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1998 September Report of the Auditor General of Canada

Main Points

13.1 The National Energy Board Act has not been amended significantly since it established the National Energy Board (NEB) in 1959. While the NEB has been given some new responsibilities in areas such as frontier activities, its role has not changed much since its creation. However, its modus operandi has changed significantly. Through regulatory changes, the Board has moved from an interventionist approach to reliance on market-based forces, industry self-regulation and negotiated toll structures. During this period of evolution, the NEB has moved its operations from Ottawa to Calgary, downsized its staff complement by 35 percent and reorganized itself internally for greater efficiency. However, it has not objectively measured the extent to which it is being effective and relevant.

13.2 The Board has recognized that the aging of the Canadian pipeline system poses potential threats to public safety and the environment. The number of reported pipeline incidents has increased in recent years. A risk assessment methodology is being developed that should improve the targeting of inspections and safety audits. However, deficiencies in information management will need to be addressed.

13.3 The Board's ability to fully meet its environmental regulatory responsibilities is at risk due to shortfalls in its environmental inspection program - namely, in setting priorities and scheduling inspections and in inspection practices, which are too informal and unstructured.

13.4 Since 1991, the NEB has recovered most of its costs from industry. No change has yet been made to its cost allocation method, despite some concerns expressed by stakeholders about its fairness. The NEB has settled for simplicity at the expense of cost causality. The Board does not have a cost accounting system; it needs to recover costs in a way that is more equitable and acceptable to stakeholders.

13.5 The NEB is moving toward management for results, by adopting a new accountability framework and changing its style of decision making. While it is too early to evaluate the results of this initiative, we noted that significant opportunities exist to better link its human resource management activities to its vision of the future. In addition, the NEB will need to state and report clearly what it wants to achieve, monitor its performance on a regular and systematic basis and better link the results achieved to the costs.


What Is the National Energy Board?

13.6 The National Energy Board (NEB or the Board) is an independent regulatory tribunal reporting to Parliament through the Minister of Natural Resources. Its main responsibilities (Exhibit 13.1) are defined in the National Energy Board Act and the Canada Oil and Gas Operations Act . Most of the Board's activities deal with international and interprovincial oil and gas pipelines and exports. It has few activities dealing with the electrical sector, and staffing in that area has been reduced to four people.

13.7 The NEB's corporate purpose is to make energy-related regulatory decisions that are fair, objective and respected. The Board promotes:

  • reasonable transportation costs and fair access to shippers, and fair return on investment;
  • the functioning of the energy market without disruption;
  • fair market access by Canadians to energy proposed for export; and
  • safety and environmental protection.
13.8 The NEB expenditures for 1997-98 were $28 million, of which about 90 percent is recoverable from regulated companies. It has a staff complement of 277.

Evolution of the National Energy Board
13.9 The NEB was formed when government regulation had more public acceptance, at least for the oil and gas industry, than it appears to have now. The past decade has seen a major shift by government from detailed intervention by means of regulation toward a more market-based process of economic decision making. The NEB is changing its modus operandi in light of these shifts in societal perspectives on regulation, and has modified its processes and internal management structure correspondingly.

13.10 Moving from a strictly regulatory process to one more broadly influenced by a market-driven economy has seen the NEB start to play a less significant role in some areas. Although it still regulates various companies in the pipeline and electrical sectors, the degree of regulation has changed. It no longer micromanages the regulatory process, and many of the functions previously carried out have been reduced or ended.

13.11 The NEB has adapted its regulations and processes to the changing energy market and to resource constraints (Exhibit 13.2) . For example, in the last 10 years it has changed its processes for toll approval, financial surveillance and assessing long-term gas export licences. Even though the NEB processes have changed, the NEB Act has not been amended fundamentally since the Board was created in 1959. Oil and gas commodities are still transported by a few pipeline systems holding dominant market positions, and therefore may require some regulation.

13.12 Up to 1985, long-term gas exports were approved under section 118 of the NEB Act only after the NEB was satisfied that Canada would still have a strategic reserve. Since price deregulation in 1985, procedures for assessing long-term gas export licences have changed three times. In particular, the NEB Act was amended in 1988 to reflect the Canada-U.S. Free Trade Agreement (FTA). The FTA made it more difficult for the Board to intervene in the free flow of energy commodities across the Canada-U.S. border. Now the NEB approves export licences provided that Canadians have access to the oil and gas at competitive prices. In 1997, sales under export licences, typically lasting for 10 years, represented about 35 percent of total export gas sales compared with 78 percent in 1987. The balance of 65 percent represents exports under short-term orders, which apply for a period of up to two years and are renewed automatically upon request.

New challenges
13.13 The oil and gas industry is highly active at present, with commensurate impacts on the NEB's workload. The proposed construction of new pipelines in the next few years raises the likelihood of increased competition among companies, which might move the Board into an arbitration role and could result in further changes to regulatory approaches.

13.14 In the1998-99 Report on Plans and Priorities, the Acting Chairman noted that the energy industry is at a dynamic stage and its relationship to environmental and safety considerations is evolving. The recent burst of industry activity has resulted in increased workload for the NEB and, at the same time, has produced job market conditions that make it very difficult for the NEB to attract and retain qualified staff.

