ORDER NUMBER
G-152-24
IN THE MATTER OF
the Utilities Commission Act, RSBC 1996, Chapter 473
and
FortisBC Alternative Energy Services
TELUS Garden Thermal Energy System Complaint filed by Strata Plan EPS 3242
and Georgia and Seymour Properties Limited Partnership
BEFORE:
B. A. Magnan, Panel Chair
W. M. Everett, KC, Commissioner
on May 30, 2024
ORDER
WHEREAS:
A. On January 5, 2023, the British Columbia Utilities Commission (BCUC) received a complaint (Complaint) from Strata Plan EPS 3242 and Georgia and Seymour Properties Limited Partnership (the Customers) regarding FortisBC Alternative Energy Services Inc.’s (FAES) proposed rates for the TELUS Garden Thermal Energy System (TELUS Garden TES) for the performance term (PT) which began on January 1, 2021 and ends on December 31, 2025 (PT2);
B. By Orders C-1-13 and G-2-15 dated February 4, 2013 and January 9, 2015, respectively, the BCUC granted FAES a Certificate of Public Convenience and Necessity and approved the rate design and rates for the TELUS Garden TES, among other matters. The rate design approved by the BCUC for the TELUS Garden TES includes a performance mechanism whereby the actual costs from the first four years (2016 through 2019) of FAES’s service agreements with the Customers (Service Agreements) during the five-year (2016 through 2020) first performance term (PT1), factor into the calculation of a performance ratio (Performance Ratio). The Performance Ratio then impacts the rates for the next five years (PT2 from 2021 through 2025);
C. In the Complaint, the Customers raise two areas of concern regarding the assumptions and inputs FAES used to calculate the Performance Ratio and rates for PT2. The concerns relate to the inclusion of Thermal Energy System Deferral Account (TESDA) recovery charges and the allocation of increased costs to the TELUS Garden TES for overheads and shared services provided by FAES affiliates;
D. Between January 5, 2023 and May 30, 2023, BCUC Staff received information from FAES and the Customers through the BCUC complaints process;
E. By letter dated June 20, 2023, the BCUC requested FAES to file supplementary information regarding the issues raised in the Complaint. FAES filed its response on June 30, 2023;
F. By Orders G-204-23, G-256-23, and G-349-23, the BCUC established the regulatory timetable for the review of the Complaint which included one round of BCUC information requests (IRs) to FAES and to the Customers, and final and reply arguments from the parties;
G. On December 14, 2023, the BCUC reopened the evidentiary record and issued one round of confidential Panel IRs (Confidential Panel IR No. 1) to FAES. On December 22, 2023, FAES provided responses to the Confidential Panel IR No. 1, and by Order G-4-24 dated January 10, 2024, the BCUC requested submissions from the parties on the responses. The Customers and FAES provided their submissions on FAES’s responses to Confidential Panel IR No. 1 on January 18, 2024 and January 19, 2024, respectively; and
H. The BCUC has reviewed the evidence and arguments filed in this proceeding and determines that the following orders are warranted.
NOW THEREFORE for the reasons outlined in the decision accompanying this order, the BCUC orders as follows:
1. FAES is approved to allocate a TESDA amount calculated using the same method as in the initial rate setting for the TELUS Garden TES in the Performance Ratio, in the determination of PT2 rates.
2. FAES is approved to allocate overheads and shared services based on asset values in the Performance Ratio, in the determination of PT2 rates.
3. FAES is approved to set the rates for PT2, effective January 1, 2021, for the TELUS Garden TES based on the Performance Ratio for PT2 as set out in Confidential Appendix A of the accompanying decision.
4. FAES is directed to refund to the Customers the difference between the rates approved in Directive 3 and the rates that have been charged to the Customers since January 1, 2021, with interest calculated in accordance with the terms of FAES’s Service Agreements with the Customers, by way of a bill adjustment on the Customers’ next TELUS Garden TES bills.
5. The Complaint is closed.
DATED at the City of Vancouver, in the Province of British Columbia, this 30th day of May 2024.
BY ORDER
Original signed by:
B. A. Magnan
Commissioner
FortisBC Alternative Energy Services
TELUS Garden Thermal Energy System Complaint filed by Strata Plan EPS 3242
and Georgia and Seymour Properties Limited Partnership
DECISION
Table of Contents
Page no.
3.1 The Allocation of TESDA Recovery Charges to the TELUS Garden TES
1.0 Introduction
Background
FortisBC Alternative Energy Services Inc. (FAES) owns and operates the TELUS Garden Thermal Energy System (TELUS Garden TES), which provides thermal energy for heating, cooling and hot water to the TELUS Garden building development in downtown Vancouver, British Columbia at 777 Richards Street, 783 Richards Street and 510 West Georgia Street. The TELUS Garden TES has two customers (the Customers):
• The Owners, Strata Plan EPS 3242, which is the residential strata corporation in the TELUS Garden buildings, and
• Georgia and Seymour Properties Limited Partnership, which owns the office and retail spaces in the TELUS Garden buildings and is represented by Warrington PCI Management.[1]
On January 5, 2023, the British Columbia Utilities Commission (BCUC) received a complaint (Complaint) from the Customers regarding the rates proposed by FAES for the TELUS Garden TES for the second performance term[2], which began on January 1, 2021 and ends on December 31, 2025 (PT2). [3]
The rate design approved by the BCUC for the TELUS Garden TES includes a performance mechanism whereby the actual costs from the first four years (2016 through 2019) of FAES’s service agreements with the Customers (Service Agreements) during the five-year (2016 through 2020) first performance term (PT1), factor into the calculation of a performance ratio (Performance Ratio). The Performance Ratio then impacts the rates for the next five years (PT2 from 2021 through 2025).[4] As outlined in the Service Agreements, a Performance Ratio adjustment considering the previous five years (four years for the first performance term) is required to update the thermal energy rate that FAES will charge to the Customers.[5] FAES must provide its calculation of the Performance Ratio to the Customers and meet with the Customers, if they desire an opportunity to discuss the results.[6]
The Customers do not take issue with the rate design approved for the TELUS Garden TES (which is described in more detail below under the heading “Approved Rates for the TELUS Garden TES”) nor with the majority of the inputs used by FAES to calculate the Performance Ratio and rates for PT2.[7] However, the Customers raise two areas of concern regarding these inputs, namely:
1. The allocation of Thermal Energy System Deferral Account (TESDA) recovery charges to the TELUS Garden TES; and
2. The allocation of increased costs to the TELUS Garden TES for overheads and shared services provided by FAES affiliates.[8]
In the Customers’ view, FAES’s proposals for these items result in a higher Performance Ratio and higher rates for PT2 which do not appear to be justified.[9] The Customers are not seeking a variation of any prior BCUC orders, but are seeking that the BCUC:[10]
(i) Determine that the TESDA balance amortized to the TELUS Garden TES during PT1 should be excluded from the calculation of the Performance Ratio for PT2 rates;
(ii) Determine the reasonable and appropriate overheads and shared services cost allocation to the TELUS Garden TES; and
(iii) Direct FAES to recalculate and charge PT2 rates in accordance with the BCUC’s final determinations in this proceeding related to items (i) and (ii) above.
