Category Archives: Economics

BC Budget hides $100 Billion, forces citizens to shoulder debt burden

October 15, 2013Economics, Politics, Western CanadaErik Andersen

As the Liberal Government compiles the 2014 BC Budget, it is ignoring warnings of exploding capital borrowing, hiding $100 Billion in taxpayer liabilities, and forcing the province’s least fortunate citizens to shoulder the burden of the province’s appalling fiscal mismanagement – argues independent economist Erik Andersen.

It goes without saying that when governments set about budgeting, they should do so in the “Public’s Interest”. So what are the best ways to do this task? Usually, the conflicting individual objectives are so diverse it takes a general election to arrive at a consensus – much as just occurred in Nova Scotia. The trouble with waiting for a general election is that a great deal of fiscal and economic harm can be done in the interim.

Like many others, the Government of BC has been in denial of post-2009 realities. Even after 20 years of stagflation, Japan has yet to accept the reality of the rollback in corporate shares and property values by more than 70%.

[quote]The true increase in BC’s total liabilities is from $64 billion in 2005 to $170 billion in 2013. In per capita terms, that is a staggering increase in Provincial liabilities of 150% in one decade.[/quote]

BC ignores rating agency’s warnings on capital borrowing and spending

Two years ago the credit rating agency, S&P, publicly advised Canada’s provincial governments to try to control budgets for education and health care, to curtail building large capital projects if debt must be found first and to work on increasing revenues.

Our BC government has been aggressive in limiting the budgets for the first two items; irresponsibly reckless about borrowing and spending on infrastructure projects, and much too timid about increasing revenues in ways that are not regressive taxation strategies.

An examination of historical financial data is one way to get a sense of what might be in store from the 2014 BC budget unless a fundamental change of character emerges.

Revenues not keeping pace with GDP growth

Starting in 2004, the Gross Domestic Product (GDP) for BC was reported to have been $145.763 billion and Total Revenues $29.060 billion. By 2013 these values were $224.823 billion and $42.055 billion, respectively. In that decade, GDP increased by 54% but Total Revenues only by 45%. This shortfall in revenue growth easily explains why the government has had continuing operating deficits ever since 2008 and – if fictional revenue transfers identified by the Auditor General continue – operating deficits will be the order of the day into the foreseeable future.

[quote]BC has a government that prefers for the least financially able carry the burden of annual revenue shortfalls.[/quote]

Parts of the economy that play a large role in determining what is the “public’s interest” – health care and education – have not fully participated in the increase in GDP. In 2004, the per capita amount spent on health care was $2,770 and by 2013 the amount increased by only 35% to $3,750. Spending on education was even more troublesome. In 2004, the per capita amount was $2,040 but by 2013 it had only increased to $2,470 – or a 21% rise.

Electrical consumption remains flat, job growth slow

What about the rest of the BC economy? Electrical energy could be thought of as an indicator of social and business activity in the province, yet total sales to BC-only customers by BC Hydro remained stagnant at 50,000 GWhrs per year. Even the total of employed citizens came nowhere close to matching the increase in GDP, only a 15% increase over the decade.

BC’s citizens left out of GDP growth

So, why, might you ask, are BC’s citizens being left out of enjoying the benefits from this run-up in the Province’s economy?

There are two possible reasons. The first is that the Government has not been able to stop “leakage”, if indeed it even tried. The second has to do with one of the items mentioned by S&P – unaffordable borrowing and spending on infrastructure, particularly by BC Hydro.

Auditor General calls out fuzzy math in BC budgets

BC’s Government likes to “word-play” around the topic of debt and contractual obligations, a sort of Enron-Nortel approach to financial reporting. Each year the Comptroller General reports on the province’s financial condition and the Auditor General does a review. Without fail there has not been one year in the past decade that the Auditor General has issued an unqualified audit, short form of saying not right folks.

So back to debt or whatever some in Victoria like to call it. Formally, the Comptroller General reports annually the province’s “debt” and other liabilities. The political practice is to focus on the number in the “debt” column. In 2004 it was $37.735 billion and as of 2013 the “debt” was $55.816 billion. Not an altogether bad picture, right?

$100 Billion in hidden liabilities

Next, the Comptroller General shows “Liabilities”, which mostly don’t go away and are now $19.5 billion, up from $15.216 billion in 2004. What the Comptroller General does not show is a third category of liabilities known as “contingencies and contractual obligations”. The first reported year for this category was 2005 when the amount was $12.392 billion. Since then this addition to Provincial liabilities has exploded to over $100 billion (1).

All political parties running candidates in the recent election knew that the Auditor General reported the total in 2012 at $96.374 billion but none would talk about it.

Adding these three liabilities together, the increase in the provincial total is from $64.273 billion in 2005 to $170 billion in 2013. In per capita terms, that is a staggering increase in Provincial liabilities of 150% in one decade.

Citizens shoulder debt burden of BC budget

So what does the trend of the past decade suggest?

BC has a government that prefers for the least financially able carry the burden of annual revenue shortfalls.

We have a Government addicted to being big borrowers and spenders, “air-brushing” away exploding provincial liabilities. A borrow-your-way-to-financial-success model of management.

We have a government in total denial of the economic risks prevailing in the global economy of 2013 and beyond.

Not much “public’s interest” in the continuation of the government’s recent fiscal practices and little cause to think they will change.

(1) In the absence of a formal value for “contingencies and contractual obligations” the amount assumed is $100 billion for 2013.

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China’s chaotic leap forward to a green economy

October 15, 2013Economics, Energy and Resources, RenewablesWill Dubitsky

When most people talk of China and its environmental and energy challenges, they tend to paint a very bleak picture. While this view is historically justified, things are changing fast in today’s China.

Criticism of China’s environmental record has been traditionally well-justified. After all, China: 1) displaced the US as the world’s largest energy consumer as of 2009 – doubling its energy consumption between 2000 and 2009; 2) produces the world’s highest pollution levels, with 16 of the top 20 most-polluted cities in the world being in China; and 3) now has total annual vehicle sales higher than that of the US.