Focus of the Audit

13.15 The Board operates in a quasi-judicial manner. Its decisions and the evidence presented are all on the public record. Therefore, we did not examine the hearing or evidentiary processes. Instead, we looked to see what strategic challenges face the Board and we concentrated our audit effort on them, including important management processes and key operational aspects. More details are included in About the Audit at the end of the chapter.

13.16 During our work, we consulted extensively with the pipeline industry and various associations, both in person and through a telephone questionnaire.

Observations and Recommendations

Reorganization to Focus on Results

13.17 During the last 10 years, the NEB has changed significantly, with reductions in staff by 35 percent to about 277, a move to Calgary in 1991, and an internal reorganization in 1997.

13.18 The reorganization was aimed at increasing operational effectiveness. The internal structure changed from 10 functionally structured branches (for example, engineering) to five results-focussed business units: Applications, Operations, Commodities, Information Management and Corporate Services. Each of these units is headed by a business leader. Collectively, the business leaders, along with the Executive Director, constitute the Executive team, which is accountable to the Chairman of the Board. We discuss in paragraphs 13.83 to 13.97 the challenges the NEB faces as it moves toward managing for results.

13.19 It is too early to evaluate the results of this change. We understand that the NEB is planning to conduct a survey in the near future to get feedback from its staff. We encourage it to do so and to monitor and report the results to the Board.

The Trend Toward Negotiated Tolls

13.20 Historically, tolls on major pipelines were set through a cost-of-service methodology that required detailed analysis and approval processes. Recently, a growing number of tolls in the larger companies have been products of negotiated settlements between shippers and pipelines that reflect the business risks and appropriate financial returns or shared cost-saving incentives. For other pipelines, usually smaller ones, tolls are approved subject to the filing of a complaint. In essence, the operational approach to ensuring that tolls and tariffs are just and reasonable has been altered over the years.

13.21 The results expected from the move to negotiated incentive settlements are lower transportation costs and a reduced regulatory burden. Since the introduction of negotiated settlements, the NEB has exempted companies from having to provide information on their financial and operational performance pursuant to Toll Information Regulations. To protect the public interest, however, it does need to monitor the effectiveness of its new processes.

Operations in Support of the Regulatory Process

13.22 As the Board considers applications made by pipeline companies, its staff provides analytical support to the approval process. Two elements, safety and the environment, are given particular emphasis under federal legislation. These elements extend beyond the approval itself, into pipeline construction, operation and ultimately abandonment when the pipeline is no longer useful. The Board may impose specific conditions in its approval, and the NEB Act sets out severe penalties if these are not complied with.

13.23 We examined how the NEB manages its safety and environmental responsibilities under the applicable legislation. Major responsibility for these functions is vested in the Operations Business Unit, with the Health, Safety and Environment and the Pipeline Integrity teams. These teams employ specialists, including engineers and environmental scientists, and have a total staff of about 20.

13.24 Given the resources it has available, the Board has chosen an approach for its regulatory regime that relies in part on co-operation with the industry. In the light of that approach, we expected to find that the NEB had adopted a risk-based approach to its inspection and monitoring processes, based on good information. The extent to which it has done so is described below.

Safety and environmental regulatory responsibilities
13.25 Pipelines transport oil, natural gas and other commodities over great distances and ensure a reliable supply for residential, commercial and industrial consumers. Even though the number of accidents with pipelines is extremely low compared with other modes of transport, the construction and operation of pipelines is not without risks. The NEB tries to ensure that such risks are properly identified, managed and minimized. Exhibit 13.3 provides details on how it regulates safety and environmental matters.

13.26 Pipeline companies have the primary responsibility for environmental compliance and operational safety of the pipelines. The existence of laws, and the threat of lawsuits by injured parties along with the associated potential loss of revenues, provide strong incentives for owners to comply with the rules. But the NEB also has an important responsibility for ensuring that owners comply with the applicable laws. It accomplishes this through making regulations, assessing applications, imposing specific conditions, conducting inspections and audits and investigating incidents. (see photographs)

The risks of aging pipelines
13.27 Public concerns over safety and the environment have increased as pipelines have aged. About 60 percent of the present 40,000 km of pipeline regulated by the Board was constructed more than 20 years ago (Exhibit 13.4) . Safety and environmental issues include potential injury or death of pipeline company employees or members of the public, degradation to the environment, and damage to public and private property.

13.28 Pipeline age alone may not be the sole determinant of risk; construction practices, methods and materials, along with maintenance practices, also play a part. Nonetheless, older pipelines are receiving more attention.

13.29 The NEB has recognized pipeline integrity as an emerging risk area, but has not analyzed its regulated pipelines by age or location. At present the Board keeps a separate paper file on each reported incident. It records basic information including the date, company name, location, a short description of the incident, the category or type of incident, the consequences, and the action taken by the company. The NEB has an electronic data base, but it has not been updated since February 1997 and is of limited use in determining trends and identifying risk areas. For example, data showing the relationship between pipeline ruptures and aging could not be retrieved because they are not collected that way. The NEB notes that it has been working for the past year with industry to collect more comprehensive data to support risk management. Because this initiative is not complete, the NEB does not know whether it will be satisfied with the results and may yet have to develop its own system.

