It is a commonly held belief that the greatest risks to Canada’s water resources under NAFTA are related to exports. In fact, the more immediate area of public policy concern is not water exports but water use in Canada by firms that are American or have US investors.

Private sector firms issued water licenses by government – be it for hydroelectric generation or for snowmaking – hold NAFTA rights far superior to any rights held by Canadians if those firms are American or have American investors.

Investment Provisions of the NAFTA

Investor rights – which trump conflicting provincial legislation - include the right to national treatment and compensation for losses to investment, profits, markets and goodwill if those rights are expropriated by the Government of Canada or any province

For many years, I and others have held up Alberta’s oil patch as the clearest example of water rights arising from domestic takings. Whether by water flooding (conventional oil and gas drilling) or by deep steam injection (extracting bitumen from the oil sands), water used by US firms (or firms with American investors) for energy extraction in Alberta’s oil patch is covered by NAFTA.

In a paper published in The University of Toronto Faculty of Law Review March 9, 2007, Joseph Cumming and Robert Froehlich examine in detail the effect of NAFTA on Alberta’s ability to use regulation as a public policy measures to protect its water resources.

Assuming a cutback in water use due to extended drought mandated under the Alberta Water Act, the authors present a case law review of relevant NAFTA Chapter XI Tribunals (Ethyl Corporation, SunBelt, Pope and Talbot, Metalclad, SD Meyers and Methanex) then go on to look at the success of a potential compensation claim by American firms whose investments in energy extraction suffer as a result of reduced access to the province’s water resources. Their conclusion:

“... the Government of Alberta, and therefore the Government of Canada, may face difficult financial consequences if the Director suspends or cancels a water license for environmental protection purposes. There are strong arguments available to a US investor that support the position that a cancellation or suspension of a water license is an indirect expropriation, or a measure tantamount to an expropriation, thereby resulting in substantial compensation being payable. In the case of an oil sands operation that is shut down as a result of a loss of its water license… a successful Chapter XI claim could be exceptionally high. Consider the loss of capital expenditures, the nullification of past expenditures, and the lost marketability of the future oil production.”

And while Canada could attempt to “settle” such suits before they reach a NAFTA panel, this “may allow environmental legislation and regulation to survive, but would do so at a tremendous cost” requiring Canada to, in effect, “purchase its environmental sovereignty by settling its way out of Chapter XI claims.”

Arguing the presence of external pressure by foreign investors undoubtedly constrains Canada’s ability to enforce its environmental policy, the authors go on to note:

“the implications for Canadian environmental sovereignty in this circumstance are clear. A private investor could essential force the hand of a Canadian legislative body. A US investor, who is not accountable to the Canadian public and who may have no concern for the Canadian environment, could potentially influence how internal Canadian environmental policy and legislation is treated. As a result of the potential for a significant compensation award to be issued, a single US investor, through the threat of use of a Chapter XI claim, may be able to cause Canadian legislation to be altered or even repealed.”

To read the full review, click on this link: Cumming, Joseph and Robert Froehlich. NAFTA Chapter XI and Canada’s Environmental Sovereignty: Investment Flows, Article 1110 and Alberta’s Water Act, The University of Toronto Faculty of Law Review March 9, 2007.

Implications of NAFTA Investment Provisions on Hydro Privatization in BC

There is no difference between water used for bitumen extraction, water used for hydroelectric production, or water used to make snow for a ski hill. When the entity holding rights to Canada’s water is American or has American investors, all such takings are covered by NAFTA.

NAFTA investment defenses would trump (and, experts fear, eventually influence the direction of) provincial and federal environmental laws. Even when water licenses are reduced or cancelled on a non-discriminatory basis, for a public purpose, and pursuant to provincial legislation, they give rise to NAFTA claims for compensation under Chapter 11.

The result is an erosion of Canadian policy sovereignty and a denigration of the rights of Canadian communities vis a vis foreign investors.

This risk is unacceptably high when the commodity in question is water.

Wendy Holm is an award-winning Agrologist, resource economist and journalist.