INTRODUCTION

Natural gas distributors in Canada are under increasing pressure to reduce greenhouse gas (GHG) emissions. Policies at all levels of government impose ambitious GHG emission reduction targets that directly call for reduced use of natural gas. For example, the CleanBC Plan legislates a 40 per cent reduction over the next decade, and encourages electrification.^[1] Municipalities have equally imposed stringent decarbonization goals.^[2] While these policies pose an existential threat to natural gas distributors, they also present an opportunity for utilities to invest, innovate, and be a part of the solution. The ability to turn this threat into an opportunity, however, depends on the success of new innovative technologies and approaches that will allow a gas distribution utility to adapt to operate in a low carbon world.

Recognizing the need for innovation to respond to decarbonization policies, in March 2019 FortisBC Energy Inc. (FEI) applied to the British Columbia Utilities Commission (BCUC) for approval of $24.5 million Clean Growth Innovation Fund (or “Innovation Fund”) to be funded by customers and administered by FEI from 2020 to 2024. In June 2020, the BCUC approved the Innovation Fund for FEI.^[3] The BCUC Decision represents a key milestone for innovation funding by utilities. While utilities, including FEI, have contributed to innovation funding in the past, this involved relatively small amounts and was narrow in focus, largely due to legislative and regulatory constraints. The BCUC Decision represents a breakthrough in public utility funded innovation activity, as the regulator acknowledged the need for increased innovation funding (by a gas utility) and approved a fund administered by the utility and funded by customers. The BCUC concluded: “Overall, the Panel finds that FortisBC has demonstrated it needs to accelerate its innovation activities for FEI in light of increasing governmental climate policies aimed at decarbonization and electrification.”^[4]

This article will describe FortisBC’s proposal for the Innovation Fund, the issues raised in the BCUC proceeding, and the BCUC’s decision to approve the Innovation Fund. We also conclude with a consideration of the potential implications of the Innovation Fund for other utilities in Canada.

OVERVIEW OF FORTISBC’S INNOVATION FUND

FEI and its sister company FortisBC Inc. (FBC) (together “FortisBC”) jointly applied to the BCUC in March of 2019 for approval of the Innovation Fund for each of the utilities.^[5] FEI is a natural gas distribution utility serving most of BC, and FBC is an electric utility that serves communities in the interior of BC. The application was made as part of FortisBC’s 2020–2024 multi-year rate plans (the “MRPs”), which combined elements of performance based and cost of service ratemaking that together provide a framework to set FortisBC’s rates for five years. The Innovation Funds were proposed as part of this five-year framework.

The goals of the Innovation Funds, as stated by FortisBC, were to “accelerate the pace of clean energy innovation, to achieve performance breakthroughs and cost reductions, and to provide cost effective, safe and reliable solutions for our customers.”^[6] FortisBC proposed to accomplish this by using the Innovation Funds to invest in innovation activities at the pre-commercial and commercial level across the utility “value chain” including supply, transmission and distribution, and end-uses. FortisBC’s guiding principles for the fund included using a portfolio approach to diversify risk and leveraging partnerships with other organizations.

FortisBC identified investment areas that included blending hydrogen, renewable natural gas, fugitive emissions reductions and carbon capture (for the gas utility) and electric vehicles and charging stations (for the electric utility).^[7] The Innovation Fund was proposed to support initiatives that were ready for feasibility research, rather than basic technology research. The aim was to focus on activities that had relatively shorter and more certain potential benefit timelines, increasing the likelihood of customer benefits.

The size of the Innovation Fund was proposed to be $24.5 million for FEI and $2.5 million for FBC over a five-year period. This was based on annual funding of $4.9 million for FEI and $0.5 million for FBC.^[8] FortisBC requested this amount based on a “bottom-up” assessment on the innovation activities available for each utility to fund.