13.30 The NEB has a limited number of human resources to carry out its safety and inspection activities. Thus, it must be able to work co-operatively with other regulators or agencies and pipeline owners to discharge its regulatory responsibilities adequately.

Pipeline incidents follow-up
13.31 Reported pipeline incidents per thousand kilometres of regulated pipeline have increased by 73 percent in the last five years (Exhibit 13.5) . The most prevalent types of incidents are uncontrolled spillage, usually of liquid oil product, and uncontrolled escape of natural gas and high-vapor-pressure products. Since 1992, significant ruptures have totalled 18, with a high of 6 in 1994.

13.32 Section 60 of the Onshore Pipeline Regulations requires pipeline companies to report to the NEB any incident involving the construction or operation of a pipeline that results in a fatality or injury requiring hospitalization, a fire or explosion, an oil spill, a pipeline rupture, or any other failure or malfunction of the pipeline. The NEB reviews all reported incidents. For major incidents involving serious injury or the release of large volumes of oil or natural gas, it conducts detailed on-site investigations. It then produces a report containing its findings and recommendations aimed at preventing future similar incidents.

13.33 We examined four incidents investigated by the NEB to see whether reasonable corrective measures had been taken as a result of its recommendations. While we found evidence of follow-up on these recommendations, we noted that the NEB does not have a tracking system to provide assurance that all recommendations are followed up and that corrective measures taken are documented.

13.34 The National Energy Board should:

  • increase its capacity to analyze pipeline incidents by improving its data base, including the sharing of data with other jurisdictions and other regulators; and
  • improve its management of information to ensure that recommendations arising from pipeline investigations are systematically followed up and that corrective measures taken are documented.
Board's response : The Board accepts the recommendation and will implement an internal data base for the tracking of recommendations by 30 September 1998. The NEB will develop an action plan by 30 October 1998 to improve its data base for pipeline incidents with a longer-term goal of having a data base to be shared with other jurisdictions in place by December 1999. We will build on existing initiatives to ensure that the Board's needs and those of other regulatory agencies and the industry are met.

Safety and environmental interfaces with other jurisdictions
13.35 The Board has identified many areas where it could work effectively with other organizations. It has attempted, where practical, to reduce regulatory overlap and provide more efficient regulatory services.

13.36 The Board in the past has assumed a mandate for environmental protection as a component of the public interest under the NEB Act . Since 1995, the Canadian Environmental Assessment Act requires that all projects that can impact the environment undergo appropriate levels of assessment before they are approved. The Board, as a "responsible authority" under the CEA Act, ensures that such environmental assessments are conducted for projects under its jurisdiction, taking into account the factors set out by that legislation. Arrangements are being made between the NEB and the Canadian Environmental Assessment Agency to harmonize their quasi-judicial and administrative processes.

13.37 Shared jurisdiction. There is also a matter of shared jurisdiction: since 1990, operating pipeline incidents must also be reported to the Transportation Safety Board. Parliament has mandated both the NEB and the Transportation Safety Board to investigate essentially the same things.

13.38 While the NEB can investigate incidents , it cannot, under section 14(3) of The Canadian Transportation Accident Investigation and Safety Board Act, conclude about their causes and contributing factors where the Transportation Safety Board also investigates. From 1991 to 1997, the Transportation Safety Board has investigated 24 operating pipeline incidents. We question whether it makes sense for pipeline companies to report incidents to two entities with similar jurisdictions and for both of them to investigate.

13.39 Two separate studies have examined this sharing of jurisdiction. On one hand, the 1994 Report of the Canadian Transportation Investigation and Safety Board Act Review Commission held that jurisdiction should be retained by the Transportation Safety Board, because of a potential for conflict between regulators and those in charge of accident investigations. It recommended that the NEB's jurisdiction be restricted to investigating accidents involving new or rebuilt pipeline construction. On the other hand, a Regulatory Review Report 1992-1994, published by the Treasury Board Secretariat, noted that a Minister's Advisory Panel had endorsed an NEB recommendation to delete pipelines from the mandate of the Transportation Safety Board. No changes have yet been made to either Act to reflect the concerns raised.

13.40 Since 1994, the two agencies have had a memorandum of understanding setting out a protocol for co-ordinating their respective investigations of operating pipeline incidents. However, this does not address the broader issue of shared jurisdiction. We were advised that the two entities are examining ways of harmonizing their reporting criteria as well as the possibility of having incidents reported to only one of them.

Need to improve information management and ensure compliance with Board approvals
13.41 When the Board approves pipeline construction, it may include terms and conditions to which applicants must adhere in addition to the applicable legislation and approved specifications and procedures. In cases of non-compliance, the Board is empowered to impose a penalty of up to $1 million and/or jail terms. The Board uses a graduated approach to resolving any non-compliance. First, it requests the company to provide its Assurance of Voluntary Compliance; second, it issues a Board Order compelling the company to rectify the situation if no Assurance of Voluntary Compliance is received; and third, it imposes a penalty. As a result of this graduated approach, no penalty has ever been imposed. A system of penalties for repeated or persistent non-compliance was to be developed in 1997-98, but this was not done.