[quote]China went from 1% of the global market for solar technologies in 2004 to 50% by 2012[/quote]

Add to this picture the fact that approximately 62% of China’s current electrical power generation is derived from thermal, mainly coal-fired, generating plants and much of China’s industrial pollution emanates from plants with dated technologies.

China invests hundred of billions in green economy

The flip side to this gloomy portrait is that China is actively migrating to a green economy, albeit in sometimes chaotic fashion. Indeed, in 2012, China had the highest level of investments in clean energy, totalling $67.7B – up 20% from 2011 due to a solar sector surge. The US was in a distant second place with $42.4B in clean energy investments in 2012.

With these sharp contradictions, one might be tempted to conclude that China is schizophrenic on environmental issues. However, that would be unfair because the trends are shifting in favour of clean technologies, supported with massive investments by the national government.

In fact, in 2009, China committed a staggering $223B to clean technologies, sustainable development-related R &D, energy efficiency and emissions and pollution control. In August 2012, it announced a new plan for $372B up to the year 2015.

Concurrent with the aforementioned investments, under the 2009 China Renewable Energy Law, China introduced: 1) a Feed-in-Tariff (FIT) for renewables (a fixed price paid above market prices for all renewable energy sources that sell into the grid), and 2) Right-to-Connect obligations that require all grid operators buy all of the renewable energy produced in their respective regions. (Note: the FIT and Right to Connect formula was conceived in Germany and has since been copied by 40 governments around the world, including Ontario, until that province abandoned the model in response to a WTO ruling over provisions requiring the use of locally-built technology to qualify for the program).

China’s renewable energy quota

Complementing the FIT and right to connect programs, in 2012, China began to implement a quota system for provinces and cities for the amount of their energy that must come from renewable sources.

Against this backdrop, China has become the world’s fastest growing wind energy market. With 13.2 gigawatts (GW) of new wind power capacity added in 2012, the total wind installed capacity reached 75.6 GW by the end of 2012. (To put this in a relative perspective, Quebec’s current total installed electricity production capacity, including Churchill Falls, is 44 GW). Projections are for over 16 GW of new installations in 2013 and 17 GW and 18 GW for 2014 and 2015 respectively. China’s unofficial target is 200 GW by 2020, but that may prove an underestimate.

Half million wind sector jobs by 2020

In terms of jobs in the wind energy sector, the projection is that from the 150,000 jobs in China’s wind sector in 2009, the numbers will rise to 500,000 jobs by 2020.

Unfortunately, in its haste to advance its wind and solar energy sectors – from the development of clean energy manufacturing capacity to the construction of wind and solar farms – China “forgot” to invest in corresponding increases in electricity transmission capacity. Consequently, Chinese electrical grids are not in place to handle all of its new renewable energy production capacity, so 20% of wind production capacity was not connected in 2012.

To remedy the situation, China will build 19 new ultra high voltage lines, but the first two lines will not be ready until 2014. One of these lines will be 2,000 km long.

China offers green economy to the world

In the interim, with the help of generous state financing from the Chinese Development Bank and other sources, China began dumping its manufacturing surplus of clean energy technologies on global markets.

The US responded to China’s dumping by imposing steep tariffs on China’s clean technologies – up to 250% on some Chinese solar products and up to 26% on Chinese wind turbine towers.

With respect to tariffs and Europe, following sabre rattling to the tune of an 11.8% introductory tariff on Chinese solar imports, effective June 6, 2013, on August 6, the EU decided not to impose planned provisional tariffs averaging 47%.That is, a preliminary truce was worked out on prices and a maximum export volume. Notwithstanding this preliminary agreement, Europe is keeping its options open for new tariff decisions at a later time.

China captures 50% of global solar market, runs into trade wall

Regrettably, up until the aforementioned trade wars, China’s photovoltaic (PV) solar manufacturing sector was almost entirely dedicated to global markets – with hardly any domestic market to speak of. China went from 1% of the global market in 2004 to 50% by 2012 – that is, up to when US and European tariffs eliminated China’s price advantage.

The US and EU tariffs having brought China back to earth, China is now more focused on internal solutions to its temporary surplus in solar manufacturing capacity.

China looks inward for new solar market

One of these internal solutions comes in the form of PV solar energy targets to install 10 GW/year in the 2013-15 period –quite a sharp increase from the total installed PV solar capacity at the end of 2012 at 5 GW. To encourage the private sector to get into the act – 40% of PV projects are represented by private developers – the Chinese government is offering 50% tax breaks for utility scale projects for that period. As a result, when the figures are in for the year 2013, China will likely be the world’s largest solar market.

What this will mean in terms of job growth in China’s solar sector may not be known for a while, but it is worth noting that prior to the new policies and targets mentioned above, there were 300,000 jobs in the PV solar sector in 2011. Another 800,000 Chinese people were employed in the solar heating and cooling sector in that same year.

But since domestic market growth by itself would still not be sufficient to address the solar manufacturing overcapacity and declining overseas demand, China has introduced tax breaks and other measures to encourage Chinese solar manufacturing sector restructuring. With the cap on exports to Europe – the world’s largest solar market – China has blocked access of its small solar firms to European markets.

Wind, solar to eclipse coal?

Where does all this lead? Well, Bloomberg New Energy Finance (BNEF) projects that 50% of China’s electricity will come from wind and solar energy by 2030 – roughly equal to that of coal. A recent story published in the Common Sense Canadian suggested that coal production in China will peak in 2015. This may suggest that these BNEF projections are too conservative.

One indicator that these clean energy projections may be too conservative or, at least, not tell the whole story, is China’s own recognition that overarching policies are essential to bring all sectors of the economy on side. More precisely, in May 2013, China’s National Development and Reform Commission began a process to explore cap and trade options, aiming to have one in place by 2016.

China exploring cap and trade

The review of this option began in June 2013 with the first of seven pilot carbon trading schemes in Shenzhen. The plan calls for strict emissions, pollution and energy efficiency standards for the industrial sectors by 2016, backed by stiff penalties for non-compliance. To assist industry to achieve compliance, loans would be made available to firms to invest in clean technologies. According to BNEF, if the power sector is faced with a price on carbon, greenhouse gases in China would peak around 2023.