FortisBC proposed collecting the funds from customers though a fixed charge rate rider that would apply equally to all customers ($0.40/month for FEI gas customers and $0.30/month for FBC electric customers). FortisBC also proposed to record the amounts collected as credits in an Innovation Fund deferral account, with utility expenditures recorded as debits in the same account. At the end of the five-year term, any unused balance in the account would be returned to customers.^[9]

In support of the Fund, FortisBC outlined its proposed governance model, which sought to ensure that funds were prudently distributed to pursue innovations with strong customer benefit.^[10]

FortisBC proposed a stage-gate process for evaluating innovation project proposals and determining project funding. The selection criteria included the amount of co-funding secured, estimated emissions reduction, and energy cost reductions.

As an accountability framework, FortisBC proposed annual reporting to the BCUC as a part of its annual ratemaking process. FortisBC promised to establish progress milestones for each initiative and report information that would allow the BCUC and customers to evaluate the success of an initiative.

REGULATORY PROCESS AND INTERVENER POSITIONS

FortisBC’s proposed MRPs, including the Innovation Funds, were reviewed by the BCUC through an extensive written process. Six interveners actively participated in the proceeding, representing a range of customer and stakeholder groups: the Movement of United Professionals (MoveUP), the BC Sustainable Energy Association and Sierra Club BC (BCSEA), the British Columbia Municipal Electric Utilities (BCMEU), the Industrial Customers Group (ICG), the Commercial Energy Consumers Association of British Columbia (CEC), and the British Columbia Old Age Pensioners’ Organization et al. (BCOAPO).^[11]

Interveners were divided on the proposal. In their written submissions, MoveUP (representing unionized workers at FortisBC) and the BCSEA (an environmental advocacy group) expressed support for approval of the Fund. The CEC (representing commercial customers) also supported approval of the Fund, albeit subject to conditions, particularly around the cost-benefit analysis of innovation initiatives. The ICG (representing industrial customers of FBC) and BCOAPO (representing low or fixed income customers) disputed the need for the Innovation Fund, the BCUC’s jurisdiction to approve it and other aspects of FortisBC’s proposal. The BCMEU took no position.

While not active interveners, various organizations, including the Pembina Institute, the University of Victoria, Fort Capital Partners and Foresight, filed letters of support for FortisBC’s Innovation Fund.

ISSUES AND BCUC DETERMINATIONS

The Information Requests (IRs) and submissions in the proceeding canvassed a range of issues related to the Innovation Fund, including the need, the benefit to customers, the jurisdiction of the BCUC, the appropriateness of a fixed charge, and whether funding of an activity should be subject to BCUC approval. These issues and the BCUC’s determinations are discussed below.

Need for the Innovation Fund

A fundamental issue in the proceeding was the need for the Innovation Fund. FortisBC’s position was that the Innovation Fund was needed “to pursue innovation and the adoption of new technologies to help mitigate policy-driven demand risks and proactively manage rate impacts, while supporting GHG emissions reductions and helping customers meet their energy and emissions goals.”^[12]

Key evidence for FortisBC was the policy direction from all levels of government moving towards decarbonization and the expectations of customers, including:

1. Canada’s commitment to reducing GHG emissions by 30 per cent from 2005 levels by 2030, and by 80 per cent by 2050.^[13]
2. BC’s renewal of its GHG emission reduction targets in 2018 by legislating a 40 per cent reduction by 2030, 60 per cent reduction by 2040 and 80 per cent reduction by 2050.
3. Municipal governments and regions throughout Canada and British Columbia declaring climate emergencies, including the City of Vancouver, and adopting decarbonization policies and goals.^[14]