13.42 Since the Canadian Environmental Assessment Act was enacted, the number of environmental conditions attached to the issuance of pipeline certificates has increased and is generally in the range of 15 to 30 per certificate. The Board has started to establish tracking systems on large projects to ensure compliance with the conditions. In 1996, for example, it created a Project Working Group to ensure compliance with Board conditions and to oversee the inspection program of a major pipeline project. However, because the NEB does not keep track of conditions for all Board approvals, it cannot provide assurance that they have been properly followed up.

13.43 Compliance with terms and conditions of regulatory approvals was identified as one of the 1998-99 performance measures for the Operations Business Unit. We believe that the NEB needs to have data to be able to provide assurance to the Board that all conditions attached to its approvals have been properly monitored for compliance, and to provide feedback on the effectiveness of the conditions.

13.44 The NEB has to work co-operatively with the pipeline industry to fulfil its regulatory responsibilities while preserving its independence. Under the Onshore Pipeline Regulations, pipeline operators generate useful environmental information through their own monitoring and surveillance programs. However, this requires direction from the NEB. Such direction has been the subject of a proposed guideline for the monitoring and surveillance program. The NEB has access to the data gathered by the pipeline operators. If verified regularly and combined with information collected under its inspection program, this could constitute an environmental data base or historical record both for reporting performance and for evaluating the Board's environmental decisions. But this would require a more comprehensive environmental information management system than is currently in place and an effective environmental audit program, which does not now exist.

13.45 The NEB lacks an effective information system necessary to support assessment of the cumulative effects of pipelines on the environment. It needs to collect such data not only for its own use but also for co-ordinating its work with other agencies, thereby ensuring that all available information is "on the table" to facilitate regional and local land-use planning and associated activities.

13.46 An effective environmental information system provides a basis for sound strategic and tactical planning, and a means of reporting the results achieved. It can also be used to identify and evaluate risks, and can help in determining the resources needed to meet legal responsibilities. It is therefore in the NEB's interest to have up-to-date information systems in order to be able to function efficiently and effectively. The NEB has recognized many of the shortcomings of its information management system with respect to environmental issues, but has not yet developed a specific action plan to rectify the situation.

13.47 The National Energy Board should:

  • determine its environmental information management needs and develop an appropriate system; and
  • ensure that all requirements associated with Board approvals are monitored systematically for compliance and to see if they are accomplishing the desired results.
Board's response : The Board accepts the recommendation and has expanded its existing compliance monitoring system to include all NEB approvals of facilities. Although the recommendation is specific to environmental information management needs, we believe there is a significant benefit in the integration of the environmental and safety auditing programs. We will develop by 30 October 1998 an action plan for the complete review of our environmental and safety information needs and an action plan for the development of an appropriate information management system.

Need to implement a rigorous safety and environmental risk management framework
13.48 Given the NEB's resources, an important question is how much monitoring is enough to fulfil regulatory requirements? Although some external checks and balances on pipeline companies are provided in law and by various watchdogs and vested interests, the NEB has to strike a balance between the need to assess the inherent risks of a pipeline throughout its life cycle and the effective use of the limited resources available for inspection and audit. Risk management provides a framework for making such determinations. We expected that the Board would have a clear policy to provide direction for the cost-effective discharge of its safety and environmental monitoring responsibilities using risk management techniques, and that the work would be planned and resources allocated accordingly.

13.49 The Board's information bulletin on safety audits indicates that they are conducted every two years for large companies and every four years for other companies. Safety audits review procedures and records of these companies to verify compliance with regulations and to address any safety issues.

13.50 Safety audit based on subjective assessment. Due to resource constraints, 40 percent of scheduled safety audits were not carried out in 1997-98. Only companies with the highest safety risks had been selected for safety audit. However, we understand that the evaluation of safety risk was based on staff knowledge but that no rigorous risk analysis was conducted and the criteria were not validated. For example, data on recent incident trends were not used in selecting audits to be carried out. Based on current scheduling practices, 25 safety audits should have been carried out in 1997-98 but only 15 were conducted.

13.51 The need to develop risk assessment methodologies was identified as a strategy for 1997-98. This would provide for an audit focus on the companies and activities where the risk of non-compliance or other risks are high and where increased surveillance is thus required. However, the risk assessment methodologies have not yet been developed and are not expected to be completed until the second quarter of 1998-99.

13.52 Environmental inspection cycles not always followed. There is no clear policy on the scheduling of pipeline environmental inspections, but the current practice is to conduct periodic inspections: during pipeline construction, post-construction (that is, within three years following construction), and in three- to five-year cycles thereafter during the operational period. Inspections at the post-construction stage are to ensure that restoration measures have been put in place and are effective. This approach has evolved within the Health, Safety and Environment Team and is based on past experience and the availability of resources. (see photograph)

13.53 The NEB's pipeline inspection regulations require companies to file post-construction environmental reports identifying any issues that arose and indicating how they were resolved. Companies are also required to provide follow-up reports after the next two growth seasons. The NEB relies on the self-reporting of companies and inspects only a limited number of construction sites to verify the accuracy of the reports.

