Site C (Again)

Opponents of the Site C project are quite right that sunk costs, no matter how large, should not determine whether it is appropriate to complete the project. The decision to proceed at any point in time should be based on the costs and benefits of going forward. That was true when the current government decided to continue construction in 2017 and remains true today.

However, any such go-forward analysis requires a clear understanding of the challenges and opportunities that electric utilities face with growing penetration of wind, solar and other intermittent supply, and the strategic value a resource like Site C can provide. That is completely missing in the latest calls to halt the project. 

Based on a comparison of spot market electricity prices in the US Pacific Northwest with their estimate of the cost of completing Site C, project opponents calculated  that BC Hydro could  save some $100 million per year by halting construction at this time.  It is not clear that this calculation fully considered the contract termination, dismantling and rehabilitation costs that halting a project this far advanced would entail.  Nor did it appear to recognize any benefit to a capital-intensive project like Site C from the low interest rates BC Hydro has locked into.  Nor is there any reason to have confidence in their estimate of the cost of completing Site C, or of the cost of their alternative, US spot market supply, over the long life of a project like Site C.

But more important than all that, the project opponents' analysis completely ignores the strategic value that the dependable capacity and shaping capability of a hydro resource like Site C provides. 

Growing amounts of wind, solar and other intermittent developments are increasing the variability of electricity supply and corresponding volatility of electricity market prices. When the wind is blowing and the sun shining, there is ample supply of electricity and market prices fall -- sometimes to zero or even negative levels when supply far outstrips demand. However, when supply from those intermittent sources is limited by weather or sunlight conditions, electric systems are constrained in their ability to meet demand and market prices can spike to very high levels. 

The US Pacific Northwest or other spot markets can be very cost-effective sources of supply. Indeed, the restrictions that government has imposed on BC Hydro in their use of spot market supply to meet provincial demand should be eliminated. (Ironically it is one of the most vocal opponents of Site C -- the Green party -- that prevented the NDP government from relaxing those restrictions this past summer). However, the best use of the spot market is an opportunistic one.  It isn't a source of supply you want to be forced to rely on regardless of the market price, for example in peak demand periods when you are short of supply because of a lack of your own dependable generating capacity..  Rather you want to buy from the spot market when supply is plentiful and prices are low. 

The opportunistic use of the spot market is precisely what BC Hydro's hydroelectric system enables it to do -- generate power in BC when spot market prices are high, and buy power,  backing off its own generation, when spot market prices are low. The development of Site C will enable BC Hydro to do that even more. 

What the latest opponent analysis of Site C completely misses is that the spot market is not a substitute for Site C. Nor is the expansion of wind and solar projects in the province that others would have BC Hydro acquire in lieu of Site C. Those sources do not provide the dependable capacity and shaping capability to produce your own power when it is most valuable, and to buy from the spot market when it is most advantageous to do so. 

What needs to be recognized is that rather than substitutes for one another, Site C complements greater cost-effective use of the spot market and can serve to accommodate more wind and solar development in BC and neighbouring jurisdictions. It is a strategically important and valuable resource.

It is possible, though highly unlikely, that the geotechnical problems and cost escalation for Site C would justify terminating the project at this time. But the challenge then would not be simply to replace the energy that Site C would have produced. It would be to develop the alternative demand and supply side measures that could offer the dependability and flexibility that more hydro production in the province would provide. The project opponents have yet to recognize the issue, let alone provide practical, cost-effective solutions.

On Tax Cuts and Cash Giveaways

They were never meant to be well considered policies.  The Liberals' promise to reduce the provincial sales tax and the NDP cash giveaway of $1000 per household were both the standard stuff of populist-driven electoral politics.  Still, it would be nice if during the leaders' debate or other forums, there was some serious discussion about government taxation and spending in this province - where the parties want to go over the medium to long term.

While one can justify virtually any fiscal stimulus including tax cuts and cash giveaways in the wake of Covid, in the not-too-distant future government will have very hard choices to make.  The government won't be able to sustain the on-going deficits it is currently incurring and yet there will be demands for more government resources in a whole host of critically important areas.

