(Adds reaction from federal government, TransCanada)
By David Ljunggren
OTTAWA, Sept 9 (Reuters) - Canada's energy regulator said on Friday that a panel assessing TransCanada Corp 's TRP.TO proposed Energy East pipeline was quitting, a decision that will drag out an already-lengthy appraisal process.
Critics had demanded two of three panel members quit after it emerged they had privately discussed the project last year with former Quebec Premier Jean Charest, who was working for TransCanada as a consultant at the time.
The regulator, the National Energy Board (NEB), said in a statement that the panel was stepping down "to preserve the integrity" of the board and the Energy East review.
Although the panel members had talked to Charest and others in good faith, "they understand that their participation in these meetings may have created an apprehension of bias," which could undermine the board's credibility, the statement said.
The announcement represents another challenge for the project, which is designed to carry 1.1 million barrels of crude per day from Alberta's oil sands to Canada's East Coast, where it can be sold onto more lucrative international markets.
The push for Energy East came after U.S. President Barack Obama last November rejected TransCanada's Keystone XL pipeline to the United States. Environmentalists fear the projects would spur development of Canada's carbon-intensive oil sands.
The panel that quit had been probing the section of the pipeline that would cross the predominantly French-speaking eastern province of Quebec.
That hearing will now be suspended until the NEB names another panel. This could take time since there are very few qualified French-speaking experts, officials say.
As it stands, the NEB has until March 16, 2018, to issue its final report.
Keith Brooks, a program director for Environmental Defence, a leading green group, welcomed the announcement, but complained it did not go far enough.
"The apprehension of bias ... has damaged the entire review process beyond repair," he said in a statement.
A spokesman for Canadian Energy Minister Jim Carr described the delay of the review as unfortunate, but added it was crucial that the NEB showed itself to be independent and neutral.
TransCanada said it accepts the panel's decision and looks forward to the hearings resuming, according to a company spokesman.
In January, the Liberal government of Prime Minister Justin Trudeau said it would modernize the NEB, but not before the regulator had examined Energy East.
More than 50 environmental groups sent a letter to Carr and Trudeau on Thursday demanding an overhaul of the regulator before an Energy East decision.