The Scalable Universe

There are some subjects that tend to make you feel stupid.  Cosmology is one of those subjects.  And, as I have found out, at cosmology’s limits, the philosophy of cosmology is even more difficult still.

It doesn’t matter how smart you are.  You could have the maximum luck from the genetic lottery.  Your mother and father could both be highly intelligent, for generations back.  Instead of being from tall people, and maybe being in the NBA, you are from smart people, so you’re smart.  Great luck for you.

Cosmology will still make your mind go numb.  Unless you’re one of the select few that understand that kind of stuff, you’re toast.

It doesn’t mean you stop trying.  Many people who enjoy intellectual pursuits try to understand that difficult area.  Alas, it is very hard.

But one of my hobbies is reading about science:  Discover, Scientific American, American Scientist, and so on, plus books, journal articles, the works.  I enjoy it, like surfing or mountain climbing, but for the brain.  (I admit I participate in surfing and mountain climbing somewhat less than reading science.)

I have no training in science (or most anything else, as my kids will be quick to point out), but generally I can understand the stuff I read on scientific topics.  In large part, it is either intuitive, or you can figure it out if you’re willing to spend the time.  I don’t need to know the details of how to do a dig, for example, to understand the richness of archeological finds, and at least some of what they tell us about humanity.  When I read about the evolution of marine mammals, it doesn’t take a marine biologist to map that knowledge to the day to day life we face right now.  And climate change?  Sure, some of it is complicated, but the basic concepts are both simple and understandable.  In none of those cases do I understand them like an expert does, but given a good explanation, I can understand them well enough.

And then I come up against cosmology, and the physics on which it is based.  Cosmology is just really, really hard.  M-theory? (My son understands it, and tried to explain it to me once, but it leaves me floundering.)  Observing – today – events that happened billions of years ago, due to the speed of light?  (Yes, I get the concept.  It is just not part of my normal reality.)

I read A Brief History of Time, Stephen Hawking’s most famous book, and I can’t tell you the number of times I scratched my head and said “What on earth is he talking about?”  Of course, maybe my problem was the “on earth” in my question.  It was still…well, you get the idea.

And every time I read about cosmology, at least for the last ten years or more, I have had the same set of questions.

Before I pose those questions – hopefully for some real scientists to answer – I want to give a clear disclaimer.

Lots of time, over my life, I have looked at fact situations or concepts and had a moment in which I thought I saw an answer no-one else saw.  This happened more often when I was younger, of course, but it still happens today.

Now, when I think I see something “new”, I have learned to first ask some questions.  The immediate, most important question is:  Am I an expert in this field?  If I am – energy regulation, perhaps – there is at least some possibility that I have spotted something no-one else has seen.  I may have a new insight.  Great.  (Not as often as I tend to think, of course, but at least sometimes.  Not never.)

But if I am not an expert in a field, the odds that I have an insight that is truly “new” go way down.  The odds are not zero.  It happens.  It is, however, a surprise when it does. (Calculus has the concept “the limit as x approaches zero”, which is used as a proxy for zero in some equations.  The probability of me having a new insight outside of my areas of expertise is somewhere near that number.)

When I read expositions of the physics of the universe, or cosmological analyses, I often have the same thought.  That is:  Why are you (i.e. scientist, author) not thinking of these questions in a different dimension, in which the universe is not only infinitely large in our normal three dimensions, but also infinitely scalable?  (Most recently, this question popped up when I read the very readable book Astrophysics for People in a Hurry, by Neil de Grasse Tyson.)

Why can’t that muon you are studying, which has many attributes you understand, but many you don’t, be itself an entire universe?  Why can’t our universe, with all of its open questions, be a muon in another, infinitely larger universe?  Why aren’t we looking for the answers to the uncertainties of our universe – the singularity and where it came from, dark matter and energy, strings – by reference to universes infinitely larger and smaller than ours, of which we are a part, or which are a part of ours?  Why isn’t Einstein’s “spooky action at a distance” (entanglement) not explained by the fact that, in a larger universe, the distance between those same things – far away in our universe – is negligible?

Yes, yes, I know.  I’m not the first to think of this.  I have read concepts such as these in science fiction novels, some fifty years old or more.  They are not new.  In a very real sense, they are the type of creative ideas that teenagers will have.  (What do you mean, I never grew up?!)

But that doesn’t really answer my question.  I have read hundreds of articles and books about the physical structure of the universe, and not once have I read a serious analysis explaining why larger and smaller scales cannot be an answer to the questions we have.