As to why Shenzhen was chosen for China’s first cap and trade pilot, it may well be because that city’s green leadership, particularly in the area of clean transportation alternatives. To this effect, the city of Shenzhen has established a target to have more than 3,000 electric taxis, 5,000 hybrid and 1,000 electric urban transit buses around by 2015. Moreover, by 2015, the city will ban all vehicles that fail to meet in advanced emission standards. Not bad for the city that ranks second to Beijing as having the most vehicles in mainland China.

Warren Buffet joins the party in Shenzen

The audacity of Shenzhen complements that of the Warren Buffet-backed BYD of Shenzhen, which:

has become a world leader in all electric buses
will introduce its e-buses to Canada through pilot projects with the Société de transport de l’Outaouais (STO in the Gatineau area) and Société de transport de Montréal (STM)
has introduced its e-buses in a pilot in Frankfurt Germany
built an e-bus and electric car manufacturing plant Sofia, Bulgaria, which began operations in February 2013
is building an e-bus and an Iron-Phosphate energy module (large-scale battery) manufacturing facility in California that will be operational in late 2013.

Canada missing out on green economy

Meanwhile, back in Canada, Stephen Harper continues to present economic development and sustainable development as two opposing policy paths. This is true only as long as all of Canada’s economic eggs are in the old economy and one turns a blind eye as to what’s happening by way of economic paradigm shifts in China, Europe and the US.

Only in Canada – pity!

No flood insurance without better maps, factoring in climate change

September 16, 2013Climate Change, EconomicsCanadian Press

No flood insurance without better maps, says industry — Calgary’s flooded Bow River on June 22

OTTAWA – Insurance executives say homeowners will never have access to comprehensive flood insurance in Canada unless there are new maps of flood-prone areas that take climate change into account.

That’s the finding of a study that surveyed senior executives at 13 Canadian insurance firms on extreme flooding, which devastated parts of southern Alberta and Toronto this year and is becoming more frequent across the country.

Affected homeowners are often surprised to learn their policies, while covering sewage backups, do not pay for damage from water entering basement windows from swollen rivers and streams.

Canada is the only G8 country where this so-called overland flood insurance is simply not available in the private sector.

“Most insurers agreed that existing flood maps are inaccurate, outdated and inadequate for insurance purposes,” says the study by two experts at the University of Waterloo, Ont.

[quote]This data gap poses a clear threat to the viability of flood insurance.[/quote]

Biggest insurance payouts come from flooding

The Canadian Press obtained an advance copy of the report by academics Blair Feltmate and Jason Thistlewaite, to be released today. Their research was paid for by the Co-operators Group Ltd., a large insurance firm.

The insurance industry is sharply focused on flooding, which in the last 15 years has become their biggest payout area. That’s because of extreme weather events that the executives agree are linked to climate change.

“The big cost now … is flooding basements, by a country mile,” said Feltmate. “So it’s really high on their radar screen.”

Canada has seen 289 flood disasters since 1900, the largest such category, more than the number of hail, wildfire and winter storm disasters combined in the same period.

Floods are expensive. The southern Alberta floods last summer are estimated to have cost private insurers $2.25 billion, even though damage to residences was generally not covered. In 2011, floods in Manitoba and Quebec also racked up millions in payouts.

The federal and provincial governments are also exposed to huge costs under the Disaster Financial Assistance Arrangements, which pay a disproportionate amount for overland flooding compared with storm, hail and wildfire disasters, which are often already covered under private policies.

Climate change upping flood costs

Existing sewage-backup coverage is also hurting private insurers’ bottom lines because climate change results in more torrential downpours that overwhelm aging municipal infrastructure and can’t be absorbed by an ever-more-paved urban landscape.

Feltmate cites the example of a Toronto neighbourhood, south of the Downsview airport, where a large percentage of basements were flooded three times since May this year.

Executives would consider offering overland-flood insurance, says the survey, but can’t begin to draft policies or set premium levels until proper maps accurately identify the new risks arising from a warming planet. Said Feltmate:

[quote]We need new flood-plain maps that take into account not the historical weather but the weather that can be expected going forward.[/quote]

The study says existing maps are badly out of date, and focus on historical hazards for land-use planning rather than potential risks in the decades to come.

Government orders new flood mapping study

The federal Public Safety Department acknowledged the cartographic gap recently by ordering a new study that will survey flood-mapping in six countries, including the United States.

The report, due next March, will also assess the state of flood mapping in Canada and estimate the costs to meet any new national standard.

The department notes that a previous federal program to generate floodplain maps was killed in the mid-1990s, and little has been done since.

Feltmate says the next phase of his research is a year-long survey of mayors, town councillors, premiers and others who will have to become part of Canada’s flood solutions.

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The study, also supported by Co-operators, will consult as well with bank executives, who Feltmate says are only dimly aware of the threat that increased flooding poses to their mortgage business.

That’s because mortgages are contingent on a homeowner obtaining insurance, and many insurance companies may begin to steer clear of properties prone to frequent basement flooding, such as in the Downsview neighbourhood.

“The banks have a much greater stake in this game than they currently realize,” said Feltmate

Climate Change is the ultimate ‘Moral Hazard’

September 14, 2013Climate Change, EconomicsRay Grigg

Moral Hazard, Part 1: The Cost of Risk and Reward

One of the factors compromising our prospects for a stable and secure environmental future is outlined by Bryne Purchase in the subject of moral hazard — a hazard he emphasizes simply by changing the title of his article in The Walrus (April, 2013) from “moral” to “mortal” (Mortal Hazard: Why catastrophic events like the sub-prime mortgage crisis and climate change are inevitable.) His ideas are insightful and timely, even remotely hopeful because he identifies a structural flaw in “the architecture of our decision making” that we could correct by being aware of it.

All reward, no risk

The flaw, Purchase explains, “is that in the pursuit of economic growth we privatize reward and socialize the downside risk.” Economists have borrowed the term “moral hazard” from the insurance industry to describe this process. “A moral hazard exists,” Purchase writes, “whenever decision makers in risky situations reap the rewards from their decisions without bearing all the costs.” This transfer of cost to others encourages risk taking, a shifting of responsibility that is even officially acknowledged in the term “limited liability”.

