FEDERALISM AND INTERPROVINCIAL INFRASTRUCTURE DISPUTES IN CANADA.

• Author: Gillis, Rory
• Position: ARTICLES

TABLE OF CONTENTS I. Introduction 2 II. The Constitutional and Political System for Allocating Decision-Making Power 5 A. The Hybrid System 5 B. Political Conflict 12 C. Judicial Rationales 15 III. When To Vest Decision-Making Power in the Federal or Provincial Governments 16 A. Advantages of Federal Decision Making 17 B. Advantages of Provincial Decision Making 29 C. The Case for Varying the Decision-Making Site 35 D. Optimal Variation 36 IV. Who Should Choose Between Federal and Provincial Decision Making? 39 A. Impediments to Optimal Variation 39 B. Justifications for the Federal Role 43 C. Guidelines for the Federal Government 48 V Conclusion 49 I. INTRODUCTION

Which level of government should decide whether new interprovincial infrastructure proceeds? This question has been a point of contention in recent high-profile disputes over infrastructure in Canada, with provinces frequently disagreeing with the federal government and with one another. In western Canada, for instance, British Columbia introduced legislation in 2018 to establish what the BC Court of Appeal described as a provincial veto over the Trans Mountain Pipeline Expansion. (1) In eastern Canada, in contrast, Newfoundland has called on the federal government to regulate the approval and operation of interprovincial electricity transmission networks, so that individual provinces cannot threaten to prohibit specific networks, such as the network exporting hydroelectricity from Labrador to Quebec. (2)

These ongoing conflicts have been shaped by Canada's constitutional and political system for allocating jurisdiction over interprovincial infrastructure. This system has two distinctive features. The first is that the text of the Constitution (3) vests exclusive jurisdiction over interprovincial infrastructure in the federal parliament, which means that the federal parliament and, by delegation, the federal executive (collectively the "federal government")" (4) can approve, regulate, and when they choose, prohibit proposed interprovincial projects. The second is that a series of judicial decisions have permitted provincial governments to create, and by implication, prohibit interprovincial infrastructure whenever the federal government fails to exercise its jurisdiction. The result is a hybrid system in which some interprovincial projects, such as pipelines, require the approval of the federal government, whereas others, such as electricity transmission networks, require the approval of each affected province unless and until the federal government makes the political decision to act.

The hybrid system places significant responsibility on the federal government. For any proposed project, it must choose which level of government--federal or provincial--decides whether the project proceeds. This choice is important because the two levels of government employ different decision-making mechanisms, both of which affect the likelihood that the project is approved and the terms on which it proceeds. Provincial decision making vests de facto veto power in each province whose territory is crossed. The result is a quasi-market mechanism in which provinces that support a project must obtain, sometimes by purchase, the consent of those provinces that oppose it. This approach has many of the advantages and disadvantages of bargaining systems generally. Federal decision making, in contrast, centralizes decision-making power in a single government, which can decide when, and on what terms, a project proceeds. Centralized decision making bypasses the need for formal interprovincial bargaining.

The choice between these decision-making mechanisms raises at least two important questions. First, when should the federal government refrain from exercising its jurisdiction, so that provincial governments decide whether interprovincial infrastructure proceeds? Second, as a matter of institutional design, is the federal government likely to refrain from exercising its jurisdiction in situations where provincial decision making is superior to federal?

To address the first question--when should each level of government exercise decision-making power--this article identifies a number of relevant factors, including efficiency, interprovincial equity, Indigenous rights and interests, and national unity. The choice between federal and provincial decision making presents trade-offs within and between these objectives. For instance, both federal and provincial decision making plausibly promote efficiency: federal by reducing interprovincial transaction costs and provincial by reducing the cost of assessing welfare gains and losses. From an efficiency perspective, the optimal decision maker will depend on the relative size of transaction and assessment costs. Similarly, both federal and provincial decision making promote different aspects of interprovincial equity: federal by reducing bargaining power disparities that prevent a fair interprovincial distribution of infrastructure benefits and provincial by creating a robust compensation mechanism for interprovincial harms. From an equity perspective, the optimal decision maker will depend on the relative importance of these two aspects of equity. These trade-offs are difficult to navigate, but this article provides guidelines for determining when infrastructure decisions should be made by each level of government.