13.54 The NEB is developing a risk analysis approach toward scheduling and conducting environmental inspections. Recently, its inspection staff dropped from three to only one. Only inspections considered to be highest priority have been carried out. NEB staff informed us, for example, that last year they visited only 4 out of 28 potential sites as part of a post-construction inspection.

13.55 In our opinion, post-construction inspection is not being given the attention it deserves. The condition of the right-of-way after its restoration represents an environmental benchmark against which future changes could be measured and the effectiveness of Board decisions assessed. The Board needs to give this more emphasis in the inspection program.

13.56 Current environmental inspection practices are too informal. The NEB introduced two environmental inspection manuals in 1988-89, one for construction and the other for operations. However, the manuals are not used routinely in inspections. Although there are generic lists of environmental concerns to be included in inspections, there are no detailed checklists or audit programs that inspectors are to complete during the various phases to ensure that all required aspects are covered systematically.

13.57 For three projects that we selected at random for review, NEB staff were unable to find the inspection binders, which are supposed to contain all relevant inspection documentation. Nor could they locate the inspection reports on two of the three projects. We were given various reasons for this, including the misplacement of inspection binders by staff not currently part of the team and improper filing due to the heavy workload. If workload was indeed a contributing factor, we expect the situation to deteriorate further as the number of applications continues to rise along with the number of kilometers of approved pipeline to be inspected.

13.58 The National Energy Board should:

  • use a rigorous risk assessment methodology to determine the level of safety and environmental inspections and audits needed to fulfil its legislative responsibilities, and allocate its resources accordingly; and
  • formalize its environmental inspection procedures and strengthen its documentation practices.
Board's response : The Board accepts the recommendation and, as noted in the chapter, has under way a project to develop a risk assessment tool to assist in the allocation of resources to safety and environmental audits. The project will be completed by 30 November 1998. The NEB will review all of its environmental and safety audit procedures and ensure that they are complete and in place by 31 December 1998. Adherence to procedures will be an emphasis of management. The NEB will increase the resources allocated to its safety and environmental auditing program to replenish those resources lost through attrition or those resources diverted to handle the extremely high applications workload experienced in the past few years.

Human Resource Management

13.59 When the Board moved from Ottawa to Calgary in 1991, it had 310 employees. Only 130 relocated, with the option of returning to Ottawa. Eventually 25 of them did return.

13.60 More recently, in response to evolving markets and government policies, the NEB has reorganized from a conventional structure into a rational business grouping that emphasizes teamwork and is less hierarchical. The NEB is to be commended for its new approach to organizational structure, even though it is too early to judge the ultimate success of this initiative.

13.61 As the NEB started to fit into the Calgary environment and implement its new business structure, it considered whether it had the right mix of people to meet the new challenges. At the same time, the Board was conscious of the need to remain independent of the industry it regulates and to be objective in its dealings. In 1993, the Board introduced a Code of Conduct to guide its staff. Since its relocation to Calgary, the NEB's human resource management processes have been undergoing revision (see Exhibit 13.6) .

High staff turnover
13.62 The NEB views the ability to attract, develop and retain highly skilled staff as one of the important elements in meeting its strategic objectives. The past two years have been especially challenging, partly due to increased activities in, and competition from, the energy market.

13.63 The NEB's operations are located in a highly competitive market, the Calgary oil patch. It is competing for talent with an industry that has greater salary flexibility, and that may offer staff more attractive career opportunities than a government agency.

13.64 Since relocating, the NEB has had to hire professional staff to fill vacancies. The NEB has had high staff turnover in the last two years, reaching 18 percent in 1997-98 (Exhibit 13.7) ; and chronic vacancies have resulted in extra workload on remaining employees. Total human resources have decreased in the last 10 years, but the NEB has always had fewer staff resources than it projected it would need. Elsewhere in this report, we note that the NEB has some operational deficiencies in implementing its safety and environmental mandates, which may be due to a lack of staff with appropriate experience.

13.65 Organizational change. With any radical change, some people are unhappy or unwilling to adapt and this can adversely affect morale and productivity. For example, an analysis of NEB exit interviews revealed that some people saw low pay as a disincentive; others did not like the particulars of the reorganization, even though they seemed to approve of the initiative itself; and others cited low morale. At the same time, some employees spoke positively about job satisfaction, the good working environment and generous training opportunities.

13.66 While exit interviews may present some bias, they can also give valuable information from which lessons can be learned. The NEB could confirm the validity of exit comments by seeking input from employees who have not left, for example, through its Classification Review and Leadership Training projects. Without a rigorous, documented analysis of the views of staff both leaving and remaining, it will be difficult for management to determine conclusively whether staff turnover is caused by factors such as remuneration or by other factors.

13.67 As staff resource levels have declined, partly by design and partly because of competition factors, the NEB has had to come to grips with a number of human resource challenges. It has undertaken about 20 human resource management projects since 1997. We believe that many of these projects could have been structured better if they had been linked to an overall human resource strategic plan, and if the NEB had set clear goals and objectives for each project.