Whenever I read about quantum mechanics, for example, no-one ever talks about how it is anomalous, even counter-intuitive, at the scale of our universe, but may well be quite sensible at the scale of a universe within a muon.  Nor do I ever hear of anyone speculating that the questions in the physics of the cosmos could be conceptually similar to the questions that would arise if our universe is a small part of a much larger universe.

I’ll give you an example.  In his truly wonderful Massey Lectures, published as the book The Universe Within, Professor Neil Turok says

“The competition between the cyclic and the inflationary universe models highlights one of the most basic questions in cosmology:  did the universe begin?  There are only two possible answers: yes or no.”

When I read this, my mind was immediately screaming:  Neither!

Maybe the real answer is “sort of”.  If our universe is really part of an infinitely larger universe (or a nest of universes, each infinitely larger or smaller than the other), then the implications of the question change.

The question implies:  did we start out of nothing, or something?  The answer could be neither.  Our universe exists because of something that took place in a larger universe.  In that universe, that event, and our universe, are insignificant to the point of being almost non-existent.  In ours, it is the entire beginning.  Our universe in turn is, quite unknowingly, creating much smaller universes that to us would be insignificant.

If we can really imagine the concept of the multiverse, in which our universe is one of an infinite number of parallel universes, existing side by side but distinguished by different paths taken an infinite number of times, why can we not also imagine an infinity of universes larger and smaller than ours?  This, indeed, would be the logical conclusion of the concept of infinity.  There is no reason to think it is limited to a parallel plane.  If universes can diverge over the fourth dimension – time – why can’t they diverge over the first three dimensions as well?  (Or any additional dimensions after four, but don’t get me started.)

I want to be very clear about this.  I have no expertise whatsoever about cosmology, so any ideas I have run a 99% chance of being wrong (I rounded down, not up).

That having been said, this constant anomaly that I “see” in everything written in the field is bugging me no end.  What am I missing?  Why is this explanation not at least as good as M-theory, for example, a theory so inelegant it appears almost artificial?

Of course, I didn’t stop with the question.  I have tried to do some research, non-scientist though I am.  I have looked at many sources that do deal with the possibility of scalable universes, but not one of them takes the idea seriously.

In virtually every case, they come to the conclusion that this is not a question that can be studied by scientists, because there is no empirical data against which to test the hypothesis.  They say it could indeed be true, but so what?  If it is true, we have no way of knowing that it is true, and we are equally unable to disprove that it is true.  Scientists only deal with empirical reality.  Something that can be neither proved nor disproved cannot be part of the scientist’s reality.

At the beginning of this article, I talked about the philosophy of cosmology.  Scientists – at least the ones I have read – say that this question of the scalable universe is a question for philosophers, not scientists.  It is like trying to decide if there is a god.  Scientists don’t do that for a living.  They are not philosophers.  They only deal with things that can be proved.

In some respects, I understand that answer completely.  However, I think I have to reject it.

Essentially every part of what we today call science – biology, chemistry, physics, everything, including all of their most mundane components – has at one time or another in the past been the purview of philosophers rather than scientists.

It was philosophers who first speculated on how the human body works.  Then, as methods were developed to test ideas of biology, a science was born.  Things as simple as mechanics – forces, and how things move – started in the minds of philosophers, and were only handed over to the scientists when there were experiments to run, empirical analysis to do.  The history of philosophy is a history of people grappling with difficult concepts, and ultimately figuring out how to test their thinking in the real world.  Philosophers handing off to scientists.

Or, perhaps more correctly, conceptual scientists handing off to empirical scientists.

Many parts of physics existed only as untestable concepts, until philosophers or scientists developed ways to test them.   They weren’t rejected by everyone because there were no tests to see if they were true.  The nascent concepts were each treated as something for which a test had not yet been found.

Some scientists will argue that, for example, the existence of planets around other stars was, until relatively recently, not part of science.  It was a matter of speculation, by philosophers, writers of science fiction, and other non-scientists, but it was not part of science.  We had no way of determining whether it was true or not, so why would a scientist waste their time on it?

In reality, some scientists made it their goal to find a way of discovering planets around other stars, and through creativity, insight, and then experimentation, they found those planets.

I don’t understand why there are not scientists, right now, trying to bring the scalable universe from philosophy to science, conceptualizing and then testing ways of determining if that might explain some aspects of our universe.  Is it too hard?  Is it too far out there, or too far into the future of cosmology?  Do we already know that it will be a long time before we can pursue this question?

