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Lonsdale Energy Corp. (“LEC”) – Financial Mismanagement

A. Lonsdale Energy Corporation (“LEC”) – Also known as the “District Energy” initiative, LEC represents the City’s foray into a citywide radiant heat system. The LEC system employs a series of “Mini-Plant” boilers to boil water using natural gas supplied by Fortis Gas. The hot water is then pumped throughout the City to all new residential and commercial buildings greater than 10,000 sq/ft in size, where on arrival it passes through individual heat exchangers. That process causes heat transfer to a closed loop hot water system specific to that particular building, which building then circulates that hot water for space heating purposes as well as “hot water consumption” purposes. The hot water supply is used for showers, sinks, washers, etc., in each connected building.

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The City first contemplated this venture back around 2002 when it began to sell “Land Bank” properties in the 100 blocks of west 1st and 2nd streets. These land sales were completed with covenants compelling each developer to make use of LEC thermal heat as the sole means of providing building heat, and for making hot water for consumption.

LEC was established by the City as a wholly owned private enterprise, with an eye to social engineering of the heating demands of City residents living in the 100 block of west 1st and 2nd streets.

The City subsequently passed a bylaw compelling all new buildings over 10,000 sq/ft in size, constructed anywhere in the City, to connect to LEC. This expanded mandate compelled LEC to pursue aggressive expansion of the underground pipeline network or risk loosing the opportunity to connect many of the new developments coming on-line at an ever-increasing pace. The effects of this new bylaw have given LEC a “monopoly” right to supply “space-heating” energy, “hot water” and now “space-cooling” energy requirements City wide.

To pursue these new development driven opportunities as they arrived on the desks of City staff, LEC needed significantly more capital money, money LEC did not have.

In 2009 the City, who has laid all the new hot-water pipe for LEC, began the expensive process of installing the additional underground infrastructure at a pace deemed necessary by LEC. The City, upon completion of each LEC project, invoiced LEC in the same manner as it typically invoices all other utilities for which public services and monies are expended (eg: Hydro, Fortis Gas, etc.). But it is at this point where the LEC story takes a decidedly negative twist. Upon receipt of the City’s invoices by LEC, these invoices were recorded, and then thrown in the corner. Since 2009, LEC has not been able to pay City pipeline installation invoices, and despite repeated requests that the amounts owing to the City be disclosed, none of the documents confirming these amounts have been forthcoming from City staff.

In answer to LEC’s inability to pay the bills it owes to the City, the City has taken the unusual step of simply increasing the line-of-credit available to LEC. This is a highly unusual step for any enterprise, and an unprecedented action for a municipal government to take. But that is exactly what the City did. Over the course of 2009 through 2013, LEC spent approximately $10,500,000 of the City’s money. It did this without ever coming before council and asking for borrowing authority for the amounts being spent. The initial $2,000,000 equity investment by the City in LEC, together with the additional $10,500,000 in non-performing short-term receivables, have essentially become interest free investments and loans to LEC, going back as far as 2004/5. The act of lending the City’s money to LEC beginning in 2009, without ever having come back before council to appropriate these funds and authorize these expenditures was a clear violation of the Community Charter Act, and I believe it was illegal.

Not until I began bringing attention to the issue of LEC’s unofficial loans did this matter formally come before council. LEC’s Mr. Ben Themens issued a report which came before council on December 16th 2013. In that report Mr. Themens proposed formalizing the loans to LEC at a ceiling of $12,000,000 inclusive of $500,000 in working capital, and he proposed to establish a 5-year interest rate of 0.3 per cent.

I opposed the 0.3 per cent as it was well below the amount which the City’s Isabel Gordon alleged was required from the City’s investment portfolio to fund the 10-year plan, and 1.8 per cent below the City’s current investment rate of return, identified as 2.3 per cent. I made a plea, during the public input Period on December 16th 2013, for an interest rate of 4.0 per cent. See Public Input Period:

When the matter came before council later that night, the debate was heated, given the allegation by LEC that it was supplying hot water thermal energy at a cost 30% below comparable market supply sources for the same space heating energy. Council opposed the 0.3% interest rate sought by Mr. Themens in his report. The loan rate eventually approved by council was 2.1%.

The debate on this topic was contentious, but the proposed rate of 2.1% put forward by councillor Clark eventually received unanimous support. See Council Video:

B. LEC Mini-Plants Living In City Amenity Contribution Spaces For Free – The City, in trade for building specific density bonusing and building height variance bylaws, has compelled various developers to make large areas within those new buildings available for housing of LEC “Mini-Plant” boilers. These areas, which should have properly been transferred over to the City as a “strata-lot”, were instead treated as if a mechanical room situated in a common area. The City then registered its interest and control over these spaces as a “right-of-way”. The City then gave exclusive custody of these areas over to LEC.

These “Mini-Plant” boiler areas were all acquired by selling or trading City owned density to location specific private developers. The density sold to these developers was in all cases a public asset of the City. Despite this fact, the City, who is properly the owner of the right to occupy these amenity areas in which LEC “Mini-Plants” are now situated, receives no monthly or annual rent from LEC. In essence, LEC has exclusive use of a public assets for free, to use for the purpose of manufacturing hot-water in a “for-profit” enterprise supplying thermal heat to a subset of City residents.

