Rate Regulation – Exemption
In this decision, the AUC approved an application from Calgary District Heating Inc. (“CDHI”) requesting that the Downtown District Energy Centre (“DDEC”) be exempt from provisions of the Public Utilities Act (“PUA”) and the reporting requirements under Rule 005: Annual Reporting Requirements of Financial and Operational Results.
Background and Procedural Summary
The DDEC is a thermal district energy system that provides district energy (in the form of central heating and hot water services) to commercial, municipal, and residential buildings in downtown Calgary. The DDEC is a public utility owned by CDHI, as defined in the PUA. CDHI acquired the DDEC from ENMAX Corporation (“ENMAX”) in 2021. Following the purchase, CDHI confirmed that the facility would no longer be municipally owned and subject to the exemption in s. 78(2) of the PUA. As a result, the entirety of the PUA would apply to the DDEC and CDHI as its owner.
CDHI requested an order under ss. 8 and 9 of the Alberta Utilities Commission Act and s. 79 of the PUA, declaring that:
(a) ss. 88(a), (d) and (e), 92, and 103 of the PUA do not apply to any of the DDEC, CDHI, and the goods and services produced by the DDEC and offered or provided by CDHI;
(b) the reporting requirements under Rule 005 do not apply to the DDEC and CDHI; and
(c) the requirements of ss. 88(a) and (d) of the PUA and Rule 005 be replaced with specific specified annual reporting of key metrics to the AUC.
CDHI argued that its requests were in the public interest and represented a flexible and proportionate form of light-handed regulation that was responsive to the nature of district energy services. CDHI emphasized that the AUC would retain oversight of the services provided by the DDEC on a complaint basis.
ATCO Gas intervened in the proceeding and requested that the application be denied, or alternatively, should the AUC grant the exemptions, that CDHI be limited to serving its existing customers. ATCO Gas maintained that the applied-for exemptions would result in harm to customers and create an unlevel playing field between CDHI and other regulated utilities.
Jurisdiction
The AUC is empowered to declare that certain provisions of the PUA do not apply to certain goods or services provided by a public utility under s. 79(1) of the PUA.
ATCO Gas submitted that, in determining whether to make a declaration under s. 79(1) of the PUA, the AUC must exercise its discretion consistently with the legislative scheme. ATCO Gas argued that granting CDHI’s requested exemptions would frustrate the purpose of the PUA and the broader legislative scheme, which is to protect customers from the exercise of monopoly power through prospective regulation.
ATCO Gas argued that granting the exemptions requested by CDHI would undermine the legislature’s express intention to establish prospective rate regulation.
The AUC disagreed that a departure from prospective economic regulation would necessarily frustrate the purpose of the PUA or undermine the intent of the legislature. The AUC found that it must exercise its discretion within the framework provided by the legislation and consistently with the purposes and policies underlying its grant. The AUC held that the overarching objective of the legislative scheme is to safeguard the public interest in a service environment that is susceptible to abuses of monopoly power. The legislature has equipped the AUC with the tools required to fulfill this purpose, including the ability to fix rates and exercise general oversight of the operation of public utilities.
The AUC was satisfied that most of the exemptions requested by CDHI could be granted without harming customers or interfering with the integrity of utility service.
Issues
Will the Regulation Proposed by CDHI Interfere with the Establishment of Just and Reasonable Rates
The PUA, as well as the Electric Utilities Act (“EUA”) and Gas Utilities Act (“GUA”), require the AUC to ensure the establishment of just and reasonable rates. Rate regulation is not generally exercised in competitive markets where customers have a choice of providers, as it is intended to operate as a surrogate for competition where competition is absent and is unnecessary where the market will otherwise function on its own.
ATCO Gas asserted that the DDEC has all the characteristics of a natural monopoly and that its customers require protection from the abuse of monopoly power. ATCO Gas argued that CDHI customers do not have a choice of options. ATCO Gas relied on AUC Decision 24056-D01-2019 regarding the application from ENMAX Independent Energy Solutions Inc. (“EIES”) for exemption of the Edmonton District Energy System from sections of the PUA. In Decision 24056, the AUC found that customers who agreed to take service from the Edmonton District Energy System were effectively captive to the services from EIES. The AUC was not convinced by the reference to this decision and determined that the current circumstances of CDHI are not comparable to those between EIES and its customers.
In contrast to Decision 24056, the AUC would retain oversight and authority to consider rates on a complaint basis in the circumstances of this matter. Further, CDHI submitted at the hearing that it could accept the AUC’s authority to fix rates for affected customers or a customer class if, following a customer complaint, the AUC determined that rates charged by CDHI were unjust or unreasonable.
The AUC determined that CDHI operates in a sufficiently competitive environment to allow its customers a degree of choice about their service provider that would not exist in a monopoly.
What are the Effects of the Application on Safety, Reliability and Integrity of the Utility System
The AUC found no evidence to suggest that the exemptions proposed by CDHI will impact the safety or reliability of service offered to customers of the DDEC.
ATCO Gas submitted that approval of the application would result in an unlevel playing field between the DDEC and other utilities subject to more extensive regulation, which would result in an unfair shifting of costs to regulated customers. ATCO Gas is the default supplier of natural gas in the city of Calgary and operates as a natural monopoly. CDHI can choose which customers to serve, taking those with the highest throughputs and greatest possible profits while ignoring less or non-profitable customers. This can contribute to higher prices for remaining customers, initiating a cycle of defecting customers and increasing costs.
The AUC was not convinced that approval would harm existing ATCO Gas customers. The AUC was not convinced as ATCO Gas did not provide detailed evidence supporting the harm. CDHI is also a customer of ATCO Gas, and the DDEC uses natural gas as an input in providing heat to its customers. The AUC accepted that ATCO Gas could lose some customers to the DDEC. The AUC, however, determined that the DDEC’s continuing operation or expansion within its current capacity will not alter the character of ATCO Gas’ statutory obligation to serve customers within its franchise area, impair ATCO Gas’ ability to charge just and reasonable rates to its customers, or limit its opportunity to recover its prudently incurred costs and earn a fair rate of return.
Conclusion
As a condition of approval, the AUC imposed that CDHI provides, within 30 days of this decision, a written notice to its existing customers of their entitlement to raise complaints with the AUC in respect of the district energy service provided by CDHI or rates paid for that service. Further, upon executing any new thermal energy services agreements, CDHI shall notify customers of their entitlement to raise complaints with the AUC regarding the district energy service provided by CDHI or rates paid for that service. Finally, CDHI shall file with the AUC an annual report of key metrics. CDHI must file the report no later than 60 days following the completion of CDHI’s corporate unaudited financial year-end for each calendar year.
The AUC determined that it is in the public interest to allow the exemption of the DDEC and CDHI as its owner from specific provisions of the PUA. The AUC found it unnecessary to grant the requested exemption from s. 92 of the PUA. The AUC declared that ss. 88(a), (d) and (e), and 103 of the PUA and the reporting requirements under Rule 005 do not apply to DDEC and CDHI.