The Complaint references the rate design for the TELUS Garden TES and the TESDA. For reference, a description of the approved rates for the TELUS Garden TES and the TESDA, along with a summary of certain relevant BCUC orders for each topic are set out below.
Approved Rates for the TELUS Garden TES
On January 9, 2015, by Order G-2-15, the BCUC approved, among other things, the TELUS Garden TES rates, rate design and fuel deferral account as established in the Service Agreements.[11] As such, the Service Agreements set out the BCUC-approved rates for the TELUS Garden TES.
As noted above, in accordance with the Service Agreements, FAES is required to calculate a Performance Ratio adjustment every five years (four years for the first performance term). “Performance Ratio” is defined in the Service Agreements as follows:[12]
The ratio of actual costs of providing the Service relative to the forecast costs of providing the Service (set out at the initiation of Service), as reasonably determined by the Utility, calculated in the fourth year of each Performance Term for the Previous five years (four years for the first Performance Term). The individual cost components included in the calculation of the Performance Ratio are: a) steam costs, b) electricity costs, c) operations and maintenance,
d) depreciation and amortization, e) taxes (property and income), and f) capital carrying costs, including initial investment, and replacement capital.
In the reasons for decision accompanying Order G-2-15 (Order G-2-15 Decision), the BCUC also determined that the ongoing regulatory oversight of the TELUS Garden TES would be administered on a “complaints basis”, noting that:[13]
1. The determination would not exempt, or otherwise relieve, FAES of any of its obligations under the Utilities Commission Act (UCA), other than paragraphs (a) through (f) of section 44.1(2) with respect to the TELUS Garden TES long-term planning filings to the BCUC; and
2. Unlike the complaint process in the TES framework, there would be no limitations on the nature of complaints that the BCUC would review nor on the BCUC’s approach to resolving the complaints, in accordance with the UCA.
The TELUS Garden building opened for residential occupancy and the TELUS Garden TES began providing thermal energy services in 2016.[14]
Thermal Energy System Deferral Account (TESDA)
The TESDA is an FAES deferral account containing past costs related to alternative energy solutions projects.[15] FAES provides the following explanation of the history of the TESDA:[16]
The TESDA (formerly the New Energy Solutions Deferral Account) was established as part of the Negotiated Settlement Agreement (NSA) in the FortisBC Energy Inc. (FEI) 2010 and 2011 Revenue Requirements and Delivery Rates, approved by Order G-141-09. FEI was anticipated to be the entity providing TES. The NSA stated “[t]he risk of non-recovery of amounts in the New Energy Solutions Deferral Account will not be borne by natural gas ratepayers. The Parties agree that any debit balance in the New Energy Solutions Deferral Account will not be recovered through natural gas rates and any credit balance will not be applied to reduce natural gas rates.”
At that time, FEI used the TESDA to capture the costs associated with FEI’s nascent thermal energy services business, and to segregate those costs from FEI’s natural gas business. The intent was to prevent FEI’s natural gas distribution customers from cross-subsidizing FEI’s nascent alternative energy solutions business. FEI transferred the TESDA and the account balance to FAES on December 31, 2014, pursuant to Commission Order G-151-14 and Commission Letter L-62-14. The transfer was part and parcel of FEI discontinuing its role in
TES. […]
In Order G-151-14, by which the BCUC directed FortisBC Energy Inc. (FEI) to transfer the TESDA to FAES, the BCUC stated that determinations regarding the disposition of the balance in the TESDA would be the subject of a future application from FAES.
In the proceeding leading to the setting of rates in Order G-2-15 (TELUS Garden TES Rates Proceeding), FAES filed certain information request (IR) responses referencing the allocation of TESDA costs to the TELUS Garden TES, reproduced in part below:
• “The allocation of costs from the TESDA to this project will be accomplished by crediting the TESDA and charging the costs to the operating costs of the project. To the extent that the allocation method differs from forecasted, the actual amounts credited to the TESDA and charged to the project will change, but the rates will only be affected to the extent that the Performance Ratio changes as a result for future rates…“[17]
• “[…] FAES will be bearing the risk for any difference between the actual allocations of the TESDA and the forecast amounts FAES used in setting the rates. While the Performance ratio will be somewhat affected by a change in the TESDA recovery amount, the effect on future rates would not be a direct pass through...”[18]
• FAES confirmed its intention that “any future Commission determinations on the TESDA allocation will flow through to the Performance Ratio calculation and be used to adjust rates in the subsequent Performance Term.”[19]
Subsequently, on June 13, 2017, FAES filed an application with the BCUC to amortize the TESDA balance (TESDA Amortization Application), and on November 23, 2017, by Order G-167-17, the BCUC approved FAES amortizing the TESDA balance in the manner described in its TESDA Amortization Application. In particular, the BCUC directed that “FAES will amortize amounts each year to the Legacy, Micro TES, and Stream A TES projects consistent with its negotiated customer agreements”,[20] and that “[t]he future amortization of the TESDA balance to the Delta School District project or any future Stream B TES projects is excluded from the scope of this order, and will be the subject of future Commission orders, as required.”[21]
In the reasons for decision accompanying Order G-167-17 (Order G-167-17 Decision), the BCUC noted that FAES’s TESDA Amortization Application proposed a “flexible amortization mechanism” that would allow FAES to:[22]
(i) Leave existing customers unaffected by maintaining the amortization amount inherent in the financial model for the life of each project; and
(ii) Recover as much or as little of the TESDA balance from future customers in negotiated rates as the market will bear in each circumstance.
