Thinking outside the (sand) box: Responses to innovation by Canadian energy regulators

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Canadian energy regulators are grappling with how best to respond to a rapidly evolving  energy sector, resulting in some out-of-the-box approaches. The recent pace of change and burgeoning new technologies designed to address climate change pose a challenge for regulators, who must  adjudicate requests to approve the cost consequences of innovation.

This challenge exists because under the long-standing energy regulatory framework, regulators must examine the costs incurred by utilities to serve their customers and, generally speaking, to pass on these costs only when they relate to prudent investments. Thorny questions can arise when regulators need to determine whether the costs associated with innovative services and products, which by their very nature may be new or untested, should be approved for inclusion in rates. In many cases such investments may eventually prove to have been useful, but inevitably some will not. Regulators must determine how to treat these costs and who should pay for less successful investments.

At the same time, regulators are being encouraged to be innovative in their own processes. The Canada Energy Regulator (formerly the National Energy Board) and the Ontario Energy Board (OEB) recently had their governance structures changed, in part to enable them to respond more nimbly to sectoral changes, and to innovate in their own processes. Similarly, in Alberta, recent legislative changes have prompted the Alberta Utilities Commission (AUC) to explore changes to its processes to enhance innovation within the province. These regulators are now faced with the triple challenge of fostering innovation in the sector, innovating themselves in the way they respond to accelerating change, and importantly, continuing to ensure they appropriately deliver on their basic statutory mandates to set just and reasonable rates.

This article looks at recent developments at the energy regulators in three Canadian provinces as they seek to address these issues within their respective regulatory regimes.

Ontario : The OEB Innovation Sandbox

As noted above, like other regulators, until recently the OEB had not had to deal very often with proposals for innovative products or services where the proponent was seeking to  rely on ratepayer funding. However, recently the number and importance of innovative proposals have been increasing.  An enabling measure undertaken in Ontario in 2020 was an amendment to the Ontario Energy Board Act, 1998 that added a new objective “to facilitate innovation in the electricity sector.” This objective was an important addition to the governing statute, providing the OEB with the ability to consider the facilitation of innovation as a factor it takes into account as it balances its statutory objectives and creating a statutory anchor for increased consideration of proposed innovation in its decision making.

The importance of innovation is reflected in the OEB five year strategic plan:

The OEB facilitates innovation that can provide demonstrable value to Ontario’s energy consumers and solve energy challenges cost effectively. The OEB provides clear direction on when and how regulated utilities can recover costs for innovation-related activities from ratepayers, and for how risk is addressed. The OEB continually
evaluates which activities or emerging needs are better undertaken or addressed through competitive markets. .¹

In 2019 the OEB established the Innovation Sandbox to address demand for regulatory flexibility and guidance for the sector and to breathe life into its efforts to deal with regulatory issues concerning the treatment of innovation. The Sandbox’s purpose was stated to be to “[p]rovide a venue for proponents to engage in candid conversations with OEB staff about innovative ideas,” “allow proponents to request temporary relief by way of a streamlined, simplified application process,” “[r]educe regulatory uncertainty and risk” and to give the OEB “insight into sector challenges and innovations.”²  The Sandbox was the first of its kind for energy issues in North America,  and was in itself innovative. In its first few years of existence, it handled numerous inquiries.

However successful the Sandbox was in its first iteration, it did have some parameters dictated by nature of the OEB’s role and by the applicable legislative framework. Firstly, there was no funding source attached to the Sandbox, meaning there were no monies available to provide seed funding to pilot innovation.  Secondly, for some of the proposals, the requested regulatory relief was not within the OEB’s jurisdiction. And lastly, some stakeholders expressed concerns that efforts to protect commercial confidentiality for proponents hampered transparency.

After two years, the OEB conducted a consultation on the sandbox, producing a report entitled Innovation Sandbox 2.0 in January of 2022. The report details changes to the Sandbox, including strategies to enhance Sandbox awareness and transparency, enhancements to the Sandbox website, including a new dashboard, improved annual reporting and increased outreach.³ 

Importantly, the report also stated that the OEB would explore opportunities for funding and exploration of partnership opportunities. In so doing it addressed a desire expressed by Ontario energy sector participants that the OEB seek insofar as possible to coordinate its activities with other energy sector agencies, and in particular with the Independent Electricity System Operator (IESO).

In 2021, the IESO and the OEB announced a targeted call for proposals for innovative Distributed Energy Resource (DER) projects that would provide both local and provincial solutions. As a result, in March of this year, several projects  that demonstrate the positive effects of such coordination were announced. The OEB website announced the initiative as relating to “Four projects, representing a total investment of $37 million, [which] will accelerate the adoption of local energy projects to help communities play an increasing role in providing for their own energy needs.”⁴ 

The projects will be funded in part by the IESO ‘s Grid Innovation Fund, which has been set up to “[advance] innovative opportunities to achieve electricity bill savings for Ontario ratepayers by funding projects that either enable customers to better manage their energy consumption or that reduce the costs associated with maintaining reliable operation of the province’s grid.”⁵ The projects are community focused and all involve testing  models for using distributed energy resources such as wind, solar and battery storage technology.

While the IESO Grid Innovation Fund will partially fund the projects, the OEB Innovation Sandbox will provide the necessary regulatory support to help facilitate innovation, in accordance with the statutory objective concerning the facilitation of innovation.  This type of inter-agency coordination would appear to have the benefit of advancing energy innovation in Ontario, while maintaining and respecting the different roles of the OEB and the IESO.