Predicting future staffing needs is crucial for the NEB
13.68 The NEB has identified key factors that will influence its regulatory program over the next three years, but we have not seen any analysis of the levels and skills it will need in its staff and how it will attract them, considering its resources and staff turnover. Consequently, in spite of new human resource management initiatives, there is a risk that the NEB may be more reactive than proactive, and may lack appropriate resources in the future to deal with new issues. Management has identified a need to develop a human resource strategic planning framework, but at the time of our audit this project had not been started.

13.69 Management needs to build on its positive initiatives, create better communication to dispel any concerns resulting from the organizational changes, and introduce initiatives that can improve its effort to retain staff. The NEB recognizes this problem and has made some positive changes to try and compete for staff more effectively, given the government environment in which it functions. We noted, for example, the inclusion of some incentive measures in the recent collective agreement signed with its professionals.

13.70 The National Energy Board should ensure that its human resource management activities are clearly linked to its vision of the future and that its related projects are carried out in accordance with a systematic plan and in response to its operational needs.

Board's response : The Board accepts the recommendation. In the fall of 1998 the NEB will develop clearer context, strategies and expectations for performance. This will provide the environment within which human resource management activities can be more clearly linked to the NEB's vision of the future and enable the development of a systematic human resource strategic plan. A human resource strategic plan will be in place by 1 April 1999.

Cost Recovery: Who Pays?

13.71 Since 1991, the NEB has recovered most of its costs from the companies it regulates, except the costs related to its frontier activities. The regulations identify companies subject to cost recovery on the basis of their size. Small companies are charged an annual fee of $500 and intermediate-size companies $10,000. The remaining costs are charged to large companies based on staff time spent on the regulation of each commodity and according to their relative share of volumes shipped or, for electrical companies, volumes exported.

13.72 In 1995, a staff working group was established to consider the updating of the Cost Recovery Regulations. Some of its recommendations were reflected in the revised regulations, approved in April 1998. No amendment was made to the cost allocation method, except a minor revision to the calculation of electricity export volumes.

Are costs recovered equitably?
13.73 The cost allocation method has been the same since it was first introduced. It is based on direct time charged into three commodity pools: gas, oil and electricity. While this is simple to administer, it raises some concerns about fairness, one of the objectives pursued by the government cost recovery and charging policy. For example, we noted that:

  • the portion of indirect time charged to commodities remains high, at about 60 percent;
  • the NEB costs of processing applications and of hearings are not borne by the applicants but instead are recovered from the existing large companies, based on their respective volumes shipped. The net effect is that existing companies are paying for the cost of processing new applications, some of which may be those of competitors;
  • only about 60 percent of direct staff time was spent on large companies in the last three years, whereas 99 percent of the costs are recovered from this group; and
  • under the cost recovery regulations, the costs charged for a given year are based on time actually spent in the previous fiscal year, and are not adjusted to reflect current-year actuals.
13.74 Stakeholders have expressed dissatisfaction with the present cost allocation methodology. When it assessed the feasibility of cost recovery, the NEB conducted preliminary analyses of allocation methods. The present commodity allocation method was selected over using a detailed fee structure or charging direct time. One industry association commented in 1989 that the Board had settled for simplicity at the expense of cost causality in its decision to use the cost allocation method. The NEB set up a Cost Recovery Liaison Committee to provide a forum for stakeholders and staff to discuss cost recovery issues of mutual concern. Our review of the Committee's minutes indicated that some industry representatives have complained that the current allocation method does not share costs equitably among the regulated companies.

13.75 In our opinion, the method now used for cost recovery raises questions about equity. As more applications are pending and stakeholders raise concerns about fairness, there is a need to review the present cost allocation method.

13.76 There is no cost accounting system. The NEB uses its Time Reporting System to identify the time spent on regulating each commodity, and costs are allocated based on time spent. The NEB does not have a cost accounting system. It is important to know how much it costs to carry out a specific activity, not only for cost recovery but also for management purposes. If data from the Time Reporting System could be merged with data in the current financial system, this might provide an adequate basis for costing.

13.77 Cost control versus operational efficiency. As a government agency, the NEB has been subject to the same budgetary reductions as other departments. Yet the NEB's costs, for the most part, are paid by industry and not from the public purse. Given its growing workload, and the needs of stakeholders for thorough and timely decisions, there may be an opportunity for the Board to discuss a more flexible financial arrangement with the Treasury Board and its other stakeholders to better match its resources with its service needs.

13.78 The National Energy Board should:

  • recover its future costs in a more equitable and acceptable manner, to be developed in consultation with the regulated industry; and
  • develop a cost accounting system so it can identify the costs of processing applications and of other activities, for cost recovery and management purposes.
Board's response : The Board accepts the recommendations, and has already started negotiations with the cost recovery community for a complete review of all aspects of the cost recovery regulations. A recommendation for a new, more equitable methodology will be made by the second quarter of 1999-2000. Also, a review of the financial planning and reporting processes and a redesign of the management information systems are targeted for completion by the end of the fiscal year 1999-2000.

Costs of frontier activities are not recovered
13.79 In 1991, the Board was given administrative responsibility for overseeing oil and gas operations in frontier regions previously managed by the Canada Oil and Gas Lands Administration (the NEB Act was amended in 1994 to authorize this transfer of responsibilities). Responsibilities include regulating oil and gas exploration, development and production; enhancing worker safety; and protecting the environment. Other frontier activities of the NEB include calculating discovered and undiscovered hydrocarbon resources, and developing emergency environmental contingency plans that support and complement the Board's regulatory responsibilities. The total cost to the Board of its frontier activities is more than $4 million annually.