In my opinion, the City’s COO, Mr. Ken Tollstam, who also acts as president of LEC, has failed in his fiduciary obligation to City taxpayers by not having acquired for those taxpayers an appropriate rate of rent from LEC for LEC having exclusive use of a public amenity space. Mr. Tollstam’s conduct sitting as the COO for the City while at the same time being the president of LEC, puts him in a real “conflict-of-interest”, and I believe this conflict of interest lies at the heart of his failure to act in the best interests of all City taxpayers.

The City needs to commence charging LEC market rent for the exclusive use and occupancy of City owned amenity spaces.

C. LEC Not Contributing To Strata-Plan Common Expenses For Mini-Plant Boiler Rooms – Each LEC Mini-Plant is situated in the common area of a building, yet LEC does not make any financial contribution to the maintenance fees and common area expenses applicable to those buildings. Instead, LEC rides on the backs of the strata plan owners in each building where a “Mini-Plant” has been situated.

City staff and certain council members have taken the position that LEC’s existence in these common areas is exactly the same as if an electrical meter receiving BC Hydro electric power located in a strata lot common area mechanical room. This allegation is entirely false. BC Hydro provides power to a “goose-neck” when aerial, or to a “junction” or “breaker-box” where power enters the building underground. Beyond that connection, all infrastructure is the property of the building, save and except the weights and measures approved electrical meter heads installed for billing purposes.

All electricity transferred into a building remains in the building for internal use and consumption, and all the switching and electrical systems are paid for and owned by the building through the strata.

The LEC “Mini-Plants” on the other hand, take in natural gas, and using the “Mini-Plant” boilers situated in the common areas, convert that natural gas energy through a manufacturing process to hot water, and then LEC pumps that hot water through heat exchangers to fulfill that buildings space heating and hot water demand requirements. It also pumps that hot water outside the building into a network of underground pipes where it then enters many other buildings connected to the LEC pipeline network, at which point LEC provides each of these additional buildings with hot water, which similarly passes through yet another heat exchanger, to satisfy heating and hot water requirements in each of those other buildings. All this hot water is provided throughout the network as part of a “for-profit” thermal heat business venture operating as LEC.

Under the Strata Property Act, each strata plan owner is compelled to share equally in the cost of maintaining the building envelope, and all common costs which result. LEC lives in these common areas but makes no financial contribution to the operating cost of each building. This is not illegal, but it is immoral and clearly wrong. LEC should pay a common expense contribution like every other person or entity resident in each building in which an LEC  “Mini-Plant” is situated. In this respect, I have appeared before council and requested a delegation to review these issues in detail. The delegations is now set to proceed on July 7th 2014. See council video feed:

IT IS MY POSITION THAT in relation to LEC:

  1. The City should not extend any further loans or loan guaranties in excess of those values already in place: and
  2. LEC should be required to pay all bills properly served on it by the City, within the credit terms set by the City, which terms should be the same as those applied to all other utilities and taxpayers: and
  3. The City should restructure the amortization period of all LEC loans, compelling repayment to now occur over 25 years: and
  4. The City should approach each strata or other form of building owner in which an LEC “Mini-Plant” boiler is situated, and propose transition (at no charge to the Strata) from a “right-of-way” to a designated “strata lot”, which strata lot will then be registered in the provincial land-title registry as a property of the City of North Vancouver: and
  5. The City should negotiate and come to agreement, as part of the strata-lot transaction process above, determination of a fair and reasonable “common expense” contribution in accordance with the Strata Property Act, and thereafter begin paying that monthly “common expense” to each strata plan council or other form of building owner for each building in which an LEC “Mini-Plant” is situated: and
  6. The City, having arrived at a fair monthly “common expense” contribution through negotiation with each strata plan and other building owner, using a reasonable reverse adjustment mechanism for cost de-escalation, should agree to make payment of all historical “common expense” monies owing to each affected building, retroactively to that point in time when LEC gained custody of the particular site; and
  7. The City should instruct LEC to commence a process to secure third party lending for the total $12.0m of LEC debt owed to the City through the Municipal Finance Authority (“MFA”) in such a way so as to take advantage of any investment credits which may accrue to LEC, which are similar in nature to the $340K investment credit which LEC has/will realize on the existing $2.0m MFA loan; and
  8. All future expansion of LEC infrastructure should be compelled to submit to a “certificate of public convenience” process similar in nature to that employed by the BC Utility Commission to ensure that such expansion will indeed provide benefit to all those who will be compelled to pay the LEC bill’s; and
  9. LEC should immediately begin accruing and booking the allowed “Return-On-Equity” at the rate specified for a monopoly utility by the BCUC; and
  10. LEC should begin paying the City of North Vancouver rent for occupancy of the City property used by all LEC Mini-Plant boilers.

When I find myself in a position to effect these changes, the policies and principals setout above will guide my decision-making.

What do you think?

What do you think about my position on Lonsdale Energy Corp. (“LEC”) – Financial Mismanagement?

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