British Columbia – Applying Traditional Rate-Setting Principles to New Issues

In recent years, the British Columbia Utilities Commission (BCUC) has also been grappling with the appropriate regulatory approach to innovation in the utilities sector. 

To date, the BCUC has effectively applied traditional rate-setting principles to address this issue. The BCUC’s ratemaking approach is illustrated, for instance, by its disparate treatment of “innovation fund” requests made by related natural gas and electric utilities, FortisBC Energy Inc. and FortisBC Inc.:

• For the natural gas utility, the BCUC approved a ratepayer-funded $24.5 million innovation fund, observing that the fund will benefit ratepayers “by ensuring cost-effective, safe and reliable gas solutions,” including by “[p]roviding cleaner and more affordable energy sources” and by “[e]nsuring the long-term viability of the gas utility by reducing the risk of stranded assets” through innovation.⁶
• In contrast, the BCUC rejected the electric utility’s similar request for a $2.5 million innovation fund as not being in ratepayers’ interests, noting that while decarbonization may harm “the business of the gas utility… as it strives to reduce if not eliminate reliance on GHG emitting fuel sources,” “electrification potentially benefits the electric utility… by driving up customer demand for energy fueled by clean hydroelectricity.” ⁷  

The BCUC has, moreover, shown that traditional economic regulation principles continue to have a place even in an evolving legislative landscape. In BC, legislation, including the Clean Energy Act⁸ and the associated Greenhouse Gas Reduction (Clean Energy) Regulation,⁹ exempts certain “prescribed undertakings” relating to decarbonization investments from “needs” reviews and requires the BCUC to allow utilities to recover costs incurred in pursuing these undertakings from ratepayers, but provides the BCUC with discretion to oversee how those undertakings are implemented and recovered from ratepayers. 

Two recent examples demonstrate BCUC’s approach to reviewing these undertakings:

1. The BCUC has in recent years considered the appropriate regulatory framework for electric vehicle (EV) charging services. In an inquiry that concluded in 2019, the BCUC held that persons providing EV charging services were “public utilities” under the Utilities Commission Act, ¹⁰ but that an exemption from utility regulation should be granted to EV service providers that were not otherwise public utilities¹¹ because the EV charging market was not a monopoly in need of economic regulation.¹² 
   
   The BCUC nonetheless continues to regulate investments made by rate-regulated public utilities into the EV charging market. Recently, the BCUC considered BC Hydro’s proposed rates for EV charging services at stations it owns and operates.¹³ Although these services are “prescribed undertakings” that BC Hydro is entitled to full cost recovery for, the BCUC nonetheless rejected BC Hydro’s proposed charging rate on the basis it was not just and reasonable, because it failed to recover BC Hydro’s  cost of service and would therefore create an uneven playing field for other (non-utility) charging service providers and potentially distort the competitive EV charging market.¹⁴
2. The BCUC is also tasked with considering the acquisition of renewable natural gas (RNG) by public utilities in British Columbia. RNG is also a “prescribed undertaking” when certain criteria are met, but the legislation leaves many specifics of what constitutes RNG undefined. To date, the BCUC has considered RNG energy supply contracts on an ad hoc basis to ensure they meet the legislated requirements,¹⁵  but the BCUC is now undertaking an inquiry into RNG that is expected to establish a framework for assessing RNG contracts, which is also expected to ensure the BCUC retains the power to review contracts that do not meet the legislated decarbonization objectives.¹⁶  

Alberta – Cutting Red Tape to Enable Innovation

In Alberta, recent legislative changes have prompted the AUC to re-examine its processes. Alberta enacted the Red Tape Reduction Act in June 2019, in an effort to enhance economic growth and innovation in the province by reducing regulatory and administrative burdens.¹⁷  In response, the AUC appointed an independent “Procedures and Processes Review Committee” to recommend steps the AUC could take to streamline its adjudicative procedures.¹⁸ 

The AUC has since accepted most of the recommendations made in the committee’s August 2020 report.¹⁹ The main takeaway from the report was to recommend that the AUC develop an “overarching, assertive case management approach” that focuses proceedings on “the regulator’s information requirements and on procedural efficiency.”²⁰ The AUC has since taken steps to implement corresponding changes to its processes and rules.²¹

The AUC recently held a roundtable to canvass the public’s experiences with these changes so far. The chair of the AUC noted that two main themes emerged: “continued support for the AUC’s efficiency agenda, and recognition that there remains room for further refinement and improvement.”²²  The AUC reported broad stakeholder support for further reducing regulatory burden, including by making the negotiated settlement process more accessible, and stipulating reasonable limits on process steps.²³

These changes are intended to allow the AUC to more nimbly respond to the evolving energy landscape in real time. Although there has been some recent discussion in Alberta about implementing a “sandbox” approach akin to the OEB’s²⁴ , the focus thus far has been on ensuring regulation is streamlined so as to not impede the private sector.

Conclusion

This brief examination of three Canadian jurisdictions provides a snapshot of the regulatory treatment of innovative technologies in Canada. The British Columbia examples considered above illustrate regulators’ ability to examine these issues using a traditional rate-setting analysis, while the Ontario example points to the potential advantages to be gained from inter-agency cooperation through playing to the strengths of two of the province’s key energy agencies. In Alberta, on the other hand, the focus in recent years has been on ensuring public regulatory requirements do not unduly impede private innovation.