Regulations Amending the Crown Corporation General Regulations, 1995: SOR/2024-78

Canada Gazette, Part II, Volume 158, Number 11

Registration
SOR/2024-78 May 3, 2024

FINANCIAL ADMINISTRATION ACT

P.C. 2024-480 May 3, 2024

Her Excellency the Governor General in Council, on the recommendation of the Minister of Finance, makes the annexed Regulations Amending the Crown Corporation General Regulations, 1995 under subsection 92(2) of the Financial Administration Act footnote a.

Regulations Amending the Crown Corporation General Regulations, 1995

Amendment

1 Section 2.1 of the Crown Corporation General Regulations, 1995 footnote 1 is replaced by the following:

2.1 The following Crown corporations and their wholly-owned subsidiaries are exempt from the application of section 91 of the Act:

Coming into Force

2 These Regulations come into force on the day on which they are registered.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)

Issues

With the construction of the Trans Mountain Expansion Project (TMEP) targeted for completion in the second quarter of 2024, the Government of Canada is working with the Canada Development Investment Corporation (CDEV) and Trans Mountain Corporation (TMC) to operationalize and eventually divest the pipeline system at an appropriate time.

Accordingly, new subsidiaries may need to be incorporated — for example to market spot pipeline capacity, to broaden TMC’s insurance coverage, and to facilitate eventual Indigenous ownership in the pipeline system.

As a participant in the highly competitive energy sector, TMC must conduct business at the speed necessary to compete in the sector.

With respect to the proposed subsidiary related to Indigenous economic participation (IEP), the Government of Canada previously advised eligible Indigenous groups that a special purpose vehicle would be created to collect and hold a certain portion of TMEP cash flows for transfer to Indigenous groups.

At present, the Financial Administration Act (FAA) requires CDEV, Canada TMP Finance Ltd (TMP Finance), and TMC and its subsidiaries to seek Governor in Council (GIC) authorization for certain transactions, such as incorporating new subsidiary corporations and acquiring shares of other corporations. The FAA allows the GIC to make regulations exempting a specified parent Crown corporation or wholly owned subsidiary of a parent Crown corporation to conduct such transactions.

Seeking GIC approval each time CDEV or the TMEP subsidiaries need to conduct certain transactions would significantly slow down CDEV’s ability to organize the TMEP entities in ways that facilitate the operation of the pipeline. Exempting CDEV and its TMEP subsidiaries from this requirement would allow them to organize themselves in a way that allows Trans Mountain to compete effectively in the sector and facilitate Indigenous economic participation in Trans Mountain.

Background

In August 2018, the Government of Canada purchased the Trans Mountain Pipeline System, including the TMEP. The parent Crown corporation, CDEV wholly owns its subsidiary TMP Finance, which in turn wholly owns TMC (together, the TMEP entities). TMC owns and manages the entities that operate TMEP. TMEP twins an existing oil pipeline that runs from Edmonton to the Canadian West Coast. In doing so, the pipeline’s capacity will increase to 890 000 barrels per day from 300 000.

The Government purchased TMC, including TMEP, because it was a necessary and serious investment in the national interest. Independent reports by the major Canadian banks have underscored the fact that the project will create thousands of middle-class jobs, provide a fairer value for Canada’s natural resources in a diversified range of global markets, and provide billions in additional tax revenue to various levels of government.footnote 2 Specifically, construction of TMEP has thus far resulted in $2.9 billion in federal, provincial, and local tax revenue, a $26.3 billion increase in GDP, and $4.86 billion in Indigenous contracts, according to a 2023 assessment conducted by Ernst & Young (E&Y).footnote 3 E&Y provided additional analysis to TMC stating that, over the next 20 years, the volume and price impacts from TMEP operations could result in at least 40 000 incremental full-time equivalent positions, $33.7–38 billion in additional provincial royalties, $18.5–21.0 billion in additional corporate income taxes and a $112.2–126.8 billion increase in GDP. Finally, the project is being advanced through the lens of reconciliation, as the government, CDEV, and TMC conduct continuous engagement with Indigenous communities.

TMC is set to complete construction on the expanded pipeline in late spring 2024, with a projected in-service date before the end of June 2024.

Proposed marketing function of TMC

As part of operating the pipeline, TMC seeks to promote any spare pipeline capacity that has not already been contracted out, through the creation of a dedicated subsidiary.

For context, shippers have signed take-or-pay contracts with TMC for durations of either 15 or 20 years, covering 80% of TMEP capacity. These contracts provide revenue certainty for TMC, and by extension the Government of Canada, for the next 20 years. The remaining 20% of TMEP capacity will thus remain available to the broader market for monthly spot sale shipments to various markets. TMC estimates that 96% of TMEP capacity will be utilized for most of the 20-year period following in-service.