This article turns to the larger institutional question to consider whether the federal government is well-positioned to determine when decision-making power should be exercised by the provinces. The federal government encounters at least three problems in choosing the decision maker for any given project, which can be broadly defined as political economy, information, and incentive problems. For example, the federal government faces a political economy problem since the choice of decision maker is not between two third parties but between third parties (the provincial governments) and itself (the federal government). This prima facie conflict of interest means, among other things, that it is hard for the federal government to consistently identify and execute the optimal choice between the two levels of government. There is no perfect solution to this problem, but this article canvasses ways in which the federal government can best exercise its power to choose between federal and provincial decision making within the constraints of the political economy, information, and incentive problems.

This article has five parts. Part II sets out Canada's constitutional and political system for allocating jurisdiction over interprovincial infrastructure. Part III considers when infrastructure decisions should be made by the federal or provincial governments. Part IV assesses the federal government's role in choosing between federal and provincial decision making. Part V concludes by briefly identifying potential implications for other contexts, such as the recent incorporation of the United Nations Declaration on the Rights of Indigenous Peoples into Canadian law. (5)

2. THE CONSTITUTIONAL AND POLITICAL SYSTEM FOR ALLOCATING DECISION-MAKING POWER

   1. THE HYBRID SYSTEM

      Canadian constitutional law permits both the federal and provincial governments to exercise decision-making power over interprovincial infrastructure, although the provincial power is more circumscribed.

      The federal decision-making power primarily results from subsections 91(29) and 92(10) (a) of the Constitution. (6) Subsection 91(29) grants the federal parliament exclusive legislative authority over all matters that are expressly excluded from provincial jurisdiction under section 92. Paragraph 92(10)(a) expressly excludes from provincial jurisdiction all works and undertakings "connecting [a] Province with any other or others of the Provinces, or extending beyond the Limits of the Province", provided that the works and undertakings relate to enumerated transportation or communication projects. (7) Courts have held that the combination of subsections 91(29) and 92(10)(a) grants the federal parliament exclusive jurisdiction to legislate with respect to a number of interprovincial works and undertakings, including pipelines, (8) electricity transmission networks, (9) railways, (10) and telecommunications networks. (11)

      Federal legislative jurisdiction has three important features. First, through legislation, the federal parliament can approve or reject (or, in other words, veto) interprovincial infrastructure that falls within paragraph 92(10)(a), as well as regulate many aspects of the infrastructure's operations. (12) Second, the federal parliament can delegate its decisionmaking power to the federal executive. Most commonly, federal legislation establishes administrative regimes that govern the approval and regulation of interprovincial infrastructure. Arguably, the highest profile example of this approach is the administrative regime governing interprovincial pipelines under the Canadian Energy Regulator Act. Under this Act, interprovincial pipelines can only proceed if they are first approved by the Canadian Energy Regulator (and ultimately the federal cabinet). (13) Third, whenever the federal parliament or executive exercises its decision-making power to approve or reject interprovincial infrastructure, it greatly diminishes the scope of provincial decision making. For example, when the federal parliament or executive expressly approves interprovincial infrastructure, a dissenting province cannot prohibit the infrastructure's construction or operation, (14) even if the infrastructure otherwise implicates areas of provincial jurisdiction, such as property and civil rights, the environment, or health. (15) Under the doctrine of interjurisdictional immunity, provincial laws of general application can apply to infrastructure falling within paragraph 92(10)(a), but they are inapplicable if they "impair[]... [a] vital or essential part" of a federal work...