13.80 The Minister of Energy in 1991 exempted these operations from cost recovery, because they were outside the scope of the Board's normal activities. The cost recovery regulations were modified in 1995 to empower the Board to decide which costs it could recover. In July 1998, the Board decided to continue the exemption of frontier activities from cost recovery, retroactive to 1995.

13.81 There are three producing fields in the frontier lands. The most significant one consists of 350 wells, a gas plant, oil treating facilities and six artificial islands in the Mackenzie River. Current production annually generates a five percent royalty and a one-third net profit interest for the government amounting to approximately $7.5 million and $50 million respectively. These amounts are collected through an agreement between the federal government and a petroleum company. Although frontier lands are federally owned, the royalty regime appears to be similar to provincial arrangements.

13.82 The Board has seen its workload as administrator of frontier activities increase since 1994 and it anticipates more frontier activity in the near future. It may be appropriate to take a fresh look at frontier costs. Any future change to allow for cost recovery from the companies active in the frontier lands will need to be accompanied by an amendment to section 24(1) of the NEB Act.

Challenges to Reporting on Performance

13.83 Unlike companies in the private sector, organizations such as the NEB cannot measure their performance by reference to a conventional bottom-line profit or loss. As a public sector entity, the NEB has to find different ways to demonstrate whether its results meet the expectations of its stakeholders.

13.84 Traditionally, government agencies have shown how they have spent their budgets but often not what they have achieved. This is changing as entities like the NEB are increasingly challenged to report the results they have achieved. This is particularly appropriate for the NEB, having reorganized itself into a team-based structure focussed on results and having adopted a new accountability framework. Furthermore, the NEB was part of a pilot project in late 1996 to identify and report on its performance for the fiscal year ended 31 March 1996.

13.85 Our April 1997 Report Chapter 5, "Reporting Performance in the Expenditure Management System", identified five elements needed to give a credible account of performance:

  • clear context and strategies;
  • meaningful performance expectations;
  • accomplishments reported against expectations;
  • demonstrated capacity to learn and adapt; and
  • fair and reliable performance information.
13.86 A significant part of the challenge for an organization moving into performance measurement and reporting is the need for visible commitment by senior management. The corporate culture also needs to change, as staff come to accept that different things not previously selected will be measured and reported. Another challenge is to accept and report results that may be less than favourable, and to learn from the experience.

Need for clear expectations
13.87 As organizations adapt to performance measurement and reporting, they need to adopt a multi-year perspective with critical analysis of what has and has not worked, and to be willing to change what has not. Sometimes it is helpful to benchmark an organization against similar entities, both to identify performance measures and to compare relative performance achievements. To improve accountability, it is important that performance indicators be focussed and stated clearly.

13.88 The NEB has made a good start toward identifying and reporting on its performance. It has developed a Report on Plans and Priorities, backed up by more detailed work plans, that identifies the elements of performance measurement, including performance indicators. But it will need to review its progress critically, and adapt in a number of areas. First, it needs to set clear performance expectations. Second, it needs to harmonize them between its plans and priorities document and its Performance Report. Third, it needs credible reporting of its actual performance.

13.89 The NEB's performance indicators still focus more on activities and outputs than on outcomes. The 1998-99 Report on Plans and Priorities identifies 44 performance indicators. It would be preferable to identify fewer indicators that can be linked directly to outcomes of the organization. This would provide for a more in-depth analysis of its performance. When selecting indicators, it is important to keep in mind that information for performance reporting needs to be of value internally as well as effective for external accountability.

13.90 Currently, some of the NEB's performance indicators change from year to year. Although performance indicators may evolve over time, if the NEB decides to change them it ought to be able to demonstrate why, and provide some continuity in its documents for the purpose of assessment.

13.91 In the 1997-98 Report on Plans and Priorities, the "expected results" could correspond better with the "strategies" to be used to achieve them. Presently, it is unclear how the expected results will be achieved or measured. Additionally, the 1996-97 Performance Report did not restate previous performance expectations; it noted only some direct outputs of the organization. A stronger link between the NEB's stated expectations and the results it has achieved would result in a more useful performance report for accountability purposes.

Reporting results achieved
13.92 The NEB will need to change its culture to fully embrace performance reporting. It has no system developed to track results against objectives, or to report periodically to its Executive with suggestions for change. Performance measurement and monitoring in a results-oriented organization needs to be an integral part of management. For performance measurement and reporting to continue to be a positive and productive process, it is important that the NEB monitor its performance strategically, regularly and consistently.

13.93 Preparation of the NEB's annual Performance Report is delegated to a staff person in Finance, who has to try to obtain information from the teams and co-ordinate it in some meaningful way. It would be preferable for each business unit to have a Performance Report co-ordinator, who can track results regularly and meet periodically with counterparts in other units and the NEB performance reporting facilitator to consolidate the information for internal and external reporting.

