Why Alberta's review of its energy watchdog is vital to get right — and difficult to do

These are strange days at the Alberta Energy Regulator.

Weeks after the provincial government removed its board and launched a review of the agency, three investigations detailed gross mismanagement and a culture of fear inside the industry watchdog.

Then, the same week Finance Minister Travis Toews unveiled a provincial budget that includes reductions to the AER's ranks, the regulator announced its three executive vice-presidents were no longer with the organization.

Change is definitely blowing through the halls of the regulator.

"We're doing a full review of the AER and its mandate, its governance structure and its operational practices," Energy Minister Sonya Savage told reporters ahead of the provincial budget last month.

That's no small endeavour. 

The AER is one of Alberta's most recognized public agencies. It oversees the massive energy sector and is expected to ensure the safe and environmentally responsible development of the industry.

If the province is going to shake up or refocus the organization, it may also want to ask how it can help rebuild confidence in the agency and, fundamentally, what kind of regulator Alberta needs.

These questions aren't easily answered, particularly now.

The oil and gas industry — the biggest cog in the provincial economy — continues to struggle to regain its footing while it is under heightened scrutiny for its environmental legacy and the effects of climate change.

Not that Alberta hasn't dealt with big challenges before.

The province's first regulator was created in 1938 amid fears that if industry was left unchecked, the race to get rich by drilling fastest could damage oil reservoirs and nip the sector in the bud.

Though they were not popular with everyone, rules were established with the public interest in mind.

The regulator has undergone several evolutions since then. The AER was created in 2013 with a mandate to ensure orderly and efficient resource development, but safe and environmentally responsible, too.

The Progressive Conservative government said then it would streamline processes, saving megaproject developers months of waiting for approvals while allowing Alberta to focus more effectively on its environmental priorities.

In time, however, industry complained of slow approval times, while environmentalists brought attention to the growing and costly legacy of aging energy infrastructure like orphaned pipelines and oil wells.

Then three provincial probes into the AER found its senior leadership had shifted much of their focus to an international side project called ICORE.

Its operation led to questions about the priorities and oversight of the AER as well as the treatment of staff, many of whom were worried speaking out would cost them their jobs.

It's the kind of scandal that could invite big change.

The government's vision includes a "leaner" regulator that more "efficiently manages industry investments," according to budget documents. It says total savings to industry are expected to be $147 million over four years.  

The agency is funded through administrative levies charged to industry. It says it has less than 1,160 full-time employees, though its numbers will decrease further over the next few months.  Budget documents show the number positions will drop to 970 this year.

But cutting resources is not where the review's focus should be, says Nikki Way, a senior analyst for the Pembina Institute, a clean-energy think-tank. 

She said the AER had the right intentions when it was created with a mandate that includes environmentally responsible development. What the government should review is where the AER directs its resources, she says.

"We've seen a lot of resources invested in two programs that speed up and accelerate timelines for the approvals of projects, which I think is not a bad thing," Way said. 

"But if those savings don't go back to programs that deal with cumulative effects, with reducing [greenhouse gas] emissions, in dealing with other environmental concerns that are increasingly becoming problematic in Alberta, then the regulator has lost track of what it needs to do."

'A credible regulator is essential'

She is concerned a smaller budget will mean the programs intended to fulfil the agency's environmental mandate will continue to be underfunded or even make the situation worse.

"A credible regulator is essential," Way said. "If Albertans don't have confidence we have a regulator that upholds the regulations we tout as world class, those regulations don't mean much in practice."

Neil McCrank, chairman of one of the regulator's predecessors, the Alberta Energy and Utilities Board, from 1998 to 2007, believes there are fundamental issues the government should examine.

McCrank said the government should decide whether the regulator is going to be truly independent. He said some provinces, like Saskatchewan, deal with regulatory matters inside government. But if Alberta wants the organization to run as an independent agency, it should ensure that it really is.

McCrank also believes it may be time to evaluate the structure atop the organization, from the board to the C-suite. If the AER is going to keep a board of directors, its responsibilities must be clear, he said. The auditor general's report on ICORE found the AER's board did not have all the skills to conduct proper oversight.

Finally, McCrank says there's a discussion to be had about how the AER is funded. For decades, its funding was shared between the government and industry, though the sector gradually ended up paying most of it. These days it's funded solely by industry. 

"I think if the government, on behalf of the people, is paying half of the cost of the regulator and the industry is paying the other half, there seems to be a balance," McCrank said.

Canada's oilpatch has struggled to attract investment in recent years, while the U.S. has slashed taxes and red tape for its sector. Some believe changes at the regulator could make Alberta more competitive.

Groups like the Canadian Association of Petroleum Producers (CAPP), with a membership that produces most of the country's oil and gas, sees a more focused and efficient regulator as something that could help the sector. Greater regulatory certainty, they say, will result in increased capital investment.

In a submission to the government last month, CAPP and other industry associations said timelines for application decisions can be lengthy and highly variable. That is a competitiveness risk for the sector, it says. 

They say the regulator needs to focus on key roles, like making sound and timely development decisions. What it shouldn't do, in their opinion, is stray outside its mandate, like spending money on scientific studies where a direct link to AER jurisdiction isn't clear.

"It's going to take some tough decisions and some strong focus, but at the end of the day, this is going to be critical to re-establishing and asserting Alberta competitiveness," said CAPP vice-president Ben Brunnen.

"It's one of the key levers that the Alberta government has to strengthen the competitiveness of the industry."

Brian Fleck, an AER board member from 2017 until September, said the agency has taken steps to cut red tape and duplication in its approvals processes, including the use of an online tool that reduces paperwork. When the province unveiled the new approach last year, it said it should ultimately save the industry more than $600 million annually.

In his opinion, it's important the AER continue with those efforts.

With the UCP government declaring that it wants Alberta to be one of North America's most attractive places to do business, one might expect a retooling of its energy regulator with that in mind.

But many people in and outside Alberta will also be watching to see the government's actions don't come at the expense of safe and environmentally responsible development. That's still a part of the AER's mandate.

Alberta's regulator has faced challenges before, but this could be among its biggest yet.