, the building owner, the utility, and the broader community. One entity has to raise most of the money, but many other entities share in the benefits. All too often no one entity enjoys enough of the benefit to finance the project. Revenue leakage occurs when a new infrastructure investment changes the tax classification of a project and causes revenue to flow to an agency that had no role in stimulating the investment. In other countries with a more holistic approach to assessing costs and benefits, if an investment produces long term energy savings, the benefits can be effectively amalgamated and quantified whether they go to the federal, provincial or local level. In Canada many viable projects never get financed because benefits are viewed myopically by each level of government without considering the gains being delivered to other levels of government. Both problems can be solved through administrative agreements between the levels of government. More examples are discussed below.
3. The need to resolve uncertainty over national infrastructure planning: If pipelines or transmission lines are built east-west, it’s good for economic development and nation-building. Impacts on provincial and local planning are significant. However, the impacts are likely to be net positive only if there is consistency in what the federal government’s game-plan is, and what the provincial role(s) will be. Likewise, the federal plans, including those facilitating export and import of power, are more effective when they are linked with provincial initiatives in generation and transmission.
4. Environment and climate change policy: While identical policy cannot be expected at the different levels of government and in the different regions, establishing systems for consistent recognition of efforts that achieve shared goals is feasible. How dysfunctional is it to see the provincial government implementing ambitious and costly measures to install green power capacity while the federal government institutes its own climate change measures that allow little or no credit for provincial investments that serve the same ends?
5. With the federal government negotiating trade liberalization deals around the world, there’s no doubt that provincial agencies and companies that operate largely under provincial regulations and programs will be affected. Co-ordination between federal negotiators and experts in provincial level energy priorities will help to ensure the trade deals are as beneficial as possible.
6. Much of the impetus for privatization of LDCs has been artificially deflated by the revenue leakage problem. Under current rules, each privatization would mean a permanent transfer of tax revenue from provincial to federal levels. While one can argue which government is the most appropriate tax collector, it’s inappropriate that tax rules designed for a completely different purpose should have the effect of consistently obstructing purchases or restructurings that make sense in other respects.
7. Similarly, if micro-grids become more widespread as seems likely, they will presumably be profit-making tax-paying entities, transferring revenue to the federal government. In contrast, the existing local distribution companies which provide much of the same services, under municipal control, do not send their tax revenue to Ottawa.
8. Tax policy, R&D funding, and remote community policies are largely under federal control. While some co-ordination is likely at work already, it’s a safe bet to suggest that more co-ordination could produce greater benefits.
A big part of the BNA deal was to give provinces broad powers over the management of natural resources, while leaving the federal government in charge of a lot of trade and taxation matters. When the Act was amended in 1982, section 92A was added, which gave the Provinces greater control over non-renewable natural resources. This kind of principle can be retained even as other types of changes are made.
Although it may be unrealistic to expect that provincial and federal governments will always have exactly the same priorities and strategies for energy sector development, it’s certainly possible to imagine a system in which unnecessary examples of working at cross purposes can be anticipated and minimized.
A case in point is the Ontario government’s current proposal to extend the electric grid to remote communities in Northern Ontario. Wataynikaneyap Power, a partnership of 20 First Nation communities and RES-Fortis, recently assembled an unprecedented public/private partnership to connect remote First Nation communities, a project in excess of one billion dollars, with major economic benefits. Minister Chiarelli noted that analysis by the Independent Electricity System Operator (IESO) estimates that “up to $1 billion in savings would be generated as a result of transmission grid connection – by eliminating reliance on diesel generation for these 21 remote First Nation communities.” Here’s the rub: a large portion of those savings would occur in the form of reduced costs of diesel fuel. That fuel cost is currently a responsibility of the federal government. Unfortunately, the federal government has steadfastly maintained that it is unwilling to commit any of the resultant savings to help fund the cost of the grid connection project. This failure of co-ordination between federal and provincial governments is not just economically costly: It also unnecessarily prolongs substandard living conditions in a string of First Nation communities that could easily be made more consistent with Canadian living standards. The change of government in 2015 may open the door to resolving this problem.
Although the provincial governments regulate and in many cases actually own the electricity systems in their own jurisdictions, in essence, the federal government controls tax policy, R&D policy, trade policy and significant aspects of environmental policy. Effective electricity policy can only be produced by bringing all of these threads together in a co-ordinated structure of some sort.
In this period with a new federal government and a provincial government eager to pursue a comprehensive and ambitious energy strategy, there is promise in joint efforts to better co-ordinate energy policy between the various levels of government. Such collaboration may not be that far off what the Fathers of Confederation originally envisioned.
— Jake Brooks, Editor