Mark Spurr, IDEA Legislative Director
historically been provided by government-owned monopolies. In the U.S., power and
natural gas have historically been provided
by regulated monopolies (private, investor-owned companies) or by municipally owned
utilities. In exchange for receiving monopoly
powers and a guaranteed rate of return,
the utility companies accept government
regulation of rates.
With a rate-regulated monopoly, the
government becomes responsible for ensuring fair and reasonable rates for consumers
while also ensuring the continued business
viability of the utility company.
Should district energy service be regulated? If so, how? Are the answers
different in different parts of the world?
With rapid international economic
development, we are witnessing dramatic
growth in demand for all kinds of utility
services, including power, natural gas, cooling, heating, water and wastewater treatment. Constrained supplies and steep
increases in the costs of energy and materials
are driving utility costs to unprecedented
levels. At the same time, concern is mounting regarding the environmental impacts of
producing and distributing utility services.
Significant changes are taking place in
how governments regulate utility services.
Internationally, the trend has been toward
deregulation rather than increased regulation. Competition is seen as providing lower
costs, better reliability and increased customer service. However, not all deregulation
has been successful (as was demonstrated
with the power industry in California), and
in some cases there is a move toward reregulation to better achieve public policy goals.
Where does this leave district energy?
within a given geographic area. Most district
energy systems in the United States operate
under a franchise agreement. In many cases
some type of franchise fee is paid, generally
as a percentage of gross revenues and, in
a few cases, per lineal foot of public right
of way used.
Most district energy systems in
the United States operate under
a franchise agreement.
Rationales for Regulation
First, let’s review the reasons why utilities are regulated. A fundamental policy
goal is to avoid construction of duplicative
infrastructure. This is usually addressed by
granting an exclusive license (or franchise)
for providing a particular utility service
Another key goal is to ensure that the
impacts resulting from construction and
operation of utility facilities are acceptable.
Requirements for permits relating to air
and water emissions are usually undertaken
at the national or state/provincial level, while
impacts relating to construction of facilities
is addressed at the local level. Notably,
because of the structure of government
agencies, there is generally little attention
given to integrated utility planning to minimize the impacts and costs of all utility
systems – power, cooling, heating, water
Finally, government has an interest in
fair pricing of utility services. If governments
grant monopoly powers to utilities to provide
essential services, it is appropriate for government to provide oversight on consumer
rates. In much of the world, utilities have
Whither District Energy?
These general public goals and associated regulatory issues are also relevant
to district energy. The discussion regarding
regulation, deregulation or reregulation of
district energy varies depends on history
and status and maturity of district energy
in a given country.
In the U.S., district energy operates
commercially in the competitive environment and must compete head-on with
conventional building heating and cooling
systems. Therefore rates are generally not
regulated, but there are exceptions. For
example, many older district heating systems
and a few chilled-water systems evolved
out of regulated monopoly electric utility
businesses and ’inherited‘ rate regulation.
Of the 50 states in the U.S., only 10 states
regulate the rates of these ’legacy’ district
heating systems and only two states regulate chilled-water rates.
In many countries, utility companies
are owned and operated by governments
and were historically not regulated. However,
some governments have created separate
government-controlled utility regulatory
bodies to provide oversight to the utilities.
District heating rates are regulated in
Denmark, Norway and former Soviet bloc
countries, but are unregulated in Sweden,
Germany and Finland.
Creation of separate regulatory bodies
tends to occur as governments introduce
competitive elements into what was historically completely government owned
and operated systems. Competition is being
introduced primarily on the production side
of the utility business but also, in some cases,
on the distribution side. This has occurred
in Sweden, where district heating systems
that had been government-owned have