This article is therefore a plea to the real scientists out there.  I’ve tried to learn enough to figure this out.  I don’t have enough grounding in math to figure it out that way.  (I understand some algebra, and even a few of the concepts in calculus.  However, every Greek symbol after Pi and Delta just makes me gag.)  I’ve tried to stretch my mind to accommodate the non-mathematical concepts.  Every time I do, I run into this conundrum.  Where is the barrier to solutions based on scale?  How is it different from any of the other big questions on the edges of cosmology or physics?  Why aren’t we even asking the question?

Or, have we asked it and answered it, and I just didn’t notice?

Please help.

  • Jay Shepherd, October 14, 2017
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Energy #19 – Regulatory Capture

This article was originally supposed to be about the Fair Hydro plan, and in particular the regulatory failures that led to the political need for it.

As so often happens, events overtook my plan.  While I was looking at the empirical data explaining that regulatory failure, the Ontario Energy Board did some things that took me in a new direction.

The OEB is more and more exhibiting the signs of regulatory capture.

Note that I said the OEB, by which I mean the regulator as an entity.  The adjudicative panels at the OEB, i.e. the Board members, have often shown strong independence.  On the other hand, senior management of the OEB – those who are setting policy and regulatory direction – show bias in favour of the views of the industry they regulate.

Further, instead of moving to head off that problem, the OEB is going in the opposite direction, proposing to increase the ability of utilities to influence OEB policies and directions, and decrease the ability of customers – those who pay for everything – to provide balance and perspective.

What is Regulatory Capture?

Now, before you get all hot and bothered, and want to storm the ramparts, let’s look more closely at regulatory capture.  “Bias” sounds really bad.  (Or maybe really, really bad.)  It’s actually not quite as bad as it first appears.

Still bad.  Just not AS bad.

Regulatory capture is sometimes compared to Stockholm syndrome, but it’s not quite the same.

Usually attributed to Nobel laureate George Stigler, the term “regulatory capture” refers to the situation in which the regulator’s independence has been compromised by the influence of the industry it regulates.  Stigler’s extreme view was that capture was inevitable, because regulation exists primarily to benefit the private interests being regulated, such as utilities.  As decades of debate over the subject have evolved the concept, most theorists no longer agree with Stigler that private interests will necessarily crowd out the public interest in every case.  However, most also agree that it is a common problem for regulators.

In vastly oversimplified terms, there are three types of regulatory capture.

The classic definition describes a full or complete capture, in which the industry regulated basically dictates what the regulator does and says.  This can be because of bribery or other corruption, for example, or just complete subservience.  This has happened to many regulators in the past.  Some purists consider this the only true regulatory capture.  Others, like Scott Hempling, believe that corruption is different from capture, and should not be included under the same umbrella.

There isn’t the remotest evidence that the OEB has been captured in this extreme sense.

The other two types of capture are more ubiquitous, and are more relevant to the OEB situation.

Cultural capture occurs when the regulator and the regulated industry become so close that the independence of the regulator is undermined.  Phillip Wallach, in an excellent article reviewing a book of essays, Preventing Regulatory Capture (Carpenter/Moss, ed.), describes cultural capture thus:

“The main mechanisms of this cultural capture will be: group identification, in which regulators come to identify themselves with regulated firms and their employees, sometimes because of the existence of revolving doors; deference to high-status regulated executives; and deference to those with whom one has face-to-face relationships, because of empathy or the desire to avoid conflict.”

This is not really surprising.  Regulation, including economic regulation of a monopoly through an administrative tribunal, is based on the concept that experts in a particular field are the best people to understand the intricacies of regulating that field.  What that means is that the talent pool the regulator draws from is often the very entities it regulates.  What’s more, the social circles of the regulated and the regulator will overlap, sometimes extensively.

None of this is inherently bad.  In fact, often former utility staff who work for the regulator are the best people to do the regulating.  They really know what it’s like inside a utility.  Anyone who has argued a case before an adjudicator with a utility background knows that they can be very effective precisely because they don’t wear rose-coloured glasses.  They’ve seen the good, and the bad, up close.

Closeness between the regulator and the regulated is therefore quite normal, even expected.  It is only when it morphs into a set of blinders that it becomes a problem.

The third type of capture is informational capture, sometimes called “weak capture”.

Regulators make decisions and develop policies based on information.  Regulated industries have an asymmetry of information, in that the utilities or other regulated entities have most of the information.  As a result, the information the regulator gets is often from those it regulates.  Informational capture arises when the regulator ceases to be sufficiently skeptical about the information it is getting, and reduces its emphasis on obtaining information, verification and input from other sources.