But the society that inherits costs also reaps rewards. Modern market capitalism, Purchase explains, has created an incredibly dynamic economy with unimaginable wealth since its inception a little more than two centuries ago. The material success of our global economic system is due primarily to this agreed distribution of risk and cost.

In exchange for the immense social and economic benefits provided by adventurous investors, their businesses are protected by corporate recognition, legislated support, government grants, tax benefits and even bankruptcy laws that limit personal responsibility for imprudence and outright incompetence. In exchange, society gets jobs, infrastructure, merchandise, services, opportunity, innovative new products, and the promising prospects generally described as progress.

Catastrophic failure

The danger in this system, however, is that it lacks the checks that provide appropriate restraints. Such a lapse in supervision occurs because both the economic system and the social system are joint beneficiaries of the risk process. Society, therefore, is reluctant to impose restrictive regulations on economic activity because any constraining effects may be felt by everyone.

This exposes modern market capitalism “to new orders of potentially catastrophic failure,” explains Purchase.

[quote]Catastrophic, because by the time a potential problem becomes recognized as clear and present danger, no action may be sufficient to prevent social and economic breakdown…[/quote]

The complexity of such a system produces “tipping points” that may have “viral effects”, the most dramatic and vivid example being the recent sub-prime mortgage fiasco of 2008-09 that came close to collapsing the world’s entire financial system — secondary and tertiary effects are still reverberating throughout the economies and societies of many countries.

Purchase quotes Allan Greenspan, the former chair of the Federal Reserve Board in the United States, who succinctly explains the forces of risk in the evolution of this financial shock:

[quote]A difficult problem is that much of the dubious financial-market behaviour that emerges during the expansion phase is the result not of ignorance that risk is badly underpriced, but of the concern that unless firms participate in a current euphoria, they will irretrievably lose market share.[/quote]

The competitive power of the system, therefore, sanctions inexcusable risk.

The psychology of risk

This, however, is but half the equation. The other half is the social and political psychology underlying the unfolding disaster. Notes Greenspan

[quote]I am also increasingly persuaded that governments and central banks could not have importantly altered the course of the boom either. To do so, they would have had to induce a degree of economic contraction sufficient to nip the budding euphoria. I have seen no evidence, however, that electorates in modern democratic societies would tolerate such severity in macroeconomic policy to combat a prospective problem that might not even materialize.[/quote]

Since everyone was benefitting from the surge in the housing market, and the cost only existed as conjecture for some time in the indeterminate future, no one would take the initiative to reduce the opportunities for financial gain. The present reward overruled the possible risk.

Climate Change: The ultimate moral hazard

Now transpose this entire argument to the subject of global climate change. “A moral hazard exists,” Purchase reminds us, “whenever decision makers in risky situations reap the rewards from their decisions without bearing all the costs.” Fossil fuel corporations and their investors, together with almost every member of a modern market capitalistic society, are all reaping the economic wealth accruing from the present unrestrained use of coal, gas and oil. The cost of billions of tonnes of carbon dioxide emitted into the atmosphere is calculated as possible risk projected into the future, cost for some other people to solve with some other ingenuity.

Moral hazard invites such deferrals and human psychology is willing to comply. And, as Purchase notes, “There are always politicians willing to offer the policy option with the least short-term cost or the greatest short-term benefit.”

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We are now, however, entering a transition phase. The environmental risk is beginning to impose its cost. The Arctic is melting, the oceans are rising, the temperature is climbing and the weather is getting more bizarre. The cost is floods, droughts, fires, political instability, crop failures, climate refugees, species loss and miscellaneous disasters that are surprising in their imaginative ingenuity. The deferred future is becoming the unfolding present.

Moral hazard is exacting its payment. Whether we continue to play the game of risk and cost remains an unanswered question.

Massive power bill increases due to Liberals’ failed IPP scheme

September 12, 2013Economics, Hydropower, WATERRafe Mair

Massive power bill increases due to Liberals' failed IPP scheme — BC Energy Minister Bill Bennett (photo: CP)

I told you so!

My colleague Damien Gillis told you so! Independent economist Erik Andersen told you so! The Campbell/Clark government has taken the jewel of our diadem, BC Hydro, and forced it into what would be, for any company in the private sector, bankruptcy.

We learn this from a leaked internal BC Hydro document, headlined in the September 11 Vancouver Sun, where Independent Power Projects (IPPs) share part of the blame for the massive power bill hikes on the way for Hydro customers – over 26% by 2016! By 2024, rates will allegedly skyrocket by 57.3 per cent!

Minister Bill Bennett says that the costs from IPPs are “not that great” but doesn’t give any figures. According to Jim Quail of COPE Local 378 – the union that represents many Hydro employees – these losses are due to “a failed experiment with independent power producers”.

$55 Billion in over-priced IPP contracts

What we do know – and have known for some time – is that BC Hydro has signed on for some $55 BILLION of power from IPPs, over the next 20-40 years, to buy power at 2 -3 times the market rate, sometimes far more. We also know that Hydro didn’t have to spend one cent for private power (we’re now a major net exporter, at a considerable loss) and we also know that on Minister Bennett’s orders, at least 10 IPP contracts for unfinished projects will be cancelled.

Minister Bennett, trying to act as if he and his government had nothing to do with the mess Hydro is in, says:

[quote]I’ve been very forthcoming since I took over as minister, in terms of saying to the public that there will be some rate increases. I have always coupled that statement with my commitment that I will do everything I can to keep the increases to a minimum.[/quote]

And while we’re at it, how can a BC Hydro report come as a surprise to the minister?!

Is there any question why Premier Clark is not calling the Legislature into session this Fall? Day after day hammering by the opposition on BC Hydro?

No chance, Lance.

LNG is the answer to all our fiscal problems…or so they tell us

When I started preparing this piece, I asked this question: “How are you going to deal with these huge power bill hikes, Minister?”

There is only one way – find some other pathway to the taxpayer’s pocketbook. Be honest, Mr. Bennett, your government has screwed up big-time and no matter how you tart it up, the taxpayer will pay every red cent of Hydro’s debt.

