The BC Utilities Commission has deregulated many thermal energy systems and strengthened consumer protection. It could have gone a bit further, though.
Introduction
The BC Utilities Commission (BCUC) regulates energy utilities in BC, albeit with varying degrees of enthusiasm these days. The Utilities Commission Act has a broad definition of what must be regulated, and gives the BCUC no wiggle room to simply ignore its obligations (known as forbearance).
Sometimes, though, the BCUC decides there’s a case for deregulation. With the prior approval of the Minister of Energy, it can use section 88(3) of the Act to exclude an entire class of utilities from regulation. The BCUC always retains some powers, though, including the ability to restart regulating a utility, if that’s in the public interest.
The BCUC recently expanded the deregulation of thermal energy systems in BC. This article explains what happened.
Disclosure: I was involved as a commissioner in the early stages of this proceeding.
Thermal energy systems
Thermal energy systems are used to heat and cool buildings using centralized boilers and chillers. Hot and cold water, air or steam is piped to where it’s needed, often serving more than one building. The customers for thermal energy services are usually building owners or strata corporations.
Thermal energy systems have the potential to address one of the trickier aspects of the clean energy transition – reducing the greenhouse gas (GHG) emissions from heating and cooling buildings. By centralizing the heating / cooling facilities, economies of scale can reduce the cost of newer, greener energy technologies.
A recent example is being built at the new Oakridge property development in Vancouver, serving 14 tower blocks and using sufficiently clean energy sources (such as geothermal energy) to qualify for certification under the City of Vancouver’s Green Buildings Policy.
Early deregulation
Commercial thermal energy system providers (Provider) are public utilities, regulated by the BCUC. Providers must seek BCUC approval before starting construction of a thermal energy system, and approval of rates before charging customers for the service.
However, in a ground-breaking report in 2012, the BCUC concluded that a competitive market can provide “superior protection for consumers”, unless there is a natural monopoly or consumers require protection for some other reason. The BCUC recognized that economic regulation is costly and time-consuming, and there are limits to its effectiveness.
As a result, some thermal energy systems were deregulated in 2014. Providers of smaller “Stream A” systems no longer needed BCUC approval before starting construction, and the BCUC did not set their rates. Even broader exemptions were available for Providers of very small (“Micro”) systems, and systems owned by Strata corporations. Deregulation cut the startup and ongoing costs for these systems, and probably encouraged their recent growth.
The BCUC justified this deregulation because there was a competitive market for thermal energy systems. A customer, such as a strata corporation, had a choice of Providers. Whatever deal was agreed would have been freely negotiated, protecting the interests of the customer and the end consumers of the heating and cooling services, such as residential tenants or commercial businesses.
To be clear, thermal energy systems that didn’t qualify for any of these exemptions weren’t banned. Their Providers could still apply for BCUC approval to construct facilities and charge rates as any other regulated public utility would have to do. The BCUC, rather than the market, would ensure customers and end consumers were treated reasonably.
Fixed-Scale thermal energy systems
The Stream A thermal energy systems have now been renamed Fixed-Scale systems, but the changes to the exemptions are more than skin deep.
To qualify for the original exemption, the thermal energy system had to cost less than $15 million to build or buy, and the facilities and customers all had to be located on the same site. Both those restrictions have now been removed, so a system as large and complex as the one at Oakridge ($108.4 million) might qualify for an exemption.
This change potentially allows many more thermal systems in BC to be exempt from regulation, reducing their cost and encouraging more use of clean energy sources for building heating and cooling.
Other requirements for a Fixed-Scale exemption from regulation remain the same. For example, Providers must demonstrate they have sufficient capital reserves to fund a safe and reliable service for their customers. Also, a thermal energy system may only be built just large enough to serve its known customers; there must be no speculative building that might put the utility (and its existing customers) at risk.
Contractual obligations
Providers of Fixed-Scale thermal energy systems have always been required to have long-term contracts with their customers. This protects customers and end consumers, ensuring that they know what they’re getting into before committing to a long-term relationship with a Provider.
However, the previous Guidelines allowed Providers to obtain an exemption from regulation simply by telling the BCUC that they would have a contract in place sometime in the future. Once the exemption was granted, the BCUC stopped actively regulating the system, even though no contract was in place, potentially leaving customers at the mercy of the Provider.
In its recent decision, the BCUC has improved matters slightly by requiring Providers to have long-term agreements in place with all customers before their thermal energy systems start operation.
That’s better than before, when systems could start operating and still not have agreements in place with customers, but it’s still a missed opportunity. The BCUC could have removed the loophole entirely by insisting that long-term agreements were in place with all customers even earlier – before the exemption was granted at all.
Some customers may find themselves faced with a thermal energy system that’s been built for them and a proposed long-term contract they are not happy with, which could lead to more complaints to the BCUC. This could have been avoided.
No affiliated companies
There is one area where the BCUC’s recent decision has definitively improved consumer protection. In future, the BCUC will not grant exemptions from regulation if the thermal energy system Provider is affiliated with its customer.
The BCUC found it cannot assume the price will be competitively set in these circumstances. If the Provider and customer are related parties, no-one can be sure that the price and terms of an agreement were freely negotiated. These agreements should be scrutinized to ensure that rates are just and reasonable, and therefore no exemptions should be granted.
This situation may arise in the case of new strata construction, if the developer, at least initially, is the thermal energy system Provider and also controls the strata corporation, who is its customer.
This change will cause some thermal energy systems that would have qualified for an exemption under the old regime to require more regulation. But in my view the new arrangement is consistent with the regulatory justification for the exemption, and provides better protection for consumers.
Micro TES
There were also some improvements to the regulation of Micro thermal energy systems, very small systems, for which the cost of regulation is prohibitively high.
The original deregulation applied only to systems “large enough to accommodate a project undertaken by or for a small group of homeowners or small businesses.” To define such a system, the BCUC imposed a limit of $500,000 for their construction or purchase cost.
That cap has now been raised to $1,000,000, which should allow more systems to qualify for the exemptions for very light-handed regulation.
Up until now, there has been no requirement for the Provider to have a long-term contract with its customers. This has changed in the new decision; Providers of Micro thermal energy systems must have in place the same sort of long-term agreement with their customers as a Fixed-Scale system.
Another improvement in consumer protection is that the nature of complaints the BCUC will consider for Micro systems has expanded. Previously, the BCUC only accepted complaints about whether the Provider was genuinely operating a Micro thermal energy system, and not something larger. Now, customers may submit a complaint about safety and reliability issues, whether the terms and conditions were properly disclosed in the long-term agreement, and whether the Provider is living up to that agreement.
Strata TES
Thermal energy systems owned or operated by strata corporations for their members continue to be exempt from active BCUC regulation. But now, the BCUC may hear complaints regarding system safety and reliability, in addition to whether the system genuinely qualifies for the strata-related exemption.
Conclusion
These changes to the deregulation of thermal energy systems should encourage investment in the use of clean energy for heating and cooling buildings, while also relieving the BCUC of some unnecessary burden. There are some significant improvements in consumer protection too. It’s just a pity the BCUC didn’t go just a bit further and require long-term contracts with all customers be in place before granting its exemptions.