Information capture is sometimes seen as driven by expertise.  It is not just that the utilities have control of most of the relevant information.  They are also experts in the field, so the information they deliver, and how they characterize it, is taken – consciously or subconsciously – as reliable expert analysis.  That is, they not only control the information, but how and when it is delivered.  Their lack of independence is ignored.

The OEB exhibits some of the indicia of the second and third types of regulatory capture.

What is the Evidence of Capture of the OEB? – Part 1: Rates

Start at the empirical level.  On the electricity side the regulated utilities are for the most part getting what they want, with some resistance from adjudicators (Board members) in litigated cases, but with minimal resistance from the senior management of the OEB in development of policies and rules.

(Note that this is not as apparently true on the gas side.  The reasons for that are complex, and more suited to a separate article.)

The starting point for any economic regulator, whose central job is to regulate rates, is…(wait for it)…rates.

Of course, as has often been noted the actual distribution revenue per customer in Ontario from 2005 to 2016 (the range of years for which we have good, and comparable, information) has increased by 25.6%, from $548.60 per customer in 2005 to $672.26 in 2016.  That is a compound annual growth rate (CAGR) of 2.1% per year.  Inflation over the same period (GDP IPI FDD) was 23.17%, or 1.9% per year, so the rate increases are apparently a little high, but not outrageous.

There are two reasons why this initial conclusion is misleading.

First, distribution revenue per customer is only a good proxy for rates if the customer mix remains the same, and rates have increased roughly the same for all classes.  Neither is true.

Residential customers, the ones with the lowest revenues, increased from 89% to 90% of total customers, meaning the overall increase is slightly understated.  (Comparisons by rate class are from 2006 to 2016, because 2005 public data does not include this metric.)  On the other hand, the rate of increase of revenues from residential customers increased much more rapidly than for non-residential.  For residential, increases in distribution bills were at a rate of 4.66% per year CAGR.  This is despite the fact that residential average use dropped by 13.6%, from about 818 kWh per month to 707 kWh per month.  On a unit cost basis, the cost to deliver one kWh to someone’s home has increased from 2.78 cents to 5.08 cents, an increase of 82.7%, or 6.22% per year CAGR, more than three times the rate of inflation.

When residential customers say they are using less, and paying more, they are not lying.

For non-residential customers, there was a decrease in distribution bills over that same period of about 1.89% per year CAGR.  Average use by business customers has only dropped 2.9% over that period, since use is driven more by economic activity than by efficiency.  However, OEB cost allocation policies have resulted in increases in the share of costs allocated to the residential customers, largely because the business customers had been paying more than their fair share (likely a legacy of the former municipal influence on rates).

The other reason the 2.1% overall CAGR is misleading is that it came during a period when external factors were acting to push distributor costs down by substantial amounts:

  • Interest rates dropped from an average of 8.57% in 2005 to less than half that in 2016. When factored into both debt and equity costs, the impact of this reduction on the highly capital intensive utilities is around $650 million, or about 19% reduction in overall costs.
  • An accounting change meant that most distributors had a drop in their depreciation rates, with an industry-wide impact of about $400 million, i.e. around 10% reduction in costs.
  • The distribution sector in 2005 was characterized by a large number of smaller distributors, with many built-in inefficiencies. Mergers and consolidations have resulted in substantial savings in many areas, most notably for the Powerstream, Horizon, Entegrus and Toronto LDCs.  This is not possible to estimate properly, but is certainly in the $100s of millions annually.

Some part of these impacts, as well as others like the declining tax rates over the same period, would be captured in the inflation comparison.  Some, on the other hand, would not.  It is reasonable to guess that, but for these listed impacts, the rate increases allowed by the OEB over that period totalled more than 4% CAGR, i.e. more than twice the rate of inflation.

Protecting the customer is job one for an economic regulator like the OEB.  In a decade in which known costs for distributors dropped by 30-40%, more than a billion dollars, it is not credible to say that allowing rate increases in excess of inflation amounted to “protecting the customer”.

Is the same true for transmission and for prescribed generation (OPG), the other areas regulated by the OEB?

Transmission rates are the easiest.  I couldn’t find 2005 and 2006 Uniform Transmission Rates (I know, just lazy, really), but since 2007 the rates have increased 45%, i.e. an average of 4.25% per year.