FortisBC emphasized to the BCUC that both the federal and provincial governments were relying on innovation to meet their climate objectives. FortisBC claimed that, at the federal level, over a quarter of the GHG reductions (79 Mt) required to achieve Canada’s 2030 targets must be achieved with some combination of innovation and additional provincial policies. At the provincial level, the CleanBC Plan’s target of 15 per cent renewable gas was forecast to achieve 75 per cent of the total emission reductions sought in the buildings sector. FortisBC observed that this target makes FortisBC’s renewable gas supply and the associated generation and delivery infrastructure central components of the provincial strategy to reduce GHG emissions. FortisBC’s evidence was that achieving the Province’s target requires FortisBC to quickly advance innovation and develop new sources of renewable gas under supportive regulatory and policy constructs developed by the BCUC and the Province.^[15]

FortisBC’s evidence on government policy was not contradicted and proved persuasive. The BCUC concluded:

Overall, the Panel finds that FortisBC has demonstrated it needs to accelerate its innovation activities for FEI in light of increasing governmental climate policies aimed at decarbonization and electrification.

…FEI needs to step up its innovation efforts in order to meet the ambitious targets pertaining to renewable gas outlined in the CleanBC Plan. As already noted, the focus on decarbonization and electrification increases FEI’s risk profile as a gas utility. Greater innovation efforts are needed within FEI if natural gas is to remain a viable fuel in the long term in light of those climate objectives. FEI has explained that existing gaps in its innovation funding remain unfilled, which its Innovation Fund is designed to address.^[16]

The BCUC also agreed with FortisBC that the existing alternatives for innovation (including the Natural Gas Innovation Fund (NGIF)^[17] and FortisBC’s demand-side management program) left significant gaps:

The Panel notes that FortisBC has been engaging in innovation initiatives since 2007 and intends to continue to pursue innovation to address climate initiatives even in the absence of an approved Innovation Fund. However, the limited scope of FEI’s current innovation activities means FEI is unable to keep pace with the ambitious renewable gas targets set out in the CleanBC Plan. Given these circumstances, the Panel believes incremental funding for FEI to pursue such initiatives is warranted and required.^[18]

However, the BCUC found that the case for innovation funding was not persuasive in the context of an electric utility and disapproved the Innovation Fund for FBC:

FBC has not made a case for additional ratepayer funding for innovation. The Panel agrees with ICG that while the case may be compelling for FEI, the same is not true for FBC. Decarbonization as a climate objective affects primarily, if not exclusively, the business of the gas utility (FEI) as it strives to reduce if not eliminate reliance on GHG emitting fuel sources such as natural gas. Decarbonization is an objective that may drive down consumer demand for natural gas, hence increasing risk for the gas utility and its long‐term financial viability. In contrast, electrification potentially benefits the electric utility (FBC) by driving up customer demand for energy fueled by clean hydroelectricity. Thus, electrification and decarbonization policies may serve to actually reduce FBC’s risk profile. In contrast, greater innovation efforts are needed within FEI if natural gas is to remain a viable fuel in the near and long term in light of current climate objectives…^[19]

These determinations make it clear that the BCUC found the direction of policy (posing a direct existential risk to the natural gas utility) persuasive. As government policy did not pose such a risk to the electric utility, the BCUC was unable to approve the fund for FBC.

Benefits of the Innovation Fund and Who Should Bear the Cost

A second key issue was whether FortisBC has made the case that customers would benefit from the Innovation Fund such that it would be reasonable for customers to bear the costs.

FortisBC’s position was that the Innovation Fund would provide “a direct benefit to customers by improving how they use and benefit from FortisBC’s energy products and accelerating the pace of clean energy innovation.”^[20] FortisBC argued that prioritizing the role of innovation was part of FortisBC’s core business and that investments would be aimed at “increasing the overall cost effectiveness, safety and reliability of the solutions FortisBC offers its customers.”^[21]

However, demonstrating the benefits of investment in innovation is inherently difficult, as the technologies are by definition novel and always attract some risk.