TMC may stand up a wholly owned subsidiary Crown corporation to actively manage the pricing changes that will be required to maximize the revenues that TMC will recover from the market. Setting up such an entity is common practice in the industry (e.g. Enbridge’s Tidal Energy Marketing). The subsidiary would consider market conditions and oil producer margins, among other factors, as these dynamic variables affect the constant calculus that shippers make when deciding between the Enbridge or Trans Mountain systems. To meet the regulatory requirements of the Canada Energy Regulator (CER), these activities must be done through a properly constituted, independent subsidiary corporation that would report to TMC.

Proposed insurance function of TMC

As part of operating the pipeline and optimizing its risk management program, TMC is exploring options to broaden its insurance coverage.

For context, the Trans Mountain Pipeline System is a federally regulated pipeline under the Canadian Energy Regulator Act. Under this Act, companies operating major oil pipelines are required to hold $1 billion as a minimum level of financial resources to cover liabilities related to an incident. TMC complies with this requirement by maintaining general liability insurance coverage in addition to a line of credit from its parent, TMP Finance. Trans Mountain’s financial resources have been approved by the Canada Energy Regulator.

Aside from CER insurance requirements, insurers change their level of coverage based on various pressures (i.e. environmental, own financial capacity, etc.). TMC would thus benefit from broadening its insurance coverage.

One option considered by TMC is to set up an insurance subsidiary, or a “captive insurance” company, which is a common arrangement in the energy sector to address insurance coverage gaps and risk management programs. Another potential option involves obtaining coverage through energy-focused mutual insurance companies, which TMC has not yet sought. Many mutual insurance companies require share ownership as a condition for coverage; however, the purchase of shares in a corporation is considered a restricted transaction under Section 91 of the FAA.

TMC’s projected insurance capacity gap will be dynamic based on how its insurers respond to market and sector pressures. Accordingly, TMC may choose either option (or both) at the appropriate time, based on market conditions and its own insurance capacity gap.

Proposed Indigenous economic participation (IEP) facilitating function

The Government of Canada, CDEV, and TMC have been engaging with Indigenous groups that reside along the pipeline corridor and the marine shipping route (eligible Indigenous groups or EIGs) regarding the sharing of the economic benefits of Trans Mountain.

In August 2023, the Deputy Prime Minister shared a letter with EIGs announcing the next steps of IEP. The letter indicated that, with respect to the opportunity for EIGs to potentially purchase a stake in the Trans Mountain pipeline system, the government would support these communities with access to capital — i.e. Indigenous communities will not need to risk or use any of their own money to participate. The letter also indicated that the government would set up a special purpose vehicle that would hold an equity interest in the pipeline resulting in cash flows to the participating communities.

For clarity, CDEV requires additional approvals, aside from approval of this regulatory amendment, in order to proceed with incorporating this special purpose vehicle.

Creation of the special purpose vehicle is but one of many activities (i.e. subsidiary creation, asset reorganization, ownership transfer) that CDEV and its TMEP-related subsidiaries may reasonably undertake ahead of and as part of a final agreement with EIGs. The need for GIC approval for each transaction will undermine the government’s ability to fulfill its commitment to share the economic benefits of TMEP in a timely manner.

It is essential that CDEV and its TMEP-related subsidiaries be provided the tools to act as quickly as counterparts in the competitive energy sector without needing to seek GIC authorization for each individual transaction.

While examples of foreseeable activities to be undertaken by new subsidiaries were outlined above, CDEV and its TMEP subsidiaries will need to create other TMEP subsidiaries and complete internal reorganizations of the TMEP entities as business needs arise.

For example, as part of the preparatory work needed to execute IEP, CDEV and TMC may carry out a series of internal transactions, such as the creation, amalgamation, and transfer of ownership of subsidiaries. This series of potential transactions are considered a normal part of any complex commercial transaction.

Objective

The objective of the Regulations Amending the Crown Corporation General Regulations, 1995 (the Amendments) is to enable CDEV and its subsidiaries (present or future), including TMP Finance and TMC), to undertake activities necessary to the operation and eventual divestiture of the expanded pipeline system (such as incorporating subsidiary corporations, acquiring or disposing of shares in corporations, internal reorganization, etc.) at the speed necessary to remain competitive in the energy sector.

Description

The Amendments exempt CDEV and its subsidiaries (present or future), including TMP Finance and TMC, from needing to seek authorization from the GIC to conduct certain transactions (e.g. incorporating subsidiaries), if done for the specific purposes of operating the pipeline or divesting of the pipeline.

Regulatory development

Consultation

The Amendments are exempt from the requirement set out in the Cabinet Directive on Regulation to prepublish in the Canada Gazette, Part I, because the impacted stakeholders have been identified and have been engaged to the extent that details can be shared.

Only the Indigenous groups who reside along the pipeline corridor and the marine shipping route would be indirectly impacted by the Amendments, as one outcome of the Amendments is that CDEV, TMC or a subsidiary thereof is able to create the SPV that may eventually be divested to Indigenous groups. The government previously communicated to EIGs of the government’s intention to provide full access to capital and to set up an entity that would receive a portion of TMEP cash flows. The government and participating EIGs have been involved in discussions regarding the IEP process in Trans Mountain on a confidential basis. The government will continue to engage with EIGs on any potential impacts of the Amendments.