Amazingly, a magic fairy has fixed everything overnight. A day later, “back of the envelope” Bennett has figured out how to deal with a 26% rate increase.

I had underrated his ability to whip into place a change in government policy that truly takes the breath away, for now, 24 hours after the BC Hydro report was leaked, natural gas is the answer! I wonder what policy is on for tomorrow, Minister?

Do you remember when natural gas was a filthy fossil fuel? When the Liberals loudly condemned the Burrard Thermal plant, which for a few weeks of the year, when Hydro is short of power, supplies a tiny amount by natural gas?

The Campbell/Clark government came out in 2002 with an energy policy principally in line with the preferences of the right-wing philosophies of Alcan, General Electric, Accenture and the Fraser Institute. It declared that all new power henceforth (with the exception of Site “C”) would come from private projects.

IPP map — Map of 700+ IPPs – proposed, under construction, and on-line (ippwatch.info)

This policy designated some 700 rivers to be ruined and sent BC Hydro down the one way road to financial collapse. The only thing in the way for Hydro’s bankruptcy was the bigger and bigger assault on citizens’ wallets.

Of course, now that natural gas has gone from being a toxic fuel to clean energy overnight, can coal-fired power plants be far behind?

A government out of control

This government is out of control. It has had a decade to analyze BC Hydro and assess its power needs and how to meet them – and yet it couldn’t be more off-base.

Why? Because they have made these highly improvident deals with IPPs. Any study of the Hydro problem will run afoul of industry, which is on a gravy train and supported by the Fraser institute. Most of all, they’re hugely frightened that these secret IPP deals – which you’re paying for – would be made public.

Am I bitter?

Frankly, I am, but perhaps not for the reason you might think.

I am a native and lifelong citizen of British Columbia and yes, I’m a British Columbian above all else. Since the scales fell from my eyes in 2005, I’ve fought against IPPs. Everywhere I spoke, audiences would look heavenward, assuming I was exaggerating – I must be, for no government would do this!

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In many meetings I was heckled by shills for the IPP racket, who would try to discredit me by asking red herring questions about Hydro’s workings and by discussing the minutiae of these secret contracts, which only they could claim to know.

I became more and more frustrated and when the NDP blew the election in 2009, I despaired for the province and kept on speaking and writing. I thought some relief would come after the election last May. I’m no NDP fan, having whipped their ass in 1975 and 1979, but I could see that they were the only hope.

Empty vindication

I knew that vindication for Damien, Erik and me would come but what would that mean? It wouldn’t bring our rivers back and it wouldn’t stop the fiscal ruination of BC Hydro.

Now we have a government acting as if the huge mess came from the Wicked Witch of the West. Maybe it has something to do with sun spots or chemtrails.

There will be no political penalty. Just before the next election, the Liberals will trot out a modest increase in electricity rates. According to this leaked document, that’s exactly what they’re planning to do, drastically curbing power bill hikes – just as they did this election year, when they capped increases at 1.44%, further compounding Hydro’s long-term financial woes for short-term political gain.

In the meantime, they will peddle a load of horse buns about a pot of LNG gold just around the corner.

So yes, I’m bitter that our government and private power industry have destroyed much of the province I love so dearly and dragged our once proud power company to the portals of bankruptcy.

And I make no apologies for my bitterness.

With all this Oil and ‘Energy Security’, where’s the Money?

September 10, 2013Economics, Energy and Resources, Oil&GasKevin Grandia

With all this Oil and 'Energy Security' where's the Money — Prime Minister Stephen Harper, discussing trade on a visit to China (Sean Kilpatrick/CP)

Ask yourself this: why, if Canada has the third largest proven oil reserves in the world, is our country in such massive debt?

Why do post-secondary education prices continue to soar for our youth?

Why is our health care system continually going on life support?

Why does Canada have some of the highest child poverty rates amongst the so-called developed nations?

[quote]If Canada has the third largest proven oil reserves in the world, why is our country in such massive debt?[/quote]

After all, as our government will tell you, we are the Saudi Arabia of the North.

Right?

Canada leaking oil profits

While the tar sands do create much-needed jobs for some, for the most part Canadians get nothing for handing over our oil reserves to foreign oil companies to ship overseas. Most countries ask oil companies for a large percentage of their profits in exchange for access to the country’s oil.

Alberta Tar Sands — Canada gets all the environmental impacts and few of the benefits from operations like this one in Fort McMurray, Alberta (photo: Chris Krüg)

For instance, in Norway, they ask oil companies for about 70% of their profits. That might sound high, but the oil sector in Norway is a booming success and a major driver of the economy.

In Canada, our country does not collect any royalties. Alberta collects a pittance – about 12%.

Instead of money, the outlook for Canadians and oil is not wealth, it is the long-term consequences of pollution, lakes of toxic sludge, foul air and polluted waterways. We’ll be dealing with those issues long after the likes of Petro-China have moved on.

The longterm outlook for Norway is very different from ours. Despite having only the 22nd largest proven oil reserves, Norway is on track to have stowed away more than $1 trillion for their people and future generations. Note: that is a “t”rillon, not a “b”illion. As the Business Insider said just today, “Norway has more money than it knows what to do with.”

Canada a Petro-State?

Why has it come to this you ask? Why is Canada so oil-rich, but so poor?

I would propose that our politicians are to blame. And Stephen Harper is the latest in a long parade of politicians who rely on the deep pockets of the oil industry to fund their political campaigns. If a politician was to propose higher royalties for oil and gas companies, they would see campaign money dry up from not only the oil companies, but the companies behind them, like the banks and large investment firms.

However, if a leader was to emerge and demand that we make the tar sands work for Canadians and not PetroChina, Exxon Mobil, Royal Dutch Shell and British Petroleum, that person could reap the support of millions of Canadians who agree with this injustice.

If we had a leader that stood up for Canadians, instead of oil companies, we too could have more money than we know what to do with and could start to repair the damage wrought on us by politicians addicted to oil.

The Common Sense Canadian is proud to introduce Kevin Grandia as a new contributor!

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Why does BC Hydro get their demand forecasts so wrong?