The BCUC further observed that:[23]
FAES states that for customers with fixed rates, the balance and amount that FAES amortizes are of no consequence. For customers on rates that are not reviewed or approved by the Commission (projects that would currently be classified as Stream A TES projects or Micro TES), FAES confirms its proposal will result in a level of TESDA amortization expense to their overheads that conforms with the forecasts used in negotiating their contracts, thereby holding them harmless. Finally, FAES submits, for the Delta School District and any future customers with rates that the Commission will review and approve, FAES proposes that the TESDA allocation embedded in their rates can be reviewed in the context of their rate review and approval processes.
The BCUC further noted that FAES’s amortization proposal in the TESDA Amortization Application “does not disadvantage existing customers with fixed rates” and that “[a]ny TESDA amortization to Legacy, Micro TES and Stream A TES projects would be based on their negotiated contracts.”[24]
Regulatory Process
The BCUC established a written public hearing process for the review of the Complaint. The Customers and FAES were the only participants in this proceeding. The public hearing process consisted of supplementary information filed by FAES, one round of BCUC IRs to FAES and to the Customers, and final and reply arguments from the parties.[25]
On December 14, 2023, the BCUC reopened the evidentiary record and issued one round of Confidential Panel IRs to FAES (Confidential Panel IR No. 1). FAES provided responses to Confidential Panel IR No. 1 on December 22, 2023, and the BCUC requested submissions from the parties on the responses.[26] The Customers and FAES provided their submissions on FAES’s responses to Confidential Panel IR No. 1 on January 18, 2024 and January 19, 2024, respectively.
2.0 Legislative Framework
Section 83 of the UCA provides the BCUC with broad jurisdiction with respect to the resolution of complaints:
If a complaint is made to the commission, the commission has powers to determine whether a hearing or inquiry is to be had, and generally whether any action on its part is or is not to be taken.
Additionally, sections 58 to 61 of the UCA confer broad discretion on the BCUC with respect to the setting and approval of rates.
3.0 Review of the Complaint
The Panel notes that page 1 of the Order G-2-15 Decision states, in relation to the TELUS Garden TES, that “there are no limitations on the nature of complaints that the Commission will review nor on the Commission’s approach to resolving the complaints, in accordance with the Utilities Commission Act.” Further, both FAES and the Customers acknowledge the BCUC’s jurisdiction to resolve the Complaint.[27] In light of this, and the broad powers of the BCUC under the UCA described in Section 2.0 above, to resolve complaints, the Panel is satisfied that it has the jurisdiction to adjudicate the Complaint.
As described in Section 1.0 above, and acknowledged by both FAES[28] and the Customers,[29] the rates for the TELUS Garden TES were set by the BCUC by Order G-2-15, pursuant to which the Service Agreements set out the BCUC-approved rates for the TELUS Garden TES. Accordingly, the Panel intends to assess the Complaint within the context of the approved rates set out in the Service Agreements.
In the following subsections, the Panel first addresses the Customers’ two areas of concern raised in this Complaint (the allocation of TESDA recovery charges to the TELUS Garden TES in subsection 3.1, and the allocation of overheads and shared services costs in subsection 3.2) and then concludes with an overall determination on PT2 rates for the TELUS Garden TES (subsection 3.3).
3.1 The Allocation of TESDA Recovery Charges to the TELUS Garden TES
Positions of the Parties
The Customers
The Customers state that the TESDA allocated to the TELUS Garden TES should be excluded from the calculation of the Performance Ratio for PT2 rates.[30] Primarily, the Customers submit that including the TESDA allocation is not consistent with FAES’s prior representations and commitments to the BCUC, nor with the applicable BCUC orders.[31] Based on certain statements in the Order G-167-17 Decision, the Customers understand that the BCUC’s intent in approving FAES’s proposed amortization of the TESDA balance, including the amortization to the TELUS Garden TES during PT1, was that the amortization would affect only FAES,[32] and that existing customers, including those of the TELUS Garden TES, would be unaffected.[33]
In relation to the IR responses from the TELUS Garden TES Rates Proceeding referencing the allocation of TESDA to the TELUS Garden TES, the Customers state:[34]
The BCUC’s IR 2.2 to the Customers in this proceeding refers to three IR responses FAES filed in, the 2014 TGTES [TELUS Garden TES] Rates Application proceeding. As stated in the Customers’ response to that BCUC IR, FAES’s responses to those IRs presumably reflected FAES’s position at time of filing the responses in November 2014. The BCUC’s Order G-2-15 Decision does not mention that FAES evidence. More than two years later on July 13, 2017, FAES submitted its application to the BCUC for approval to amortize the TESDA balance at which time FAES represented to the BCUC that the amortization would affect only FAES and existing customers (including those of the TELUS Garden TES) would be unaffected. Based on FAES’s commitments, the BCUC approved FAES’s application without notice to FAES’s customers or a public hearing and without reviewing the propriety of the TESDA balance… [Footnotes in original omitted]
The Customers further submit that if the TESDA balance amortized to the TELUS Garden TES during PT1 is included in the calculation of the Performance Ratio for PT2 rates, then the PT2 rates will be higher than they would be otherwise, contrary to FAES’s commitments to the BCUC and the BCUC’s prior determinations.[35]
FAES
FAES submits that the TESDA allocation is consistent with the Service Agreements, FAES representations, and applicable BCUC orders for the TELUS Garden TES.[36] In FAES’s view, TESDA amortization is a legitimate cost for calculation in the Performance Ratio, as it was included in the forecast for the initial rate setting for the TELUS Garden TES, and as such, the actual costs included in FAES’s response to Confidential Panel IR No. 1 (see Confidential Appendix A) are calculated using the same method.[37]