The homelessness and despair in our parks and streets is both a tragedy and disgrace.  There are no simple answers but one thing is clear.  It will require a Covid-level commitment to address the underlying problems and the resources to match. 

Reducing greenhouse gas emissions is a universally shared objective, but it too will require serious commitment and resources to get beyond high-minded targets and achieve major reductions.  Infrastructure and other investments will be needed to make affordable, green energy alternatives available for households and industry.  Comprehensive programs and plans will be needed to support fossil fuel-dependent workers and communities in their transition to new employment and economic activity in the face of their industry's decline.  

The benefits of high quality early education and child care, both for long term child development and the more immediate needs of parents, are now widely recognized and accepted across the political spectrum.  But for that to be provided throughout the province on more than a piecemeal basis will require major investment in facilities and staff training, and on-going commitment to operating costs. 

And then there is the aging population and growing need for health care facilities and services.  There is backlog in transportation infrastructure; the on-going need to seismically upgrade, refurbish and expand school facilities; and other major demands as well.  The list could go on.

Of course, government must make choices -- not everything can be done to the extent we would like.  But if we are to take these challenges seriously, government must commit to doing more than they have in the past.  The question is whether and how the Liberas or NDP are willing to do so. 

The short term fixes the parties are offering are of no help in dealing with these critical needs.  Cutting taxes as the Liberals are offering, which will be difficult to reverse in future years no matter what their current intentions, will only make the problems worse.  Government will need more resources and unless the Liberals have some other tax in mind, their tax cut proposal will make it more difficult to address the fundamental fiscal challenges government will face. 

The NDP cash giveaway is not much better.  It will add to the deficit in the short term and increase the fiscal challenge government will face to allocate more resources to the pressing medium and long-term needs.

It is no doubt naive to think any party will want to talk about how much resources they will devote to the problems we know have to be addressed, and more to the point, how they think they will raise the required revenues.  But it still would be nice to hear whether the leaders appreciate the challenge, and in suitably election-tainted general terms, tell us how they plan to deal with it.

BC Ferries Needs More Than a Covid Bailout

It is the classic problem BC Ferries has always faced – first as a Crown Corporation and now as an unnecessarily complicated quasi-private company still dependent on government subsidy. Given the constraints on fares imposed both by the government and a regulator, the government subsidy is not sufficient to fully cover the losses on the service government requires BC Ferries to provide. The combination of fares, subsidy and service levels are not financially sustainable over the long term. 

The recently announced Covid-related bail-out will help address BC Ferries’ immediate financial woes due to the springtime and early summer collapse in traffic and revenues. But it won’t deal with the long-term unsustainable arrangements, particularly with the provincial government making clear it wants more service without any fare increases or any reversals of the seniors’ and other fare discounts forced on BC Ferries over the last few years.

 

You can be sure the current government, like every government before it, will not want to increase the contract subsidy to the levels needed to sustain the service levels and fares it wants to see. And ferry customers, particularly the vocal Island stakeholders who think BC Ferries should be seen as part of the highway system, will not support increases in fares or cuts in uneconomic service consistent with the level of subsidy government will provide.

 

However, if BC Ferries is going to be able to recruit and maintain the skilled labour force it needs, expand and modernize its terminal capacity, maintain and upgrade its fleet, something will have to change. And if more subsidy and/or higher fares are not on the table BC Ferries will need to be given the flexibility and encouragement to fundamentally change the way it does its business.

 

It will need to introduce changes to its rate structures, reservation policies and schedules in order to increase the utilization of ship capacity much like the airlines were forced to do. Higher capacity utilization in off-peak periods and seasons will reduce average costs and the need for higher fares or subsidy to sustain operations.

 

For the longer term, definitely post-Covid, BC Ferries will have to make much greater efforts to encourage passenger as opposed to vehicular travel, especially in peak periods and seasons when more ships are needed to accommodate more vehicular demand. Encouraging more passenger as opposed to vehicular traffic requires better integration of ferry service with convenient land transport options including island taxi, uber, car share, bike and e-bike share, and upgrades of safe island bike networks. It requires as well much lower passenger fares with the bulk of BC Ferries revenue requirements recovered from higher fares on vehicles.