September 8, 2013Economics, Hydropower, WATERErik Andersen

Why does BC Hydro get their electricity demand forecasts so wrong? — BC Hydro’s $8 Billion proposed Site C Dam – artist’s rendering

Energy Minister Bill Bennett has invited citizens to review and presumably submit thoughts about the recently released BC Hydro draft “Integrated Resource Plan” (IRP), which includes some “bullish” projections of demand.

Hydro chronically wrong

This BC Hydro forecast for demand is definitely in the tradition of previous inflated domestic (BC-only) forecasts, which makes it an exaggeration with very expensive consequences.

In 2003 the public utility forecasted BC-only needs were to be 56,241 gigawatt hours (GWhrs) by 2013. In reality, last year’s reported domestic sales (excluding sales to others disclosed as long-term supply contracts to out of province customers – page 68, BCH 2013 Annual Report) were 49,595 GWhrs, – an error of 6,646 GWhrs. (Hydro’s fiscal year ends March 31)

In 2007 BC hydro forecasted BC needs in 2012 would be 57,201 GWhrs. Reported domestic sales – again, net of sales to others – were 49,922 GWhrs, an error of 7,279 GWhrs.

Hydro’s short-range forecasting isn’t much better – even just one year out. In 2010, the crown corporation forecasted BC needs in 2011, 12 months forward, would be 52,024 GWhrs. Reported domestic sales were 49,013 GWhrs, an error of 3,011 GWhrs.

Forecasting errors are irrelevant if no one takes notice of the values. Unfortunately, your government, BC Hydro Board and senior executives saw these forecasted needs as their license to build, contract, borrow and spend, big-time. Using current cost numbers for the proposed dam on the Peace River, Site C, each annual GWhr of error was/is the same as borrowing/contracting for $2+ million.

The amount of borrowing error in the 2003 forecast was about $14 billion at Fiscal 2013.

For the 2007 forecast it was more than $15 billion at Fiscal 2012. The 2010 error for only a one year period was about $7 billion. The further out in time, the bigger the crime.

Population growth, electrical demand stay relatively flat

One should remember this history of continuously being wrong, always exaggerating future BC needs when addressing the new “Integrated Resource Plan” by BC Hydro, vintage 2013.

Like all government-generated material, when it comes to a vision of the future, it will be universally bullish. BC’s population is going to grow fast. Economic activity is invariably going to grow fast, they maintain.

There is lengthy discussion by BC Hydro that sets out how the domestic demand forecast is constructed. Heavy reliance is placed on new construction data, population projections by the provincial government and GDP projections from the same source.

[quote]BC’s population is on a shrinking trend

[/quote]

There are three categories of customers the forecasters treat separately:

Residential customers
Commercial and light industrial users
Heavy industrial users

Contrary to BC Hydro’s and the government’s narrative, BC’s population is on a shrinking trend. During the decades of the 70s, 80s and 90s, provincial population rates of growth were 7% for 5 year blocks. This bullish growth slowed in the first decade of this century, registering a comparative growth figure of only 5.5%.

This growth trend reversal has yet to influence the provincial government and BC Hydro.

Confirmation of this shrinking population growth trend is also found in the government’s fertility records. In 1972 the posted fertility factor for BC was 1.966; now in 2013 it is 1.435. Not wishing to endorse a diminishing population trend, the folks in charge of this report and forecast have simply “flat-lined” at 1.400 indefinitely.

Higher GDP ≠ increased electrical demand

A second important indicator for the BC Hydro forecasters is provincial GDP. A logical connection, one would reasonably think. GDP gets frequent mention in the discussions of how demand is generated for both the commercial and heavy industrial customer groups. This seems to be where BC Hydro forecasters get matters seriously wrong.

From 2003 through to now, the annual reported GDP value of BC has increased by 63%. In 2003, it was $138 billion and by 2013, the government was reporting it to be $225 billion. During the same period, none of the three groups of customers increased their amounts of purchased electricity.

[quote]From 2003-2013, residential rates have increased by 50%. They need to increase another 40% now.[/quote]

In cases like this, on the evidence, there is a big disconnection where one would not expect there to be. It clearly diminishes the value of the BC Hydro’s forecasting and seems to explain just why they have continuously made errors.

What this disconnect also suggests is that a considerable chunk of BC’s economy and finances is leaving the province. This economic “leakage” is probably why BC Hydro forecasts remain so irrelevant.

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If the above were not enough, don’t forget that BC Hydro has yet to collect over $5 billion of deferred charges – a controversial form of borrowing against future rate increases. It is not apparent that the BC Hydro forecasters adequately accommodated demand reductions in response to the certainty of sharply higher rates. In the period 2003 to now, residential rates have increased by 50%.

Reaction to this increase has been minimal, as folks have found ways in their personal budgeting to make accommodations. Per capita consumption for the past ten years has been steady at about 3,800 KWhrs. When rates increase, as soon they must, by 40%, the public response is likely to be one of enthusiastically embracing energy conservation and even withdrawal from the grid.

There is immediate relief available for BC Hydro’s embattled customers. Minister Bennett should be required to remove the excess debt associated with new generation designed to serve a misguided cabinet-crafted economic development program.

Plans to provide inexpensive electricity to resource development projects – such as mines and liquefied natural gas plants – are pure gambling. Leave the speculation and gambling to the private sector, where participants have a risk appraisal discipline that comes with using personal money.

Wheels coming off Liberal energy policy as contracts cancelled

September 5, 2013Economics, Hydropower, WATERRafe Mair

Wheels coming off Liberal energy policy as IPP contracts cancelled — BC Energy Minister Bill Bennett

Folks, the wheels are coming off the BC Government’s 2002 Energy policy, which forbade BC Hydro from creating new power (Site C Dam being exempted).

Energy Minister Bill Bennett has cancelled 10 Independent Power Projects (IPPs), with plans to defer delivery on up to another 9.

This is a major vindication for all of us who have pointed out the obvious – BC Hydro cannot go on paying over two times the market for electricity. It simply can’t deal with the $50 BILLION-plus bill it must pay for the privilege of losing money hand over fist.

Let us always remember that this policy was put in place because the Campbell Clark government, egged on by big business and the loony right wing Fraser Institute, said we would need the energy and that only the private sector could handle this need.