Of course, the decline in interest rates benefitted the transmission companies in the same manner as the distribution companies, but the benefits of changing accounting rules for depreciation, and M&A activity, did not affect them significantly.  Since the interest rate increase is partially captured in inflation, it is no surprise that the 4.25% per year rate increase is similar to the real underlying distribution rate increase.  The adjusted rate increase for transmission is likely somewhat higher, perhaps as much as 5% CAGR, but even without adjusting for the interest rate decline it would still be very high.

Now turn to OPG.  In 2007, before its rates were regulated by the OEB, the nuclear rate was $49.50 per MWh, and the hydroelectric rate was $33.00 per MWh.  The rates in 2016 were $72.30 per MWh and $44.55 per MWh respectively, increases of 46% and 35%.  On a CAGR basis, they are 4.3% and 3.4% per year.  This is despite sometimes aggressive adjudicated results from Board panels, including one cutback that went all the way to the Supreme Court of Canada for a decision.

This does not include the future increases currently proposed by OPG, which would see the nuclear rate increase by +10% per year for the next ten years, and the hydroelectric rate by 1.5% (although they would be blended).

Like transmission, OPG has benefitted from declining interest rates, but not really from M&A or depreciation changes.

All of this is to say that, for the more than two-thirds of the typical electricity bill that the OEB regulates, it has allowed increases that are effectively more than double the rate of inflation for the last decade.

Thus, on the most basic test – rates – the OEB likely fails.

This is not direct evidence of regulatory capture, of course, but it does appear that “someone’s got some ‘splainin’ to do”, as they say.  We certainly have to dig a little deeper.

Unfortunately, digging doesn’t produce better results.

What is the Evidence of Capture of the OEB? – Part 2: The Big Build

I’ve written earlier this year about the Big Build, in which the OEB has allowed wires companies to expand their capital infrastructure by massive amounts over the last decade, and continues to do so today.   Capital spending in excess of apparent requirements is at least $6 billion in distribution alone, and transmission is also substantial.  In fairness, the capital spend of OPG probably cannot be laid at the OEB’s doorstep.  Their hands have been tied on that one.

Now, this is not another opportunity for me to rant about capital spending, and the huge future debt being piled on customers over the last decade.

I’m tempted.  But no.

What this is about is regulatory capture, so the Big Build is interesting in this context mostly for demonstrating to whom the OEB listens when it is developing and implementing policies.

The Big Build started with the utilities saying they needed more money for capital.  The utilities didn’t come to the Board with empirical evidence that they needed to ramp up their capital spending.  Oh, no.  They, and their trade associations, and their favourite consultants, just kept repeating it as a mantra, over and over again.  We need more.  No evidence.  Just repetition.

The OEB is chock full of economists, so they are very familiar with the Averch-Johnson effect, first introduced in 1962, and today a still debated but generally accepted basic paradigm in utility regulation.  What Professors Averch and Johnson posited, and demonstrated, was that companies that are regulated based on a rate of return tend to over-build.  Sometimes it is conscious, and sometimes subconscious, but in fact they will chase profits.  Since profits come from rate base, they will build as much rate base as they possibly can.

Further, as subsequent research has shown, if the return on capital for the regulated entity is high relative to what the shareholder can earn elsewhere (as is the case in the Ontario wires sector, where the shareholders are mostly municipalities), the tendency to over-build is increased.

Since this built-in bias was well-known to the OEB when they were hearing all this sturm und drang (what, would you have preferred “weeping and gnashing of teeth”?) about capital needs, they should have been skeptical.  When the customer groups asked to see empirical evidence of increasing needs, a truly independent regulator would have been leading the charge to get that evidence.  “Why do you need more money now?” they should have said.

Instead, the OEB asked a different question:  “How do you want to spend this extra money?”  Rather than look analytically at overall capital needs, the OEB asked for Distribution System Plans, otherwise known as wish lists.

Now, in principle there is nothing wrong with Distribution System Plans.  Every distributor should have one.  (In fact, they shouldn’t have to be told, but that’s a whole other story.)  What’s wrong is that the OEB started from the premise that if the utilities said they had to boost their capital spending, that must be correct.  They are the ones that know their systems, right?

The OEB’s policy response to the utility “we need more capital” message has consistently been to believe the message, and implement policies (incremental rates to fund capital spending, anyone?) that provide more money for that purpose.

When a regulator believes what the regulated companies say, despite no supporting evidence, that is a classic indicator of regulatory capture.  That is particularly true in a subject area where, according to well-accepted regulatory principles, it is likely that the utilities will have an underlying bias, and thus may not be objective.

The likeliest reason for the Big Build was regulatory capture.