FAES submits the Service Agreements specify that the Performance Ratio should be reasonably calculated based on FAES’s forecast costs, including operations and maintenance costs.[38] FAES explains that the TESDA amortization is part of FAES’s overheads costs, which are allocated to the TELUS Garden TES as part of the operations and maintenance costs of providing service to the TELUS Garden TES. FAES states that since all of FAES’s customers benefit from the work done to build its business model (the costs of which were captured by the TESDA), the TESDA amortization allocated to the TELUS Garden TES is “reasonably and appropriately included in its forecast costs for setting the [Performance Ratio] under the Service Agreement.”[39] FAES suggests that this is the reason that an allocation of the TESDA was built into the initial rates for the TELUS Garden TES.[40]
FAES also submits that the Customers do not dispute the TESDA allocation was appropriately included in rates for PT1, and that if it was appropriate to include the TESDA amortization allocation to the TELUS Garden TES’s PT1, then it should also be appropriate to include it in PT2, given that the Service Agreements remain unchanged since the initial approval by the BCUC.[41] If there was any objection to the TESDA, FAES asserts that the time to raise that objection would have been in the negotiation of the initial rates and Service Agreements, or in the TELUS Garden TES Rates Proceeding before the BCUC.[42] FAES states, however, that “[n]o such objections were raised because it was understood by the parties to the Service Agreement[s] that a TESDA amortization expense was built into the costs of the [TELUS Garden TES].”[43] FAES contends that the fact that the BCUC does not mention the TESDA allocation in the Order G-2-15 Decision is of no consequence since there are many line items that go into a rate calculation, and it is “neither customary nor expected” that the BCUC’s decision approving a rate like that set out in the Service Agreements would refer to all line items and costs composing the rates.[44] To the contrary, FAES states, if a legitimate cost of service item such as the TESDA amortization expense were to be excluded, then this would need to be specified in the Service Agreements or the BCUC’s order, and there is no such wording.[45]
Finally, with respect to the Customers’ submission that FAES represented in 2017 that the TELUS Garden TES customers would bear no allocation of the TESDA, FAES submits that this is incorrect.[46] FAES explains that for complaints-based customers like the TELUS Garden TES, its proposal in the TESDA Amortization Application was to maintain the status quo. That is, FAES clarifies its submission at that time, regarding existing customers being “unaffected,” meant that they would continue to be allocated an amount of the TESDA that was already contemplated in their Service Agreements.[47] FAES argues that the TESDA allocation was discussed in, and was part of the evidentiary record, of the TELUS Garden TES Rates Proceeding. Therefore, “it was understood by the parties to the Service Agreement[s] that a TESDA amortization expense was built into the costs of the [TELUS Garden TES].”[48]
The Customers’ Reply
The Customers argue in reply that the TESDA amortization is not a cost of service of FAES or of the TELUS Garden TES. Rather, the Customers submit that the TESDA contains costs incurred by FEI prior to the existence of FAES and is a relic of FEI’s development of its nascent TES business, which was transferred to FAES to “get it off the books of FEI”, subject to the condition that determinations regarding the disposition of the balance in the TESDA would be the subject of a future application from FAES.[49] The Customers assert that:[50]
As stated by FAES, the TESDA has “fully served its purpose and has been closed”. Yet, FAES proposes to include the TESDA amortization in the calculation of the Performance Ratio, resulting in higher customer rates for Performance Term Two.
The Customers further disagree with FAES’s assertion that “[the Customers] do not dispute that the TESDA allocation was appropriately included in rates for [PT1].”[51] Rather, the Customers state, they “understand that TESDA amortization was allocated to the actual financial reporting for the TELUS Garden TES during Performance Term One pursuant to Order G-167-17 and that this amortization was not recovered in TELUS Garden TES rates, which had been set by Order G-2-15.”[52] The Customers also do not agree with FAES’s characterization of the record and what the parties at the time of the TELUS Garden TES Rates Proceeding might have understood or ought to have known. The Customers argue that they were not involved at the time, and that they rely on the record, particularly the Order G-167-17 Decision.[53]
Finally, the Customers note that the Service Agreements make no mention of the TESDA. In their view, it was only when the Customers had asked FAES to explain the large increase in the overheads costs between the forecast and actual costs and FAES’s responses identified the TESDA amortization (among other things), that the Customers first heard of the TESDA.[54]
Panel Determination
For the following reasons, the Panel finds that the TESDA balance amortized to the TELUS Garden TES during PT1 should be included in the calculation of the Performance Ratio for PT2 rates as filed by FAES.
The Panel does not agree with the Customers that TESDA amortization is not a cost of service of FAES in relation to the TELUS Garden TES. Although the Customers highlight that FAES has stated that “the TESDA is a relic of FEI’s development of the TES business that has fully served its purpose and has been closed,”[55] in the Panel’s view, the Customers have misconstrued the meaning of the word “closed” in this context. As described in Section 1.0 above, by Order G-151-14, FEI was directed to close the TESDA and dispose of it, by transferring the TESDA and the accumulated balance at the time of the transfer to FAES. The BCUC further directed in Order
G-151-14 that determinations regarding the disposition of the balance in the TESDA would be the subject of a future application from FAES.