How deep will the cuts go?

The obvious question to the minister is how far will he go? Will he place a moratorium on all future IPP projects? What about other contracts already signed? Will he look at IPP dams in production?

What about the fairness of those deals, which were stated by the BC Utilities Commission as “not being in the public interest”? What if in examining these secret contracts, the minister finds them to be, as I suspect, unconscionable bargains?

Will he start monitoring IPP plants and enforcing environmental rules? Why now, ten years after the Energy Plan, is the minister analyzing this IPP mess?

[quote]Why now, ten years after the Energy Plan, is the minister analyzing this IPP mess?[/quote]

Let good ol’ Uncle Rafe tell you why.

As many have been saying, BC Hydro is bankrupt – at least it would be if it were in the private sector. Its only recourse to avoid actual bankruptcy is to pass this mess off to voters, and that will mean big-time trouble for the Clark government. Premier Clark is now looking towards the election of 2017 and can see her government in deep, deep trouble. She sees the BC Hydro situation as the big issue – demonstrating how the pitiful NDP campaign last May was so harmful to the province.

The premier’s difficulty is that she was part of the energy policy a decade ago and supported it because right wing ideologues like the Fraser Institute advised her government that publicly owned enterprises were to be despised and done away with. In short, the present damage to BC Hydro is irreparable, which was the whole idea in the first place.

LNG Hail Mary

Premier Clark lost all the Campbell nitwits and is now supported by a caucus that was glad to see the end of him. They don’t have an ideological approach to BC Hydro and see their own survival as dependent upon cleaning up this energy mess.

Premier Clark knows this and has a solution: build Site “C” for about $10 BILLION, sell power at a huge discount to large energy producers if they will “mine” gas, largely by “fracking”, then take that gas to Prince Rupert, liquefy it, using huge quantities of subsidized power, then sell it to Asian markets. This will, opines the Premier, not only wipe out the province’s debt but also will put $100 BILLION into a “Prosperity Fund” – and we’ll all be on easy street.

All of this depends, of course, on getting a market for this gas. That depends on its putative customers needing gas in 2017 and beyond. What happens if these future customers have lots of gas? That has largely happened.

(Let me digress to note that recently The UK and Israel have each discovered enough natural gas for 25 years, the point being that the likelihood is that by 2017 – the absolute earliest any of BC’s LNG will be ready for export – gas will be a glut on the market.)

Mr. Bennett is no fool and sees that placing everything on #12 Red on the wheel is madness, while also realizing that what I’ve just said is so obvious that not to deal with it could not only defeat the government but destroy the right wing coalition.

[quote]Premier Clark has no vision because visions cost money.

[/quote]

Premier Clark has no vision because visions cost money. She sees that the energy situation is catastrophic. She will rely on companies pledging to build LNG plants yet the shovels are barely turning. As the months and years progress, she will “suddenly” find that the world – especially including Asia – will be awash in natural gas. More and more, like Mr.Macawber, her policy will be based on the hope that “something will turn up”.

Thanks to the pitiful press we face, and the just-as-pitiful NDP election campaign last May, the public is largely in the dark about this mess – but that won’t last until the next election in 2017.

Minister Bennett and his colleagues will dip deep into the top hat but, alas, there are no rabbits there.

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The ecology of wealth

September 1, 2013EconomicsRay Grigg

The ecology of wealth — Saudi Prince Alwaleed with his wife, Princess Amira al-Taweel (AFP/Getty)

What is a man to do with a “main palace” of 420 rooms, a customized Boeing 747 jumbo jet for his exclusive use, a private zoo and amusement park, and a stash of $700 million in jewels? This is the dilemma facing Prince Alwaleed, whose $20 billion in assets gets him ranked by Forbes magazine as the richest person in Saudi Arabia (George Monbiot, “Money Just Makes the Rich Suffer”, Guardian Weekly, May 17/13).

But wealth has not been easy for Prince Alwaleed. For 25 years, according to an article about him in Forbes, he has been “lobbying, cajoling and threatening when it comes to his net worth listing.” In 2006 he believed that Forbes had undervalued his worth by $7 billion. So he hounded the magazine’s researcher for days, pleading with him to change the evaluation. “What do you want?”, he tearfully asked, while offering access to his Swiss banker. “Tell me what you need?”

What Prince Alwaleed needs is not wealth but status. The Forbes list of the global rich is his measure of “success” and “stature”. Or, as the American industrialist and billionaire H.L. Hunt once explained, “Money is just a way of keeping score” (Ibid.). This is why the ultra-rich aspire to get even richer. When they already have more money than they can possibly spend in a lifetime, their wealth, as Monbiot insightfully explains, takes on the value of “prestige, power, purpose”.

This is why CEOs manoeuvre hundreds of millions in compensation from corporations, banks and investment companies, even when their leadership causes financial losses. And this is why the ultra-rich lobby politicians manipulate public policy, alter taxation regimes, hide their money in offshore accounts and pressure governments to design budgets for their benefit. The effect is a gradual dismantling of the social contract, the unspoken agreement of fairness that requires the wealth in a society to raise the wellbeing of everyone, not just a few. As the rich get richer and the poor get poorer, the common understanding that once guaranteed a judicious distribution of wealth throughout society, is gradually being lost.

Dr. Christopher Ragan, a professor of macroeconomics at McGill University for 24 years, has some helpful comments to make on this subject. The logic of microeconomics that applies to individuals, he explains, does not apply to the macroeconomics that operate at national scales (Globe and Mail, July 17/13). So the argument that fiscal restraint can be economically beneficial to indebted governments is fallacious. Fiscal restraint works for individuals because their reduction in expenditures is the only variable in their calculation for austerity. Everything else in their lives remains the same: their income, job stability, assets and personal circumstances.