What is the Evidence of Capture of the OEB? – Part 3: Policy Development

Less empirical, but still illuminating, is how the OEB goes about developing new policies.  You would expect that a regulator that believes “outcomes” are the most important goal (they are) would start by talking to customers.  The opposite is in fact true.  They start by talking to the utilities.

Just a couple of examples will demonstrate this.

At a recent OEB meeting, a senior executive of the OEB told us that residential customers were not concerned about the Board’s recent change to all fixed distribution rates.

I was surprised, so I asked where that information came from.  After some hesitation, we were told “We talked to the EDA [Electricity Distributors Association], who speak for their customers.”

When I noted that speaking to the distributors – who asked for this change in the first place – is not the same as speaking to the customers, the executive said “Oh, and we noted that there were no complaints at the Community Days around the province.”

I said “Did you go to any of the Community Days?”  When the response was no, I explained that I went to several of them, and the most common complaint of customers was the impact of the new all fixed rates on tenants and seniors.  You couldn’t miss it.  Some of those customers were very upset about it.

Deer caught in the headlights.  They simply didn’t know what the customers thought, and they assumed that the utilities were communicating on behalf of the customers.

Really?

Another example arises out of a similar situation.  The Board is proposing to change the structure of distribution rates for business customers, in order to deal with behind the meter generation and the potential for erosion of distribution revenues.  To develop the new policy, they consulted with everyone, but they didn’t like the answers proposed.  Then, they spoke to the distributors, reached a consensus with them, and approved the new policy internally.

Then they went to talk to the customers to tell them what they planned.

Duh.

Turns out, what they had already decided (before talking to the customers) was in fact a bad idea.  It completely missed the fact that solar behind the meter – really the main point of the change – operates at a 15-20% capacity factor, so that their proposed new charges would make rooftop solar completely uneconomic for businesses.  (Sorry, Mr. Energy Minister.)  It also completely missed the fact that it would catch (and penalize) peak-shaving by larger users with gas cogeneration, something that is specifically incented by the province under the Industrial Conservation Initiative, and desperately needed.  (Sorry again, Mr. Energy Minister.)

How do you establish a new policy on rates, involving hundreds of millions of dollars a year of additional charges, without at least investigating how customers will be affected by the policy?  The answer is, if you are too eager to believe what the regulated utilities tell you, that’s what can happen.

And that sounds a lot like regulatory capture.

A much bigger example is changes in the last couple of years to the Board’s M&A policy (called MAADs, an increasingly appropriate acronym).

Under the old policy, the Board tried to encourage consolidation amongst electricity distributors by offering a five year grace period (a rate freeze, in effect) after a merger.  The theory was that mergers should produce substantial savings, and for the first five years the savings would go to cover transaction costs, and then provide a financial reward to the shareholders.  Customers would benefit right away from the freeze, but would not participate in the main benefits from the merger until after five years.  A number of successful mergers took place on this basis.

The utilities, however, complained that their incentive was too small to promote consolidation, even with pressure from the province on the utilities to merge.  The utilities wanted more financial incentives to go to them, and less benefits to their customers.

The OEB complied.  With limited discussion (except with the utilities, of course), the OEB said that the period over which the benefits would go to the utility shareholders would be increased to ten years.  Not only that, but there would no longer be a rate freeze.  Now, the utilities would continue to get rate increases based on a formula, so the customers would get nothing at all in that period.  Further, if the utilities wanted to spend extra money on capital, they could get that from the customers too, including the additional profits that come from investing in more capital.  All of this, without any reference to the actual costs to run the merged utility, which were expected to decline.

The result?  Mergers like the recent Alectra combination, which created the second largest distributor in the province.  The shareholders of the merging utilities are expected to be rewarded with an extra $425  million, starting essentially right away.  The customers will only start to get benefits from the merger ten years later (so they say).  Meanwhile, they will suffer through more rate increases in excess of inflation, year after year.

The new MAADs policy is just another example of the OEB believing the utilities, and fashioning policies to respond to what the utilities want.  At the expense of the customers.

Regulatory capture.

There are lots of other examples, some of them obvious, some of them more esoteric.  A pattern emerges.  The OEB either responds to complaints of utilities with a new benefit for them, or it thinks up something on its own and checks with the utilities to make sure it works for them.

It would be easy to overstate this, and that would not be fair.  The OEB carries out many consultations, including many with customer groups.  Customer groups often – usually, in fact – have sufficient resources to participate effectively, and do so.  In many of those processes, the OEB takes note of customer concerns and adjusts policies accordingly.