13.94 With a designated person in each unit, the NEB could have better assurance that the data are accurate and meaningful. For example, we noted that the 1996-97 Performance Report presented a comparison of application cycle times for the years 1995 and 1996. The report did not mention that the comparison excluded the time between receipt of the application and the Board's issuance of directions on procedures. This represented about 10 additional weeks (see Exhibit 13.8) . Incomplete information does not provide a reasonable basis for accountability and could prove embarrassing to the NEB.

13.95 It is important that the NEB continually compare performance accomplishments against expectations. We encourage it to have each business unit produce a "Best Practices Review", as the Applications Business Unit does, to learn from experience and improve performance measurement and reporting.

13.96 Linking costs to results. The Treasury Board Secretariat guidelines suggest that key performance accomplishments linked to expectations, mission statements and objectives should include the important aspects of results achieved, and their costs.

13.97 However, the NEB's 1996-97 Performance Report does not identify the costs and other financial information associated with performance. Although it reports by activity on planned spending compared with actual spending, the NEB needs to include an explanation of where and why it overspent or saved. It could then demonstrate more effectively how actual results compared with those originally expected.

13.98 As it continues its efforts to manage for results, the National Energy Board should:

  • improve the clarity of its expectations;
  • monitor its performance regularly and make adjustments as needed;
  • state clearly the results it has achieved and at what cost; and
  • designate a co-ordinator for each business unit to monitor key performance indicators.
Board's response : The Board accepts the recommendations. The Board recently hired a team leader for planning and reporting, who has started a review of financial planning and reporting processes and is designing a training program for users of the management information systems. A new individual performance management process called "FOCUS" was introduced in April 1998, and a strategic planning process will be started in September 1998. These are seen as critical first steps to both increase the individual's and the organization's performance and improve the processes to report on that performance.

Audit and Evaluation

13.99 Program evaluation and internal audit are valuable management tools in assessing whether programs are still relevant and cost-effective. In the past two years, the NEB has planned 12 internal audits but carried out only five. No evaluations have been conducted since 1994, and it has been at least eight years since important areas such as exports and imports, pipeline facilities applications, safety, and tolls and tariffs were reviewed. Audit and evaluation budgets have declined from 1.7 percent of expenditures four years ago to about 0.3 percent now.

13.100 The Audit and Evaluation unit consists of only one person. Given that some planned audit work has not been carried out and that even the small budget has not always been used, one could question whether the Executive sees this function as adding value to the NEB and whether it is prepared to use it as a key management tool.

Need for an evaluation
13.101 With its role evolving in response to changing market conditions, the NEB needs to be able to answer critics who question whether it is still relevant and effective. Once seen as the guardian of Canada's energy security, the Board now approves exports conditional on Canadian access at competitive prices. Operational changes have preceded legislative amendments, and with the advent of NAFTA the role of the Board has become more oriented toward business. New responsibilities have emerged in the safety and environmental areas. In this climate of significant change, the NEB would do well to commission an evaluation to assess the effectiveness of its program and its continued relevance.

13.102 The National Energy Board should reinforce its audit and evaluation function and commission an evaluation.

Board's response : While the Board was initiating a profound business transformation and reorganization over the last two years, we chose to limit the number of internal audit projects. Now that we have moved to the implementation of our Vision and the rate of internally generated change has gone down, we agree that we ought to reinforce our audit and evaluation function. The NEB will adopt an explicit audit and evaluation program by 1 April 1999.

The Board also agrees that the time has come for an evaluation of the program's effectiveness. The NEB will consult with our stakeholders, including the policy arm of government, to determine the value of an evaluation of the program's continued relevance. We undertake to determine the scope of the evaluation and its timetable by 1 April 1999.


13.103 In the areas we examined, the National Energy Board has adapted its regulations and processes to the changing energy market. In our opinion, however, the NEB needs to improve some of its management processes and operational practices to minimize the risk of being unable to fulfil its regulatory obligations and cope with the challenges ahead. The NEB needs to reassess its current level of resources and determine whether they are appropriately allocated to do the job cost-effectively. We also believe that it needs to undertake an evaluation to assess the effectiveness of its program and the extent to which it continues to be relevant.

About the Audit


Our overall audit objective was to assess whether the National Energy Board was fulfilling its obligations as a regulatory body in the areas subject to examination, and specifically whether it has:

  • identified changing circumstances;
  • used appropriate surveillance and enforcement methods;
  • developed effective management interfaces with other jurisdictions;
  • established efficient and cost-effective operations and cost recovery practices; and
  • carried out appropriate monitoring and reporting of operations and managerial performance.


We examined key management and operational processes, including:

  • human resources management;
  • financial surveillance of tolls and tariffs;
  • cost recovery;
  • performance measurement and reporting;
  • environment and safety audits and inspections;
  • pipeline accident investigations; and
  • internal audit and evaluation.


We developed criteria related to our audit objectives, which were discussed and agreed to by management.

Audit Team

Assistant Auditor General: Don Young
Principal: Roger Simpson
Director: Jean-Pierre Plouffe

Christopher Keith
Martha Lywak
Werner J. Müller-Clemm
Geoffrey Robins
Donna-Lee Shaw
James Van Horn
Peter Yeh

For information, please contact Roger Simpson.