“But the same logic does not apply for a government or for the economy as a whole,” Dr. Ragan writes (Ibid.). Government austerity affects the “circular flow of income and expenditure.” Removing spending from the economy alters many other influential factors. Reducing salaries, firing scientists, chopping research, retiring civil servants, cutting public works spending, shrinking employment insurance benefits, and the entire economy constricts. The “multiplier” effect cascades throughout the society. Decreased employment, fewer sales, slowing growth and less economic activity shrinks the taxation which is the government’s income. A reduction in this income can increase debt and raise the unfavourable debt-to-GDP ratio when the amount of money in the economy goes down faster than the debt. Austerity at the macroeconomic level can invite a disastrous downward spiral of even more austerity.

Government austerity creates other problems. As unemployment goes up, more people become poor. This increases crime rates, social problems and health costs. Thus the price of maintaining a civil society rises. Since the adverse effects of austerity on low-income people are disproportionally higher than on high-income people, this accelerates the already widening gap between the wealthy and the poor, a trend that increases social tension and civic unrest.

This widening gap between the wealthy and the poor presents more problems. Since the wealthy can’t spend all their money, they have to invest it. Large amounts of available capital invites borrowers. And the more money available for borrowing, the lower the interest rates — and the greater the incentive to borrow. This is the genesis of the growing debt crisis, an economic predicament which threatens to create cycles of boom and bust, adds to economic and social instability, and creates the conditions which further increase the gap between the wealthy and the poor.

The attention of poor people is inclined to be fixed on the present. They are dealing with the reality of survival, with paycheque-to-paycheque economic concerns, and the daily domestic challenges they are barely able to meet. Don’t expect them to be thinking about global warming, melting Arctic ice, ocean acidification or the future climate of the planet. Don’t expect them to willingly pay a carbon tax to reduce greenhouse gas emissions. Don’t expect them to support higher electricity bills for solar, wind or other renewable energies. Don’t expect them to worry about conservation efforts or endangered species when their priorities are their own survival and security. The fact that economic recessions drive down the public’s support for environmental issues is no coincidence. Neither is it a coincidence that the shrinking of the middle class and the growing gap between the wealthy and the poor has the same depressing effect.

Even if a few ultra-rich were to contribute vast sums of their money to environmental causes — Prince Alwaleed probably wouldn’t — their generosity would have little effect if the attention of the rising ranks of the poor is only focused on day-to-day survival. Without some semblance of balance in the ecology of wealth, everyone loses.

BC Hydro customers victimized with $750M Powerex settlement

August 29, 2013Economics, Hydropower, WATERErik Andersen

Reported by the Vancouver Sun on 17th August, 2013: Powerex (subsidiary of BC Hydro) “has reached a $750 million out-of-court deal to settle claims it drove up electricity prices in California more than a decade ago”. Energy Minister Bill Bennett indicated, “The loss [penalty] will be applied to BC Hydro’s debt in deferral accounts and paid down by BC Hydro’s five-per-cent rate-rider.”

So what was done by whom, how and when? One certainty – BC Hydro’s customers had no hand in the fraud, nor were they ever asked if they wanted their electricity supplier to be engaged in much out-of-province trading.

Trading of electricity by Powerex was historically thought of as a marginal business, only to facilitate occasionally bringing in electricity to meet provincial short-term needs and to sell temporary surpluses to others. Oh, how far off the rails did matters go?

In Enron’s salad days, its board and executives were held up for admiration for their unbridled, rapacious conduct. The Wall Street mantra, preached by the likes of Merrill Lynch and Goldman Sachs, that “greed is good”, prevailed at Enron and, by extension, with the many “wannabees”.

For no reason other than it was there to be done, California was singled out as a worthy place to enjoy the benefits of electricity “deregulation” and this transpired with Enron leading the charge.

The average annual market price for electricity – measured by the PX-Day Ahead Prices, expressed in USdollars per megawatt hour (MWhr) – were stable at $30 for the years 1998 and 1999. In 2000, this price level continued without much change through to the end of April. By December the monthly average was US$385.60 per MWhr. In an 8 month period, electricity measured at the wholesale level, had increased by nearly 1,300%.

That scale of that price increase, in such a short period, just did not make sense in what had always been a stable industry, where balance is well maintained by producers and customers. Just imagine yourself facing a 1,000% increase for gasoline, bread or water. Your sense of outrage would be through the roof, and rightly so.

This pricing change would have been recognized as a game-changer by everyone in the electricity industry in North America. Ignorance of this change by the likes of Powerex, BC Hydro and even the BC cabinet is unbelievable.

In February, 2002, two California researchers published, “A Quantitative Analysis of Pricing Behavior in California’s Wholesale Electricity Market During Summer 2000; The Final Word.” They concluded that “there is considerable empirical evidence to support a presumption that the high prices experienced in the Summer of 2000 reflect the withholding of supplies from the market by suppliers (generators or marketers)”.

This polite representation just describes the fraudulent conduct of the few to extort unearned money from the innocent and many. Morality did not exist among the producers and marketers, making all participants guilty in an active conspiracy to defraud the innocent.

So, just how big a deal was this fraudulent behavior for Powerex/BC Hydro and the government? Starting in 2000, Powerex reported a gross volume of trading in GWhrs of 23,410 at an average price of CDN$48.22 per MWhr. Given the currency differential then, this price was roughly in accord with the US prices above.

Only one year later, with volume almost the same, the average per unit price increased by nearly 500% to CDN$228.37. That change in unit price is one huge “speed bump” not to notice and ask why. It wasn’t until 2004, after the stuff hit the fan in California, did trading prices return to the normal steady state of about CDN$30 per GWhr and has mostly held there until now in 2013.

If the electricity professionals at Powerex, BC Hydro and the provincial cabinet claimed to have missed noticing a 500% price change, you would think they would have noticed unplanned revenue increases of about $8 billion over the course of 2001-2003. Long before 2003 the evidence was in of a fraud being perpetrated on the citizens of California that no one in the Pacific Northwest would have been unaware of.

Even if the $750 million settlement looks like a good deal, it is now easy to understand why the Governor of California showed Premier Campbell the back door when he, Campbell, sought to have run-of-river power generation designated “green electricity”, thereby qualifying this energy for pricing premiums in California.

Dumping this penalty onto the shoulders of BC Hydro customers is an act of accountability avoidance. The BC cabinet should be ashamed for continuing to make BC Hydro customers victims targeted for the immoral, if not illegal conduct of others.