But there are a disconcerting number of examples where it is apparent that what the utilities want in a policy is what will happen.

Preventing Regulatory Capture

There has been an enormous amount written, by academics and others, on the ways to prevent regulatory capture.  This was especially the case after the financial crisis of 2008-9, which many ascribed to regulatory failures in the financial industry rooted in regulatory capture.

The ways to fight regulatory capture can be loosely divided into two categories:  structure and process.

Scott Hempling has written extensively about methods to avoid regulatory capture by shoring up the structure of the regulator.  For example, he talks about the importance of empowering the personnel of the regulator, including in particular ongoing professional development, so that professionalism and personal responsibility generate a natural barrier to regulatory capture.

Hempling also talks about the regulator ensuring that it frames the agenda, and that its regulatory stance is proactive rather than simply responsive to utility applications.  He notes that regulators who are the most independent are the ones that get out in front of issues, and then allocate sufficient internal resources that they can control the agenda right through policy development and implementation.

For the most part, the OEB is already doing the things that Hempling suggests.  While some have complained that OEB staff are not sufficiently empowered (and that is probably true to a certain extent), on balance the structural defences are in place at the OEB.

Others who talk about structural solutions emphasize clarity in the legislation.  Still others have suggested that the legislature should actually appoint an officer to oversee the independence of regulatory bodies, much like an Auditor-General or an Ombudsman, but directed to administrative tribunals.

These are of only marginal relevance to the OEB.

On the process side, the primary theme is systems or approaches to ensure customer voices are heard more clearly and more often.  Professor Daniel Schwarcz of the University of Minnesota, an insurance regulation specialist, believes that the key ways that a regulator can fight regulatory capture are a) encouraging and resourcing independent customer representatives, and/or b) appointing and empowering independent consumer advocates.  Many other commentators and regulatory specialists, in a diverse range of regulatory areas, echo these suggestions.

Professor Elizabeth Madill of Stanford suggests something similar in the realm of judicial review.  If access to the courts by customers and other interest groups is expanded and facilitated, she says, that can act as a check on regulatory capture of agencies.

Sadly, the OEB is moving in the opposite direction.  In a new policy, just announced, the OEB will limit the voices of customers even more than in the past.  Further, those voices will be focused on the bigger, litigated cases, just the ones where regulatory capture has been less of a problem (in part because of the participation of customer groups).

(This new policy, which has not been the subject of any consultation with customers, will be dealt with in a future article.)

Thus, it can be expected that regulatory capture will, if anything, get worse at the OEB.

Conclusion

The OEB, like any other regulator, has good and bad aspects.  On some key metrics, the OEB is not delivering as it should for the customers, and the primary reason for that is probably undue influence by the regulated utilities, i.e. regulatory capture.

The OEB and the provincial government may want to take note of what has happened to the National Energy Board (NEB) over the past decade.  As the Federal Government’s NEB Modernization Panel recently explained in their Final Report, many Canadians have lost confidence in the NEB, precisely because they feel it has been captured by the industry it regulates. The road back for the NEB to rebuilding the trust of the public, particularly those who are most directly impacted by its decisions, could be a long uphill struggle.  Realistically, it may never happen.

Better the OEB fix the nascent problem it has now, while it is still not too late, as opposed to exacerbating it, perhaps beyond repair.

  • Jay Shepherd, October 4, 2017

 

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Small Business Tax Avoidance Proposals

[This is my analysis of current government proposals to change the private corporation tax rules, limiting certain tax planning schemes.  It has also been filed as a submission to the Minister of Finance.]

Background and Summary

I own a small professional business – a law firm – that is incorporated, but I am not using or planning to use any of the tax minimization techniques that are the subject of the government’s current small business tax proposals.

Unlike most small business owners, however, I also have a fairly thorough knowledge of the tax system, because for more than a decade in the eighties and nineties I made my living as a tax lawyer designing tax planning strategies, mostly for small and medium-sized businesses and their owners.  I also taught tax planning at the law school, and to junior tax lawyers taking the CICA (now CPA) In-Depth Tax Course.  While I don’t give tax advice today, the comments below are informed by my experience helping hundreds, maybe thousands, of Canadian business owners reduce their taxes.

Four main tax changes are being proposed, all with the avowed intent of reducing the ability of “wealthy Canadians” to pay less tax, through incorporated companies, than they would pay without the use of a corporate structure.