Subsequently, FAES filed the TESDA Amortization Application with the BCUC. In the resulting Order G-167-17 Decision, the BCUC approved FAES amortizing the TESDA balance in the manner described in the TESDA Amortization Application. In particular, the BCUC directed that “FAES will amortize amounts each year to the Legacy, Micro TES, and Stream A TES projects consistent with its negotiated customer agreements.”[56] The BCUC noted that FAES’s amortization proposal in the TESDA Amortization Application “does not disadvantage existing customers with fixed rates” and that “[a]ny TESDA amortization to Legacy, Micro TES and Stream A TES projects would be based on their negotiated contracts.” The only projects that the BCUC excluded from the scope of Order G-167-17 were “the Delta School District project or any future Stream B TES projects.”[57] The Panel considers it clear that the TELUS Garden TES is neither “the Delta School District project” nor a “future Stream B TES project”, given that the TELUS Garden TES was already in operation at the time of the Order G-167-17 Decision.
The Panel notes that FAES asserts that the TELUS Garden TES is a Stream A TES,[58] while the Customers disagree, noting in particular that the “BCUC has not issued an order exempting the TELUS Garden TES from sections 45 and 59 to 61 of the UCA” and that “pursuant to the TES Guidelines the TELUS Garden TES is subject to regulation as a Stream B TES.”[59] However, the Panel considers that it is unnecessary to make a finding on this issue for the present decision, since, in the Panel’s view, it is clear from the Order G-167-17 Decision that FAES was approved to amortize TESDA amounts to existing customers at the time of Order G-167-17 (except for the Delta School District), thereby including the TELUS Garden TES, and consistent with FAES’s negotiated Service Agreements with the Customers. Whether the TELUS Garden TES is characterized as a “Legacy” project or a “Stream A TES” does not affect this. Put another way, since the TELUS Garden TES is neither “the Delta School District project” nor a “future Stream B TES project”, the Panel considers that it falls within the category of projects in the Order G-167-17 Decision for which FAES was authorized to amortize TESDA amounts consistent with its negotiated customer agreements.
In light of the foregoing, the Panel finds that FAES was approved by Order G-167-17 to amortize TESDA amounts to the TELUS Garden TES consistent with the applicable negotiated contracts (i.e. the Service Agreements).[60] As such, the Panel accepts FAES’s submissions that its earlier representation regarding existing customers being “unaffected” meant that they would continue to be allocated an amount of the TESDA that was already contemplated in their service agreements.
With respect to whether or not TESDA amortization was included in the Service Agreements for the TELUS Garden TES, the Panel is satisfied that, under the Service Agreements, one of the cost components to be included in the calculation of the Performance Ratio is the TELUS Garden TES operations and maintenance costs. The Panel is also satisfied that FAES has demonstrated that the TESDA amortization is appropriately treated as part of FAES’s overheads costs, which are themselves a component of the operations and maintenance costs that were a parameter in the initial rate setting for the TELUS Garden TES (see Confidential Appendix A).[61] The Panel also agrees with FAES that the references to TESDA allocation to the TELUS Garden TES in its IR responses in the TELUS Garden TES Rates Proceeding, preceding the issuance of Order G-2-15, provide further support for this view.
The Panel accordingly finds that TESDA costs should also be allowed in setting PT2 rates under the Service Agreements based on the Performance Ratio definition. The Performance Ratio, as defined under the Service Agreements, is the “ratio of actual costs of providing the Service relative to the forecast costs of providing the Service (set out at the initiation of Service).” The Panel considers that the intent of such a definition was to provide for a comparison of the costs used in the initial rate setting to the actual costs of providing the TELUS Garden TES service. As such, comparing actual TESDA costs related to the TELUS Garden TES and TESDA amortization which was included in the initial rate setting for the TELUS Garden TES satisfies the intent of the Performance Ratio and, accordingly, is appropriate in the Performance Ratio calculation.
In light of the above, the Panel approves FAES allocating a TESDA amount calculated using the same method as in the initial rate setting for the TELUS Garden TES in the Performance Ratio, in the determination of PT2 rates.
3.2 The Allocation of Overheads and Shared Services Costs
Introduction
In this section, the Panel addresses the Customers’ concerns regarding the allocation of increased costs to the TELUS Garden TES for overheads and shared services provided by FAES affiliates.
Some of the disagreements between the parties involve the Massachusetts formula, which is a method used for cost allocation. As explained by FAES, the three factors in the Massachusetts formula are revenues, asset values, and employees.[62] FAES has allocated overheads and shared services costs to the Telus Garden TES based on one factor: asset values,[63] and the parties disagree on whether this approach is reasonable.
As explained further below, the Customers submit that FAES’s overheads and shared service cost allocation methodology is not transparent and does not use the industry-standard three-factor Massachusetts formula.[64] FAES submits that it is reasonable to rely on only one factor (asset values) from the Massachusetts formula, which is a common allocator in the utility industry across North America.[65]
Positions of the Parties
The Customers
The Customers submit that the overheads and shared services costs allocated to the TELUS Garden TES are not transparent and do not use the industry-standard Massachusetts formula.[66] In the Customers’ view, despite protracted requests for information, including asking directly what the overheads and shared services allocation to the TELUS Garden TES would be if the Massachusetts formula were applied, insufficient information has been provided by FAES in support of its cost allocation.
The Customers are concerned that they are being asked to pay rates based on a large increase in overheads and shared services costs compared to the forecast in the TELUS Garden TES Rates Proceeding due to a “potentially self-serving allocation methodology” selected by FAES.[67] As such, the Customers request that the BCUC determine the reasonable and appropriate overheads and shared services cost allocation to the TELUS Garden TES for the purpose of PT2 rates.[68]
The Customers suggest that there are two possible solutions for the BCUC to determine the reasonable and appropriate overheads and shared services cost allocation:[69]
1. “… a somewhat arbitrary reduction in the overheads and shared services allocation claimed by FAES… on the basis that FAES has not demonstrated its proposed allocation is reasonable…”; or
2. “… for the BCUC to request and obtain further disclosure from FAES.”