Modern treaty obligations and Indigenous engagement and consultation

The Amendments do not impact rights protected by section 35 of the Constitution Act, 1982, modern treaties, and international human rights obligations.

Instrument choice

After undertaking an instrument choice exercise, it was determined that no other viable options would achieve the objectives that the Amendments target. The Amendments would exempt CDEV and its subsidiaries (present or future), including TMP Finance and TMC, from seeking GIC approval each time they wish to carry out certain transactions related to the operation or divestiture of the pipeline. In practice, the Amendments would allow the aforementioned entities to create subsidiaries, without delay, related to marketing spot capacity in the pipeline, to boosting insurance coverage and facilitating Indigenous Economic Participation in Trans Mountain, as well as any other entities needed to operate the pipeline. The proposed regulatory amendment fulfills the objective of granting these Crown corporations the agility and flexibility to conduct their activities while not derogating from the Government of Canada’s ability to provide accountability as the owner of TMC.

The status quo would mean CDEV could face delays in conducting transactions required to operate the pipeline. It may also impede TMC’s ability to compete with private sector counterparts should the GIC need to approve each relevant transaction (e.g. subsidiary creation and amalgamation, share purchases) that would be necessary to operate the pipeline as part of its day-to-day activities.

Regulatory analysis

Benefits and costs

The proposed amendments would enable CDEV and its subsidiaries (present or future), including TMP Finance and TMC, to carry out certain activities without seeking GIC authorization for each transaction. They would be able to undertake activities necessary to operate and eventually divest the expanded pipeline system with an agility and flexibility that allows it to compete effectively in the North American energy sector.

CDEV, TMP Finance, and TMC entities will continue to be accountable to the Minister of Finance and the Government of Canada through the submission of quarterly financial statements and annual corporate plans.

In the absence of the Amendments, it could take several months for CDEV, TMP Finance, or TMC and its subsidiaries to obtain GIC approval for what are considered everyday activities of corporations, such as setting up new subsidiaries and purchasing shares in third-party corporations.

While CDEV, TMP Finance, and TMC and its subsidiaries continuously engage in forward-thinking exercises, certain activities are considered time-sensitive or are reliant on external parties.

For example, as part of the transition to the expanded pipeline system operations, TMC will require higher insurance coverage. Insurance coverage can be dynamic, based on environmental and market pressures placed on insurers. The Amendments provide TMC flexibility and agility to quickly choose between different insurance options (e.g. captive insurance, mutual insurance) should TMC need to expand its insurance coverage or should existing insurers reduce their coverage. In the absence of the Amendments, should an insurer provide little notice that it would not renew its coverage, or that it would renew but at a significantly higher premium, a delay in GIC approval would mean either a shortfall in TMC’s insurance coverage or a material cost increase to Trans Mountain’s insurance program.

Broadly speaking, TMC runs a commercial enterprise and will be disadvantaged if it cannot operate with the same agility and flexibility as its private-sector counterparts. For example, if TMC determines that the creation, amalgamation or dissolution of subsidiaries would be required to ensure a financially efficient expanded pipeline system, there would be a time delay until the GIC approved each transaction. The need for such transactions may arise as market conditions change, and the need to execute such transactions may be time-sensitive.

There are no expected costs associated with the Amendments.

Small business lens

Analysis under the small business lens concluded that the Amendments will not impact Canadian small businesses. The Amendments are not anticipated to have an impact on small businesses, as they pertain to provisions governing an individual Crown corporation.

One-for-one rule

The one-for-one rule does not apply to the Amendments, as they would not impose any administrative burden on businesses.

Regulatory cooperation and alignment

These Amendments are not related to a work plan or commitment under a formal regulatory cooperation forum (e.g. the Canada-United States Regulatory Cooperation Council, the Canadian Free Trade Agreement Regulatory Reconciliation and Cooperation Table, the Canada-European Union [EU] Comprehensive Economic and Trade Agreement Regulatory Cooperation Forum).

Strategic environmental assessment

In accordance with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, a preliminary scan concluded that a strategic environmental assessment is not required.

Gender-based analysis plus

No gender-based analysis plus (GBA+) impacts have been identified for this proposal.

Implementation, compliance and enforcement, and service standards

Implementation

The Amendments would come into force upon registration. The above entities will carry out such transactions, as appropriate, as TMEP enters into service and as discussions on Indigenous economic participation progress.

Compliance and enforcement

CDEV and its subsidiaries, including TMP Finance and TMC, will continue to be accountable to the Minister of Finance and Treasury Board through the standard, robust accountability mechanisms for Crown corporations, such as the submission of annual corporate plans and annual reports, quarterly financial reports and through annual audits by the Auditor General.

Contact

Greg Reade
Assistant Deputy Minister
Crown Investment and Asset Management
Finance Canada
Ottawa, Ontario
K1A 0G5
Telephone: 613‑293‑0781