 

BC Ferries must also look for and be able to act on opportunities to eliminate duplication of terminals and reconfigure costly routes. And it should work jointly with the government to identify opportunities to replace ferry service to some islands with lower cost bridge connections.

 

There are calls for BC Ferries to return to its former crown corporation status. There is some merit in that. The current quasi-private structure makes little sense and probably adds to the interest costs BC Ferries pays on its large and growing debt. But that in itself won’t solve the fundamental problem. Fundamental change is required for that.

 

What's with the Greens?

It is disheartening to see the Greens try to derail the NDP’s efforts to eliminate some of the worst aspects of the previous government’s Clean Energy plan – in particular the NDP’s proposal to eliminate the self-sufficiency requirement that the Clean Energy Plan imposed on BC Hydro.

The self-sufficiency requirement called on BC Hydro to develop or contract for firm electricity supply from BC sources sufficient to meet forecast BC demand. It sounds harmless enough but it is hard to overstate how misguided and costly that policy has been.

Self-sufficiency was never needed to ensure reliable supply. If security of supply was the concern, the requirement should have been directed to ensuring BC Hydro had sufficient dependable peak generating capacity to meet sustained peak loads. But it was silent on that critical issue, focussed instead on the supply of energy regardless of when it was produced. That suited BC’s private run-of-river power producers, who could provide energy (unfortunately for BC Hydro customers disproportionately in the springtime when least needed), but little dependable peak generating capacity mid-winter when most needed.

There was the telltale sign that this requirement had nothing to do with reliability when it precluded BC Hydro from relying, if ever needed, on the province’s entitlement to the downstream power benefits under the Columbia River Treaty, a source of supply guaranteed under international treaty agreement and easily as reliable as contracted supply from BC sources of supply.

Nor was the self-sufficiency requirement cost-effective for BC Hydro customers. It had the predictable (indeed intended) effect of forcing BC Hydro to buy high cost, low value electricity it did not need.  The financially losses BC Hydro incurred as a result have been staggering. The average cost of the power BC Hydro was forced to buy averaged over $125/ megawatt hour, more now with the inflation provisions in the contracts. That power is worth less than $25/ megawatt hour – the losses, that have to made up for in higher than necessary BC Hydro rates, are in the hundreds of millions of dollars per year.

It was, pure and simple, a scheme by government and their developer friends to create an artificial market for what the developers could provide – all at the expense of consumers. We used to call that Mercantalist protectionism. I suppose today it could be better described as Trumpian economics, with its veil of national, in this case provincial, security of supply.

Perhaps the Greens believe circumstances are different now. They are, but if anything current developments provide an even stronger argument to eliminate the misguided self-sufficiency requirement imposed on BC Hydro. The explosion of solar and wind development in Alberta and the western United States is at times producing large amounts of surplus that can be purchased at very low prices. During high wind events and periods of high solar production prices can fall to zero – even go negative. With its large reservoir capacity BC Hydro is uniquely capable of taking advantage of this low-cost supply whenever available. Self-sufficiency only impedes BC Hydro’s ability to do so.

One would think that the Greens, of all parties, would understand the need to acquire electricity at the lowest possible cost in order to maintain low electricity rates and encourage the electrification in transport and industry we need to meet our GHG reduction targets. For that we should be doing the exact opposite of self-sufficiency. We should be expanding our interconnection capacity and freeing up BC Hydro’s ability to acquire clean energy at the lowest possible cost from wherever it is available.

That’s doesn’t mean there won’t be private or community power developments in BC. There will – when and where they are economic. It is true BC Hydro could do much more in making available low cost transmission and back-up services in order that developers could undertake power projects on their own. But the government should end the craziness of forcing BC Hydro to buy power that it does not need for reliability, that is not economic, and that limits its ability to take advantage of the exceptionally low cost renewable energy increasingly available in neighbouring jurisdictions.

Sustainability of our government debt- sustainability is not the issue

Debate about the sustainability of government debt is seldom about the debt itself – the financial burden we are imposing on future generations. After all, the well-being of future generations will depend on the investments we currently make (or do not make) as much as or more than the way in which those investments are financed.