Overall, the Customers assert that they do not have sufficient information from FAES to assess the reasonableness of FAES’s proposed allocations.[70]
FAES
FAES confirms that the three factors in the Massachusetts formula are revenues, asset values, and employees.[71] However, in response to the Customers, FAES submits that it is reasonable to rely only on one factor from the Massachusetts formula (asset values) rather than to use all three factors.[72] FAES asserts that the use of asset values to allocate the total overheads to each TES project is a reasonable approach which aligns with industry practices and relevant BCUC decisions, reflects the principle of cost causation, and is administratively efficient.[73]
In FAES’s view, asset values or capital investment is a common allocator in the utility industry across North America. FAES notes that the use of an asset allocator was recently approved by the BCUC in the Corix Multi-Utility Services Inc. (Corix) Corporate Cost Allocation Methodology Decision,[74] quoting the following from that decision:[75]
The Panel accepts that gross PPE [property, plant and equipment] is a valid and acceptable method of representing capital investment in the Massachusetts Formula. The Panel is persuaded that the use of gross PPE rather than net PPE as a composite allocator for the cost allocation methodology is appropriate as the use of net PPE would result in the allocation of corporate costs to utilities that do not reasonably reflect the resources used to provide corporate services to those utilities.
FAES considers, however, that the two other allocators in the Massachusetts formula (gross revenues and employee headcount) would not be possible or reasonable allocators because: a) the projects themselves do not have any direct employees, and b) project revenues are not necessarily reflective of the nature of the costs to provide service to each project.[76] That is, concerning the employee headcount allocator in the Massachusetts formula, FAES submits that in the absence of FAES employees that work solely for any project, the employee headcount allocator in the Massachusetts formula is “not possible” because there is no denominator in such an allocation.[77] Concerning the gross revenue allocator in the Massachusetts formula, FAES states that because each FAES project is unique, with unique cost structure and total revenues, the gross revenue allocator would result in skewed results. For example, FAES states that some project revenues include fuel costs, such as the TELUS Garden TES, while some projects do not include such fuel costs. Therefore, including revenues as an allocator would weight the allocation results towards increasing the allocation to the TELUS Garden TES relative to other projects, which is not appropriate.[78]
FAES acknowledges that the actual variance to forecast in the overheads and shared services amounts that were used in the Performance Ratio calculation are significant. The variance between forecast and actual costs is due to FAES underestimating the overheads and shared service costs in the setting of the initial rate. At the time that the original forecast was made, FAES submits that it did not have much historical data with respect to actual overheads and shared services costs. However, while the original forecast was low, the actual amounts are reasonable.[79]
The Customers’ Reply
In reply, the Customers reiterate that what they have been asking for is “what the overheads and shared services cost allocation would be if it was calculated in accordance with the industry-standard three factor Massachusetts formula.” [Emphasis in original] The Customers submit that excluding the headcount factor from the allocation methodology may result in an excessive allocation to utilities like the TELUS Garden TES that are highly automated and do not have any dedicated employees.[80]
With respect to whether asset values are a commonly accepted allocator in the utility industry, the Customers disagree with FAES. Rather, the Customers point out that in the Corix Corporate Cost Allocation Methodology Decision, the BCUC approved “a composite allocator comprised of three equally weighted factors that includes gross revenue, gross PPE and headcount, consistent with the Massachusetts formula.” [Emphasis in original] The Customers also contend that the Corix Corporate Cost Allocation Methodology Decision notes that the BCUC approved the use of the three factor Massachusetts formula for Creative Energy Vancouver Platforms Inc. Accordingly, the Customers submit that FAES’s single factor methodology is not commonly accepted for peer TES providers in British Columbia.[81]
Panel Determination
For the following reasons, the Panel finds the overheads and shared services cost allocation methodology based on asset values used by FAES for the TELUS Garden TES for PT1 to be in accordance with the approved rates in the Service Agreements. As such, FAES is approved to allocate overheads and shared services based on asset values in the Performance Ratio, in the determination of PT2 rates.
As explained in Section 3.0 above, the Panel is assessing the Complaint within the context of the approved rates set out in the Service Agreements.
The Service Agreements do not set a specific methodology for overheads and shared services costs allocation and make no reference to the Massachusetts formula. Instead, the Service Agreements provide that the Performance Ratio, used to determined PT2 rates, is the ratio of actual costs of providing service relative to the forecast costs of providing the service (set out at the initiation of service), as reasonably determined by FAES.[82]
The parties appear to agree that the cost allocation methodology to be applied by FAES in the context of the Service Agreements should be assessed on the basis of reasonableness. The Customers submit that they do not have sufficient information from FAES to assess the reasonableness of the proposed allocations,[83] and request the BCUC to determine the reasonable and appropriate corporate, overheads and shared services cost allocation to the Telus Garden TES.[84] FAES, in turn, submits that its allocations of overheads and shared services used in the Performance Ratio are reasonable and appropriate and are reasonable relative to comparable TES providers.[85]
The Panel acknowledges that accordance with a well-established industry practice can provide evidence to support the reasonableness of a given approach to cost allocation. However, deviations from well-established industry practice might also be reasonable in some circumstances.
In the context of the Complaint, the Panel finds that two of the three factors in the Massachusetts formula would not contribute to a reasonable allocation of overheads and shared service costs.
The Panel is persuaded that the use of gross revenues or employee headcounts for the cost allocation methodology is not appropriate in this case. The Panel accepts that differing cost structures and total revenues between FAES projects could result in an unfair allocation of costs towards those projects which have fuel costs included in rates compared to those which do not; for example, if the “gross revenue” factor were applied to the TELUS Garden TES. The Panel also accepts that the use of employee headcount as an allocation factor is not reasonable because FAES does not have any direct employees that work solely for any project, such that there would be no denominator in such an allocation. Given these two factors are not appropriate, the only reasonable remaining factor in the Massachusetts formula is asset values.
