Earlier this month, the Alberta Court of King's Bench (the Court) released its decision in Taylor Processing Inc v Alberta (Minister of Energy). The decision provides a helpful reminder of the limits on discretionary government decision-making and the expectations of government officials when exercising their discretionary authority.

Background

The case concerned a dispute between the Applicants, Taylor Processing Inc. (Taylor) and Nova Chemicals Corporation, and officials within the Alberta Ministry of Energy (Alberta Energy) over royalties payable on natural gas processed at the Harmattan Gas Plant, located between Calgary and Red Deer. Between 2012 and 2016, Taylor was responsible for metering and reporting on different volumes of raw gas and co-stream gas delivered to the inlet of the Harmattan Plant. Those measurements were ultimately used to determine the royalties payable by the Applicants to the Crown pursuant to Alberta's Mines and Minerals Act (MMA). During these years, the Royalty Operations Branch of Alberta Energy did not provide the Applicants with any indication that it had an issue with their reports.

At the heart of the dispute was a disagreement over the allocation of fuel gas used for processing gas streams within the Harmattan Plant. Different gas streams coming into the plant (raw gas vs. co-stream gas) require different processing and equipment. A portion of the gas stream is taken and used as "fuel gas" in the processing, and Crown royalties are calculated after deducting that fuel gas and other "shrinkage." Taylor, as the plant operator, applied its "Fuel Gas Allocation Procedure" to ensure the fuel gas used for processing the different gas streams was allocated properly for royalty calculation purposes.

Starting in 2016, Alberta Energy decided that, instead of using Taylor's Fuel Allocation Procedure, fuel gas should be allocated using a different method. Alberta Energy's insistence on using its own methodology to calculate the royalties owed resulted in the Applicants owing tens of millions of dollars in increased royalty payments. Although the Applicants filed objections to this new methodology in 2017, the department reiterated its position that the Applicants’ methodology was flawed – while failing to provide any explanation as to what these flaws were or how they had been corrected in the new methodology.

The Applicants tried unsuccessfully to resolve the matter with Alberta Energy and subsequently through Alberta Energy's Director of Dispute Resolution (DDR). Throughout the entire process, the Applicants' basic complaint was that Alberta Energy was not providing any meaningful explanation of why it decided Taylor's Fuel Allocation Procedure was inadequate and why Alberta Energy's method was more appropriate.

Decision

Section 37 of the MMA authorizes the Minister to take remedial action if, "in the opinion of the Minister," something has been done to reduce the Crown’s royalty entitlement. In addition, the Natural Gas Royalty Regulation, 2009 allows the Minister to recalculate royalties payable where "the Minister is satisfied" that a party provided incorrect information or have omitted information.

In reviewing the DDR decision, the Court began by considering whether Alberta Energy had a basis to review and recalculate the royalties payable in the circumstances. The Court stressed the limits of the Minister's discretion:

While the phrase “in the opinion of the Minister” grants some discretion in determining whether an act meets the above criteria, the opinion must be based on reasonable grounds, or at least some objective evidence, rather than merely a “best guess.” Where legislation directs an outcome or delegates authority conditioned on “the opinion of the [decision maker],” the use of the word “opinion” does not connote an unfettered discretionary determination. Rather, an opinion must be justified by appropriate reasons… and be the product of an informed mind founded on established facts. Moreover, an opinion is not to be conflated with a belief – "an opinion necessarily requires something in the nature of an evidentiary basis, which the formation of a belief does not." [citations omitted]

The Court explained that the onus was on the Minister to present the basis for forming the "opinion" referenced in section 37 of the MMA.

As for recalculating royalties determined based on incorrect or incomplete information, the Court once again emphasized that the onus was on the Minister to demonstrate the basis for such a recalculation. It also stressed that if Alberta Energy felt it was missing information, it ought to have relied on its broad audit and information request powers to complete the record. According to the Court, if Alberta Energy thought it needed more information, it could have sought that information using its broad audit and information request powers under the MMA. The failure to request that information, it said, should not adversely affect the Applicants.

Significance

The decision serves as an important reminder of the limits on the discretionary powers of administrative decision-makers. These decision-makers play key roles administering many different regulatory frameworks and can significantly impact those they regulate. Supreme Court of Canada decisions, in Vavilov and others, often stress the importance of deference, "judicial restraint," and "a posture of respect" when courts review the exercise of discretion by administrative decision-makers. While those concepts are certainly important, it is equally important to recall that, "there is no such thing as absolute and untrammelled discretion" (Vavilov, para 108). Discretion must be exercised in way that accords with the purposes of the legislation. Decision-makers must exercise their discretion based on the facts and evidence before them and be able to justify their decisions in terms of rationality and fairness (Vavilov, paras 14 and 126). A discretionary decision that fails to respect these principles could be vulnerable on judicial review.

If you have any questions about this decision and how it impacts your business, please reach out to the authors Dan Collins, Laurie Livingstone and Lyndsee Thompson.