To overcome this challenge FortisBC demonstrated that other jurisdictions (with similarly structured programs) had experienced measurable benefits.^[22] For example, an independent evaluation of a Low Carbon Networks Fund by Ofgem found that the fund “encouraged [utilities] to include innovation as core business” with “current benefits estimated to be approximately one third of the total funding cost” and “the future net benefit…is significant and is estimated to range from 4.5 to 6.5 times the cost of funding the scheme.”^[23] FortisBC argued that the Innovation Fund was structured similarly to other innovation funds and should therefore be expected to achieve similar benefits.

FortisBC also appealed to the big picture, stating in argument:

It is in the best interest of customers, the Utilities and society for the Utilities to pursue projects which address strategic and emerging issues, serve customer needs, and maintain the long term health of the Utilities. In this regard, FortisBC’s interests are aligned with its customers. Customers, who consume the Companies’ energy products and services on a daily basis, receive the direct benefits of innovation. Shareholders will benefit indirectly, over the long term, as the Utilities remain viable and continue to thrive, allowing shareholders the opportunity to earn a fair return on their investment.^[24]

Ultimately, the BCUC determined that it was reasonable for customers to bear the cost of the Innovation Fund because the benefits will accrue to customers “by ensuring cost-effective, safe and reliable gas solutions both in the short term and long term.” The BCUC identified the following benefits:

• Improving gas pipeline inspections and reducing inspection costs;
• Providing cleaner and more affordable energy sources;
• Mitigating the risk of future rate increases; and
• Ensuring the long-term viability of the gas utility by reducing the risk of stranded assets through the development of new technologies.^[25]

The BCUC concluded: “Ratepayers should reasonably be expected to fund innovation activities that are designed to provide ratepayer benefits.”^[26]

JURISDICTION TO APPROVE

FBC’s industrial customer group, ICG, questioned the BCUC’s jurisdiction to approve the Innovation Fund. However, the BCUC ultimately sided with FortisBC, finding that it could approve the fixed rate rider as a just and reasonable rate under the Utilities Commission Act (UCA):

As for whether the Innovation Fund and fixed rate rider amount to just and reasonable rates within the meaning of sections 59 and 60 of the UCA, the Panel notes that section 60(1)(b.1) of the UCA gives the BCUC discretion to “use any mechanism, formula or other method of setting the rate that it considers advisable.” A fixed rate rider is one such mechanism…

The Panel disagrees with ICG’s view that the Innovation Fund offends cost of service principles. As noted, FEI already has in place another innovation fund, the national NGIF, that addresses gas innovation activities. The Innovation Fund is just a broader iteration of that fund, albeit one funded by ratepayers under the Proposed MRPs. The Panel further agrees that there is nothing inherently wrong with forecasting the costs likely to be incurred by that fund during the Proposed MRP term, using a bottom‐up approach based on current proposals as a reasonable estimate of the anticipated expenditures. The Panel also notes that any monies that remain unspent in the Innovation Fund at the end of the Proposed MRP term will be returned to ratepayers. In short, the costs of the Innovation Fund will be limited to the amount of actual expenditures.^[27]

Governance Model and Accountability Framework

Interveners also took issue with FEI’s governance model and accountability framework. BCOAPO argued that all innovation projects should be approved annually by the BCUC. CEC argued that there should be a cost-benefit analysis supporting all investments. In response FortisBC argued that an annual approval process would not be feasible and that, while it would consider the benefits of each initiative, the nature of the investments were not suitable for the kind of simple cost-benefit analysis requested by the CEC. The BCUC took no issue with FortisBC’s governance model, taking comfort from evidence that FortisBC’s proposal was in line with best practices in other jurisdictions:

As for the proposed governance structure and accountability framework for the Innovation Fund, the Panel finds no issue. The governance structure appears to be consistent with that used for similar funds in other jurisdictions and to reflect accepted best practices. Similarly, the Panel does not consider it necessary for FEI to seek annual approval of specific projects before they are initiated. The Panel agrees that such an approval process would cause uncertainty, delay in project implementation and missed opportunities that would defeat the fund’s purpose. We are satisfied that the Annual Review process provides sufficient opportunity for the BCUC and interveners to receive and review progress reports on individual projects and monitor the operation of the fund.^[28]