3.3 Overall Determination on PT2 Rates
Based on the findings and determinations set out above, and the further reasons set out in Confidential Appendix A to this decision, the Panel approves FAES setting the rates for PT2 for the TELUS Garden TES from January 1, 2021, based on the Performance Ratio for PT2 set out in Confidential Appendix A to this decision.
Further, in order to implement the updates to the Performance Ratio for PT2 which FAES has agreed to make during the course of this proceeding but which have not yet been reflected in rates (as described in Confidential Appendix A), FAES is directed to refund to the Customers the difference between the rates approved in this decision and the rates charged since January 1, 2021, with interest calculated in accordance with the terms of the Service Agreements, by way of a bill adjustment on the Customers’ next TELUS Garden TES bills.
Dated at the City of Vancouver, in the Province of British Columbia, this 30th day of May 2024.
Original signed by:
_________________________________
B. A. Magnan
Panel Chair/Commissioner
Original signed by:
_________________________________
W. M. Everett, KC
Commissioner
Fortis Alternative Energy Services
TELUS Garden Thermal Energy System Complaint filed by Strata Plan EPS 3242 and
Georgia and Seymour Properties Limited Partnership
LIST OF ACRONYMS AND TERMS
Acronym |
Description |
BCUC |
British Columbia Utilities Commission |
Complaint |
Letter dated January 5, 2023, submitted to the BCUC by the Customers of the TELUS Garden TES regarding the rates proposed by FAES for the second performance term, which began on January 1, 2021 and ends on December 31, 2025. |
Corix |
Corix Multi-Utility Services Inc. |
FortisBC Alternative Energy Services Inc. |
|
FEI |
FortisBC Energy Inc. |
IR |
Information request |
NSA |
Negotiated Settlement Agreement |
Order G-167-17 Decision |
The reasons for decision accompanying Order G-167-17 dated November 23, 2017, for the FAES Application to Amortize the Thermal Energy Services Deferral Account Balance and Request for Confidentiality |
Order G-2-15 Decision |
The reasons for decision accompanying Order G-2-15 dated January 9, 2015, for the FAES Application for the Rate Design and Rates Established in Agreements for Thermal Energy Services for the TELUS Garden Development |
Performance Ratio |
As defined under the Service Agreements, is the “ratio of actual costs of providing the Service relative to the forecast costs of providing the Service (set out at the initiation of Service) as reasonably determined by the Utility, calculated in the fourth year of each Performance Term for the Previous five years (four years for the first Performance Term). The individual cost components included in the calculation of the Performance Ratio are: a) steam costs, b) electricity costs, c) operations and maintenance, |
PPE |
Property, plant and equipment |
PT1 |
Performance Term One (the period 2016 through 2020) |
PT2 |
Performance Term Two (the period which began on January 1, 2021 and ends on December 31, 2025) |
Service Agreements |
The FAES service agreements with the Customers of the TELUS Garden TES |
TELUS Garden TES |
TELUS Garden Thermal Energy System |
Acronym |
Description |
TELUS Garden TES Rates Proceeding |
FAES Application for the Rate Design and Rates Established in Agreements for Thermal Energy Services for the TELUS Garden Development proceeding which led to the setting of rates and other matters in Order G-2-15 |
TESDA |
Thermal Energy System Deferral Account |
TESDA Amortization Application |
FAES Application to Amortize the Thermal Energy Services Deferral Account Balance and Request for Confidentiality dated July 13, 2017 |
the Customers |
The two customers of the TELUS Garden TES that filed a complaint to the BCUC regarding the rates proposed by FAES for the TELUS Garden TES: The Owners, Strata Plan EPS 3242 and Georgia and Seymour Properties Limited Partnership. |
UCA |
Utilities Commission Act |
Fortis Alternative Energy Services
TELUS Garden Thermal Energy System Complaint filed by Strata Plan EPS 3242 and
Georgia and Seymour Properties Limited Partnership
EXHIBIT LIST
Exhibit No. Description
Commission documents
A-1 |
Letter dated May 26, 2023 – Appointment of Panel for the review of the Complaint filed by Strata Plan EPS 3242 regarding Telus Garden Thermal Energy System (TES)
|
A-2 |
Letter dated June 20, 2023 – BCUC request for Supplementary Information to FAES |
A-3 |
Letter dated July 28, 2023 – BCUC Order G-204-23 establishing a regulatory timetable |
Letter dated August 4, 2023 – BCUC Information Request No. 1 to FAES |
|
A-5 |
CONFIDENTIAL - Letter dated August 4, 2023 – BCUC Confidential Information Request No. 1 to FAES |
A-6 |
Letter dated August 4, 2023 – BCUC Information Request No. 1 to Telus Garden Customers |
A-7 |
Letter dated September 28, 2023 – BCUC Order G-256-23 establishing a further regulatory timetable |
A-8 |
Letter dated December 14, 2023 – BCUC Order G-349-23 establishing a further regulatory timetable |
A-9 |
CONFIDENTIAL - Letter dated December 14, 2023 – Panel Confidential Information Request No. 1 to FAES |
A-10 |
Letter dated January 10, 2024 – BCUC Order G-4-24 establishing a further regulatory timetable |
Commission Staff documents
A2-1 |
PUBLIC - Letter dated May 31, 2023 – BCUC Staff submission providing redacted FAES correspondence |
A2-1-1 |
CONFIDENTIAL - Letter dated May 31, 2023 – BCUC Staff submission providing confidential FAES correspondence |
Applicant documents
B-1 |
FortisBC Alternative Energy Services Inc. (FAES) – Supplementary information dated June 30, 2023
|
B-2 |
Letter dated August 18, 2023 – FAES submitting response to BCUC Information Request No. 1
|
B-3 |
CONFIDENTIAL - Letter dated August 18, 2023 – FAES submitting confidential response to BCUC Confidential Information Request No. 1
|
B-4 |
CONFIDENTIAL - Letter dated December 22, 2023 – FAES submitting response to Panel Confidential Information Request No. 1
|
B-5 |
Letter dated January 19, 2024 – FAES submitting Reply Submission to Customers responses regarding FAES response to Panel Information Request No. 1 |
Intervener documents
C1-1 |
Telus Garden Thermal Energy System (Telus) –Submitting response to BCUC Information Request No. 1 dated August 18, 2023
|
C1-2 |
Letter dated January 18, 2024 – Telus submitting FAES response to Panel Information Request No. 1 does not resolve the complaint and request for relief |
[1] Exhibit A2-1, p. 3 of 177; The Customers Final Argument, p. 1.