The fact that the same people who raise concerns about unsustainable debt commonly support tax cuts, regardless of their impact on government finances, tells you that for many the real issue is not the debt. Trumpista Republicans are particularly obvious in that regard. And the same hypocrisy is evident in Canada when it comes to glaringly contradictory positions on tax cuts, deficits and debt.

There are, of course, limits to the foreign borrowing a country can prudently undertake. Repayment obligations to foreign creditors can require draconian austerity measures, as countries like Argentina, Greece and others have recently experienced. For Canada, however, the repayment obligations on our total debt, foreign and domestic combined, is relatively small in relation to our national income.  

As Kevin Milligan, Trevor Tombe and other leading Canadian economists have pointed out, even with the huge amount of Covid-related health care, bridging and income support measures the Canadian government is currently undertaking, the interest payments on our total debt will still be significantly less than what we have readily managed in the past. As for the debt itself, it will gradually fall in relative size and significance as long as in normal times new debt accumulates at a lower rate than our rate of economic growth.

But if the debt itself isn’t a major problem, even in extraordinary times like this, what is the real issue that gives rise to the apocalyptical warnings of many politicians and commentators, particularly on the right? It isn’t the amount of borrowing per se; rather it is the extent of government involvement in the economy they are railing against.

When politicians raise alarms about the run-up of government debt what they are really decrying is the increased amount of public sector expenditures that the debt makes possible. They believe our economy should produce the goods and services that individual households and businesses want; in economic terms they believe resources should be allocated in accordance with private household and business decisions, not public sector priorities.

The problem with the misdirected debate about the sustainability of government debt –  focused on the debt itself instead of the expenditures the debt makes possible – is that it diverts attention from the far more important question we should be addressing: What is the role of government in modern society – what is the right balance between private versus public sector spending.

In the midst of the pandemic there has been widespread agreement about the need for massive government spending. But as the pandemic and with it the pandemic-related spending subsides, there will be the issue of what level of government spending is needed in more normal times. Do we return to pre-Covid levels of government responsibility and spending. Or do we recognize the need for major change.

There are legitimate, though often exaggerated concerns that government bureaucrats can be excessively political, risk-averse and inefficient in what they are mandated to do. And that does raise important cautions about exactly what government should be responsible for. Nevertheless, I think any fair-minded person can recognize that the well-being of present and future generations will depend far more on the investments we must make collectively than the spending we can make on our own.

The pandemic itself has made clear the need for more basic research and health care system preparedness to avoid the calamity of new viruses and other public health emergencies in the future.

Massive investments will be needed to address the ever-growing challenge and effects of climate change. It is not just the efforts to reduce emissions that need to be supported, but also to mitigate the social, economic and environmental damages that we are already experiencing and that will in all likelihood escalate in the future.

There is the challenge of poverty and homelessness, combined in many instances with mental and physical wellness issues. We’ve recognized the unacceptability of these conditions during the pandemic; they will be no less acceptable when the pandemic disappears.

There is the ongoing challenge of meeting increasingly complex educational needs in a world where knowledge and skills will be of paramount importance in order for our youth to find and retain meaningful employment and income.

There are the unacceptable third world conditions in some First Nation communities. And there are the growing needs of many oil and gas, coal mining and other resource-dependent workers and communities that will require support to transition to other activities and industries in order to survive.

There are as well our global responsibilities. We are a rich nation, but our well-being and those of our children will never be secure if we fail to support the basic needs of people in much more difficult circumstances.

And there are many other challenges, challenges that will require more public as opposed to higher levels of individual and private sector spending.

The Reagan and Thatcher revolutions brought a relentless effort to reduce public sector spending, leaving more resources and spending power in the hands of individuals. But that will have to be reversed if we are to meet all of these needs. The question is how much more public sector spending should we support. That is the debate we will need to have. Then we can sort out the best ways of financing that spending – with more debt, higher taxes or some combination of the two.

The question of the appropriate amount of debt will be a much easier issue to understand and resolve once we’ve developed a consensus on what we are trying to do.

Moving Away from Isolation

As governments begin to grapple with when and how to move away from the extraordinary isolation measures that, on the one hand, have been necessary to curtail the exponential growth of Coronavirus cases and deaths, yet on the other hand are hugely disruptive to the economy and our personal lives, it is important to bring some perspective to the consequences and costs that alternative strategies may entail.