Fixed Versus Variable Charge

The BCUC also agreed with FortisBC’s fixed charge approach, rejecting the BCOAPO argument that urged for a volumetric approach, presumably to impose more costs on to higher volume customers. FortisBC preferred a fixed per-customer rate on the basis that the costs for Innovation Fund activities were largely fixed and would not vary by volume, and that the reduction of GHG emissions resulting from successful research and development would benefit all customers. The BCUC agreed.^[29]

IMPLICATIONS AND CONCLUSION

The BCUC’s approval of the Innovation Fund may signal a growing willingness on the part of regulators to recognize the significant challenges faced by natural gas utilities in Canada and the urgent need for innovation to meet climate policies. This may provide impetus for other utilities to apply for similar funds.

Given the rising tide of energy policies aimed at decarbonization, other utilities can be expected to follow FortisBC’s approach in developing their own innovation funds that address the particular challenges and policy goals in their jurisdiction. FortisBC’s Innovation Fund provides a blueprint on which to model such funds, and the BCUC Decision provides a precedent to support these funds. As FortisBC gains experience with its Innovation Fund projects, the benefits of innovation investments will likely be proven out, providing further support for increased funding.

Before the Innovation Fund was approved, gas utility investment in innovation has been primarily focused in the Natural Gas Innovation Fund (created by the Canadian Gas Association). In recent years, FEI has contributed approximately $400,000 per year to the NGIF. With approval of the Innovation Fund, FEI’s funding for innovation has increased over ten fold, to approximately $5 million per year. If funding changes of this magnitude are replicated in other utilities across Canada, the pace of change in clean growth innovation could be transformed dramatically. This innovation is key to meeting government’s emission reduction goals by bringing innovative new, low carbon energy services to customers through existing gas assets in Canada.

While numerous utilities provide funding to NGIF, before the BCUC Decision utilities were hard pressed to find a regulator’s decision determining that such funding is needed and will benefit ratepayers, let alone should be increased. The BCUC Decision provides a clear example of an economic regulator explicitly and openly endorsing the need for innovation investment funded by ratepayers. This could potentially open the door for similar decisions by other regulators to increase investment in this needed area.

Further, if innovation funding becomes more prevalent, utilities may adopt their own emission reduction goals. A recent example is FortisBC’s 30BY30 target to reduce its customer’s emissions by 30 per cent by 2030. If the prospects for innovation becomes more promising, utilities may be bolder in targeting more aggressive reductions that are premised on innovation, such as new sources of supply, new methods of reducing fugitive emissions, or feasible carbon capture solutions.

As the BCUC recognized, a key benefit of investment in innovation is a means to ensure the long-term viability of a gas utility by reducing the risk of stranded assets through the development of new technologies. For example, through innovation, more sources of renewable natural gas may become possible and the blending of hydrogen into the supply mix in Canada may become accepted as a safe, reliable and economic option. This type of innovation could significantly “green” the content of supply for customers, reducing emissions and enabling the long-term viability of natural gas utilities in a low carbon world.

*Christopher Bystrom is a partner at Fasken Martineau DuMoulin LLP and appeared as counsel for FortisBC in this application.

Madison Grist is an associate at Fasken Martineau DuMoulin LLP and appeared as counsel for FortisBC in this application.

