Construction delays are putting additional pressure on energy bills. The BCUC needs to maintain a delicate balance between the interests of utilities and their ratepayers.
Introduction
Energy consumers are used to price increases. According to Stats Canada, BC’s energy prices rose 32.2 percent between 2020 and 2024, compared with 17.2 percent for consumer prices overall.
All energy utilities face increases in their cost of labour and materials, but now there are additional concerns from an unexpected quarter – the slowdown in BC’s real estate market. For example, delays in completing the Dockside Green development in Victoria, BC will contribute to a proposed 54 percent increase in energy bills for customers of Dockside Green Energy between 2024 and 2028.
There may be similar problems lurking elsewhere, too. Let’s take a look.
Background
Thermal energy systems deliver heating and cooling to buildings by circulating water or steam from a centralized facility. Also known as district energy systems, they are increasingly a feature of new property developments.
But the new energy utilities to serve these developments face a problem when they start up. They generally build sufficient capacity to serve the total number of customers once the development is complete, but often properties are constructed in phases, with new buildings added over several years. Under the typical “cost of service” formula for rates of regulated utilities, the first customers would pay higher rates for the capacity they don’t use, subsidizing the customers who are added later.
To solve this timing problem, the BC Utilities Commission (BCUC) approves “levelized rates” for start-up operations – one rate that allows the utility to collect enough revenue to cover its total costs over, say, ten years, even though it won’t collect enough revenue in the early years. The losses in those early years are recorded in a regulatory deferral account, along with cumulative interest, and are paid off once the new customers are added and revenues have increased.
Problems in the building sector
There appears to be a glut of unsold properties in BC at present, caused by such factors as high interest rates reducing affordability and reduced demand from foreign buyers.
Whatever the cause, this over supply is hurting presales for new building projects, which typically need to be 80 percent presold before they can get construction financing. As a result, developers are delaying planned construction projects.
As a recent example, the Vancouver Sun reports that Wesgroup Properties is laying off 12 percent of its workforce and “has had to delay several projects.” And late last year, delays of up to five years in construction of Vancouver’s Oakridge project, a joint venture between Westbank and QuadReal were reported.
Dockside Green
Dockside Green Energy’s facility was approved by the BCUC in 2008. After a long and somewhat tortuous history, the utility was acquired by Corix in 2018, and a regulatory deferral account was created to capture losses incurred before the completion of the development.
In its latest rates application, Dockside Green Energy states that an addition of 36 percent to the development’s total floorspace planned by 2029 has now been delayed, leaving the utility with lower revenues.
This, as well as higher costs than originally anticipated, means that current rates would never yield sufficient revenues to bring the regulatory deferral account to zero. The account balance would just continue to grow, attracting compound interest payable by ratepayers, reaching $13 million by 2035, with no prospect of ever being paid off.
The utility must, eventually, cover these costs, or it will effectively become bankrupt, hence the proposed 54 percent bill increase by 2028. Even then, the deferral account won’t be paid off until 2044, after reaching a peak deficit of $5 million in 2035. The BCUC proceeding to consider Dockside Green Energy’s rates should conclude by the end of this year.
River District
Not far behind is River District Energy. The $11 million first phase of its energy facility was approved in 2011, serving 20 buildings in the River District development. The BCUC approved a 20-year levelized rate, increasing by 3.94 percent a year, that would allow the start-up costs to be fully recovered by 2031.
But when the $34 million second phase of the energy facility was approved in 2023, River District Energy admitted that it might need until 2047 to fully recover the balance in its deferral account, because of delays in the remaining phases of development. Plus, it would need significantly higher rate increases in the short term.
Despite this analysis, in October 2023 River District Energy requested increases for 2024 and 2025 of just 3.94 percent, pointing out that it was in its interest to support the developer, Wesgroup Properties, “to achieve optimal sales volumes.”
The BCUC rejected this rate request, and directed that rates should instead increase by 7.5 percent each year. It explained this would lower the risk to current and future customers, and would reduce the compound interest they would pay on the outstanding balance.
Oakridge Energy
Possibly the largest thermal energy system to be approved recently is the $108 million facility that Oakridge Energy will use to heat and cool the buildings at the new Oakridge Park development in Vancouver.
The rates approved by the BCUC in 2024 included a 10-year levelized rate, rising at 2 percent a year. Oakridge Energy has a regulatory deferral account to capture the early losses, which should be paid off by 2033, having reached a peak deficit of $10.9 million in 2028.
But problems are already emerging. Oakridge Energy has admitted that only two of the twelve phase 1 buildings scheduled for the end of 2024 were actually connected by that date. While all phase 1 buildings are now being billed for heating and cooling, the continued slowdown in development in Vancouver leaves the timing of phase 2 in doubt.
Originally scheduled for completion in 2027, phase 2 accounts for around 50 percent of the total floorspace. If this were delayed, or even worse abandoned altogether, the phase 1 customers might be left carrying the cost of the entire energy facility. The current 10-year levelized rates would be unsustainable.
Conclusion
There’s nothing wrong in principle with levelized rates to spread a utility’s start-up costs more evenly between customers in its first few years. But there is a moral hazard to consider.
If completion of the property development is delayed, previously approved levelized rates may have to rise. But utilities at partially completed developments want energy costs to appear as low as possible to attract sales of the remaining rental or strata units. There is a risk that rates are overly suppressed in the short term, leaving growing balances in utilities regulatory accounts attracting compound interest.
This can give energy customers a nasty surprise in future years, and may even put utilities at financial risk.
In today’s real estate market, buyers are scarce – utilities at partially completed developments must be under pressure to keep energy rates low in the short term. It probably doesn’t help that some of these utilities are owned by the very developers that are trying to sell the unbuilt units (Wesgroup Properties owns River District Energy, and Oakridge Energy is indirectly owned in part by Westbank Holdings).
The BCUC seems to be alert to the danger, for example insisting that rates at River District Energy rise more than the utility had requested. It will need to stay sharp.