[2] Exhibit A2-1, p. 4 of 177.
[3] Exhibit A2-1, p. 16 of 177.
[4] Exhibit A2-1, pp. 10–12 and 16 of 177.
[5] Exhibit A2-1, p. 21 of 177.
[6] Exhibit A2-1, p. 10 of 177.
[7] The Customers Final Argument, p. 4.
[8] The Customers Final Argument, p. 4.
[9] The Customers Final Argument, pp. 3–4.
[10] Exhibit C1-1, BCUC IR 4.1; The Customers Final Argument, pp. 5, 12.
[11] Order G-2-15 Decision.
[12] FAES Final Argument, p. 5.
[13] Order G-2-15 Decision, p. 1.
[14] Exhibit A2-1, p. 79 of 177; The Customers Final Argument, p. 1.
[15] Order G-141-09, Appendix A, p. 9.
[16] Exhibit A2-1, pp. 58–59 of 177.
[17] TELUS Garden TES Rates Proceeding, Exhibit B-2, Response to BCUC IR 9.5.
[18] TELUS Garden TES Rates Proceeding, Exhibit B-2, Response to BCUC IR 9.6.
[19] TELUS Garden TES Rates Proceeding, Exhibit B-2, Response to BCUC IR 9.7.
[20] Order G-167-17, Directive 1(a).
[21] Order G-167-17, Directive 1(b).
[22] Order G-167-17 Decision, p. 1.
[23] Order G-167-17 Decision, p. 2.
[24] Order G-167-17 Decision, p. 2.
[25] Orders G-204-23, G-256-23, and G-349-23.
[26] Order G-4-24.
[27] The Customers Final Argument, pp. 6–7; FAES Final Argument, para. 43.
[28] Exhibit A2-1, p. 80 of 177 (“Therefore, FAES filed its rate design for the TGTES, which was subsequently approved by BCUC Order G-2-15”); FAES Final Argument, para. 11 (“The Service Agreement has not been amended by any BCUC Order since its initial approval”).
[29] The Customers’ Final Argument, p. 4 (“The Customers do not take issue with the rate design approved by Order G-2-15 for the TELUS Garden TES…”).
[30] The Customers Final Argument, pp. 7, 9.
[31] The Customers Final Argument, p. 7.
[32] Exhibit C1-1, BCUC IR 1.2; The Customers Final Argument, pp. 7, 8.
[33] Exhibit C1-1, BCUC IR 1.2; The Customers Final Argument, pp. 7, 8.
[34] The Customers Final Argument, pp. 8–9.
[35] The Customers Final Argument, p. 9.
[36] FAES Final Argument, para. 7.
[37] Exhibit B-5.
[38] FAES Final Argument, para. 8.
[39] FAES Final Argument, para. 9.
[40] FAES Final Argument, para. 9.
[41] FAES Final Argument, para. 11.
[42] FAES Final Argument, para. 14.
[43] FAES Final Argument, para. 14.
[44] FAES Final Argument, para. 15.
[45] FAES Final Argument, para. 15.
[46] FAES Final Argument, para. 16.
[47] FAES Final Argument, para. 18.
[48] FAES Final Argument, para. 14.
[49] The Customers Reply Argument, p. 4.
[50] The Customers Reply Argument, pp. 4–5.
[51] The Customers Reply Argument, p. 5.
[52] The Customers Reply Argument, p. 5.
[53] The Customers Reply Argument, p. 6.
[54] The Customers Reply Argument, pp. 6–7.
[55] Exhibit A2-1, p. 59 of 177.
[56] Order G-167-17, Directive 1a.
[57] Order G-167-17 Decision, p. 2.
[58] FAES Final Argument, para. 6.
[59] The Customers Reply Argument, pp. 2–3.
[60] Order G-167-17, Directive 1a.
[61] TELUS Garden TES Rates Proceeding, Exhibit B-1, p. 9.
[62] FAES Final Argument, para. 27.
[63] FAES Final Argument, para. 32.
[64] The Customers Final Argument, pp. 10–11.
[65] FAES Final Argument, paras. 32–33.
[66] The Customers Final Argument, pp. 10–11.
[67] The Customers Final Argument, pp. 10–11.
[68] The Customers Final Argument, p. 12.
[69] The Customers Final Argument, p. 12.
[70] The Customers Final Argument, p. 11.
[71] FAES Final Argument, para. 27.
[72] FAES Final Argument, paras. 32–34.
[73] FAES Final Argument, paras. 32 and 35.
[74] FAES Final Argument, p. 33.
[75] Exhibit A2-1, p. 52 of 177. Corix Application for Corporate Cost Allocation Methodology, Order G-349-20 with Reasons for Decision dated December 24, 2020, Appendix A, p. 14.
[76] FAES Final Argument, para. 34.
[77] Exhibit A2-1, p. 102 of 177.
[78] Exhibit A2-1, p. 102 of 177; FAES Final Argument, para. 34.
[79] FAES Final Argument, para. 39.
[80] The Customers Reply Argument, p. 8.
[81] The Customers Reply Argument, p. 8.
[82] FAES Final Argument, para. 8. The Service Agreements define the Performance Ratio, in part, as: “The ratio of actual costs of providing the Service relative to the forecast costs of providing the Service (set out at the initiation of Service), as reasonably determined by the Utility…”
[83] The Customers Final Argument, p. 11.
[84] The Customers Final Argument, p. 12.
[85] FAES Final Argument, para. 23.