1. See e.g. CleanBC, “CleanBC Plan” (2019) at 43, 52, online (pdf): <blog.gov.bc.ca/app/uploads/sites/436/2019/02/CleanBC_Full_Report_Updated_Mar2019.pdf> (the CleanBC plan calls for the expansion of electrification of buildings by fuel switching from natural gas appliances to electric heat pumps).
2. For example, the City of Vancouver and other municipalities have declared climate emergencies and adopted decarbonization goals (See e.g. City of Vancouver, “Climate Emergency Response” (16 April 2019), online (pdf): <council.vancouver.ca/20190424/documents/cfsc1.pdf>).
3. Re FortisBC Energy Inc. and FortisBC Inc. Application for Approval of a Multi-Year Rate Plan for the years 2020 through 2024 (22 June 2020), G-165-20 & G-166-20, online (pdf): BCUC <www.bcuc.com/Documents/Decisions/2020/DOC_58466_2020-06-22-FortisBC-MRP-2020-2024-Decision.pdf> [BCUC Decision].
4. Ibid at 154.
5. FortisBC Energy Inc. & FortisBC Inc., “Application for Approval of a Multi-Year Rate Plan for 2020 through 2024” (11 March 2019), online (pdf): BCUC <www.bcuc.com/Documents/Proceedings/2019/DOC_53564_B-1-FortisBC-2020-2024-Multi-YearRatePlan-Application.pdf> [FortisBC Application] (All documents filed in the proceeding are available on the BCUC’s website at: www.bcuc.com/ApplicationView.aspx?ApplicationId=667).
6. Ibid at C-142.
7. FortisBC Energy Inc. & FortisBC Inc., “Application for Approval of a Multi-Year Rate Plan for 2020 through 2024 – Appendices” (11 March 2019), Appendix C6-4, online (pdf ): BCUC <www.bcuc.com/Documents/Proceedings/2019/DOC_53565_B-1-1-FortisBC-2020-2024-Multi-YearRatePlan-Appendices.pdf> [FortisBC Appendices] (FortisBC provided details of the main innovation activities anticipated to be funded).
8. FortisBC Application, supra note 5 at C-120.
9. Ibid at C-120–C-121.
10. BCUC Decision, supra note 3 at 146–47 (Section 5.2 summarizes the key elements of the governance structure, which includes an Executive Steering Committee and Innovation Working Group (comprised of utility staff) along with an External Advisory Council (comprised of external stakeholders drawn from interveners))
11. Ibid at 4.
12. FortisBC Energy Inc. & FortisBC Inc., “Final Submission” (10 January 2020) at para 507, online (pdf): BCUC <www.bcuc.com/Documents/Arguments/2020/DOC_56783_2020-01-10-FortisBC-Final-Argument.pdf> [FortisBC Final Submission].
13. We note that after this evidence was filed, the federal government further updated its commitment to provide for net-zero emissions by 2050.
14. FortisBC Final Submission, supra note 12 at para 508.
15. Ibid at para 509–10.
16. BCUC Decision, supra note 3 at 154–55.
17. The NGIF as created by the Canadian Gas Association.
18. BCUC Decision, supra note 3 at 155.
19. Ibid at 154.
20. FortisBC Final Submission, supra note 12 at para 548.
21. Ibid.
22. This evidence included:
    1. A report prepared by Ron Edelstein titled “History of U.S. Natural Gas RD&D”, which concluded that, over the 40 year period of the Gas Research Institute’s operation in the U.S., gas consumer benefits were more than four times RD&D costs;
    2. A review of customer-funded innovation in other jurisdictions conducted by Concentric Energy Advisors, titled “Regulator Rationale for Ratepayer Funded Electricity and Natural Gas Innovation”; and
    3. Case studies of the United Kingdom’s RIIO Framework, New York State’s Millennium Fund and Ontario’s Low Carbon Initiative Fund.

    (See FortisBC Appendices, supra note 7, Appendices C6-1 & C6-2).

23. Pöyry, “An independent evaluation of the LCNF – A report to Ofgem” (October 2016) at 2, online (pdf): ofgem <www.ofgem.gov.uk/system/files/docs/2016/11/evaluation_of_the_lcnf_0.pdf>.
24. FortisBC Final Submission, supra note 12 at para 524.
25. BCUC Decision, supra note 3 at 155 –56.
26. Ibid at 156.
27. Ibid.
28. Ibid.
29. Ibid.