The consequences and costs for the economy are relatively straightforward to assess. Different strategies (for example, earlier or later reversal of the isolation and industry shutdown measures) will significantly impact employment and business activity. The losses in employment and business income under the different strategies provide a measure of the economic cost they entail.

The consequences and costs for Coronavirus-related illness and death are much more difficult to measure. Nevertheless, one can build on estimates of the number and severity of coronavirus cases to bring some perspective to the costs of the illness and deaths the different strategies entail.

For example, in a March 25 article in the New York Times, Nicholas Kristoff and a team of epidemiologist modellers provide information on the Coronavirus consequences of different time frames for ending the isolation measures in the US. Their estimates of the number of Coronavirus cases and deaths that one could expect if the US were to lift the isolation measures after 3 to 6 weeks are shown in the table below. 

The estimates are no doubt rough and do not take into account the mitigation measures that could be implemented in place of isolation. Nevertheless, they do indicate how severe the consequences could be. An early end to the isolation (after the first 3-week period) could result in 104 million Coronavirus cases in the US (almost 30% of the population) and some 1 million deaths. Ending the isolation measures after 6 weeks could cut the total number of cases by over 50% and the number of deaths by almost two-thirds, but would still have staggering effects (with an estimated 45 million cases and 356,000 deaths).

Weeks of Isolation	3	4	5	6
Cases (millions)	104	81	61	45
Deaths	1000000	787000	553000	356000

To some people it is impossible or even immoral to try to estimate the costs of illness and death. But to decide how to manage economic-health trade-offs, one needs some sense of the cost that people place on the risk of serious illness and premature loss of life – the amount of resources they would want government to allocate or income they would be willing to forego in order to reduce the number of illnesses and deaths.

With respect to illness, a minimum measure of the cost is the estimated average health care cost that will be incurred to treat more and less severe Coronavirus cases. As for deaths, economists look at the decisions people make with respect to more and less risky occupations, and to more and less safe automobiles or other products to gauge the cost they assign to the risk of loss of life. How much higher wages do people need to offset increased occupational risks or how much higher prices will they pay for safer products.

Based on studies of those choices people make and also on direct surveys, economists have concluded that on average people in wealthy countries like the US or Canada assign a cost in the order of $5 million to $10 million to the risk of the loss of one life. Taking $7.5 million as a mid-range estimate, the cost of the one million lives that could be lost if the isolation measures in the US were lifted after three weeks would be some $7.5 trillion dollars

The Table below uses an average health care cost of $25,000 per illness and a loss of life cost of $7.5 million per premature death to develop estimates of the total US Coronavirus health care and premature death costs when the isolation measures are lifted after 3 to 6 weeks.

Weeks of Isolation	3	4	5	6
Health care ($billions)	2,600	2,025	1,525	1,125
Loss of life ($billions)	7,500	5,900	4,150	2,670
Total Costs ($billions)	10,100	7,925	5,675	3,795

It must be emphasized that these numbers are rough – they are useful not in their precision but rather as an indication of the order of magnitude of the costs involved. And in that regard they are very clear.

Firstly, it is clear that the costs of illness and death are huge. If the US were to lift the isolation measures after 3 weeks with no effective alternative mitigation measures to take their place, the total cost would be over $10 trillion – almost one half of the US GDP in 2019.

Secondly, the costs do fall considerably with each additional week of isolation – if the measures are kept in place for 6 weeks the total costs would be $3.8 trillion – 60% less than if isolation were lifted after 3 weeks. However, they would still be huge. Costs of $3.8 trillion are equivalent to almost 20% of US GDP.

If the goal of the isolation measures has been to flatten the curve in order that hospitals can cope, the goal of delaying the lifting of isolation measures must be to develop and put in place mitigation measures that could effectively replace isolation. Delay in lifting the isolation helps but still leaves unacceptably high costs of illness and death. And unlimited delay is not sustainable – the economic costs would be overwhelming.

To avoid massive costs of illness and death if the isolation measures are lifted too soon, or of massive loss of income if the isolation is excessively prolonged, planning and preparation for effective alternatives to isolation have to start today.