To test the proposals, it is necessary to look at two aspects.  First, does each proposal address an inherent “unfairness” in an effective but practical way?  Second, do the proposals correctly reach the targeted individuals, or do they also catch in their net others they should not be attacking?

The proposals are mostly sound.  However, as with many aspects of the Income Tax Act, the devil is most certainly in the details.

This analysis deals with each of the four proposed changes in turn.

The main recommendations that flow from this analysis are the following:

  1. Provide a complete exemption to the dividend sprinkling rules for any family member with a significant role in the business of another family member.
  2. Apply the dividend sprinkling rules only to dividends received by a family member in excess of $25,000 per year.
  3. Review potential unintended consequences of the sprinkling rules on estate freezes and similar structures.
  4. Proceed with the surplus stripping rules as proposed.
  5. Withdraw the proposed passive investment rules, or in the alternative limit them to passive investments in excess of those prudently retained for the active business (150% of the replacement value of the business assets, or 200% of the business liabilities).
  6. Withdraw the limits on the lifetime capital gains exemption relating to trusts and minors or, in the alternative, increase the LCGE limit to at least $3 million.

Dividend Sprinkling

Context.  The Canadian tax system has progressive tax rates based on individual income.  Each individual is presumed to have an ability to pay that is driven by their own personal income, not the income of their family members or colleagues.  With minor exceptions this assumption reflects reality, and most of those exceptions are covered by rules to correct for their impacts.

As a result, the system has to include rules against shifting income to family members and others in ways that mean ability to pay is masked.  If Person A earns $250,000 a year, they can afford $80,000 in taxes, the theory goes.  If Person A is allowed to treat their own income as $50,000 earned by each of five family members, their combined tax is only $40,000, even though their ability to pay is $80,000.  The system can’t function properly if you can hide your true tax situation through redirection of income.  There are already a number of rules designed to prevent this.

One rule that was left open allowed a person who owned and operated a private corporation to issue shares to adult children.  Income would be taxed at a low rate in the corporation, as is normally the case.  If all the income were paid out to the real owner in dividends, the total tax at both corporate and individual levels would be roughly the same as if the income had been earned directly.  The tax break in the corporation is temporary, designed to allow the company to reinvest in growing the business.

However, by paying the income out to children with lower incomes (i.e. sprinkling), tax would be at a lower rate.  The overall tax paid on the income is reduced.

The new proposals add an incremental tax on those dividends, except to the extent that the children have contributed capital or services to the business and as a result the dividends are reasonable.

Analysis.  In principal, this is eminently fair.  Pretending that income belongs to children when it really belongs to the parent is something that should be prevented, if for no other reason than it is intentionally misleading.

There are three situations, though, in which the Minister should reconsider how this is to work.

First, the paradigm on which the proposals are based is that the “real” owner of the business is the parent.  In today’s economy, it is often the case that a parent is involved in their child’s business, whether as financier, partner, advisor, or provider of creditworthiness.  This is an increasing trend.   Where that relationship exists, the proposals could result in a punitive tax where one is not appropriate.

A simple example is the parent who owns one class of shares of their child’s small business corporation, thus showing the bank that the parent is actively involved, and in the process allowing the business to access bank and other credit.  The child owns the other class of shares.  In practice, the intent is that all dividends will be paid on the child’s shares, who is the actual owner of the business.  The shares for the parent are just an accommodation (or, just for show, if you’re cynical).  I know of several situations like this right now.

As currently structured, the government’s proposals may tax some of the dividends as if they in substance belonged to the parent, when that is simply not the case.

A similar result can arise when a parent brings an adult child into their own business as a kind of apprentice, planning that over time the child takes over.  Dividend payments in those circumstances may be influenced by tax impacts, but also and usually more importantly by personal and business considerations.

The solution to these concerns is to provide that the new rules will not apply where the child is a significant contributor to the business, for example providing similar contribution to the parent.  If parent and child both work full-time in the business as key principals, or if the child works more than the parent, the dividends paid by the corporation would be exempt.  Once that is shown to be true, the structure is no longer for tax avoidance, but rather has a business purpose.  Finance and CRA should continue their longstanding policy of not second-guessing the business judgments of small business owners.

This would go a step beyond the reasonableness test.  It would recognize that, where tax planning is not a primary driver, the CRA should simply leave the small business owner alone.  It has the added advantage that, in the majority of cases where more than one family member owns a business, the new rules would be excluded entirely.  This simplifies the Act and targets the new rules more closely to those who abuse the system.

Second, the new dividend sprinkling rule should have a de minimis test, primarily to ensure that these new rules don’t waste government money and enrich tax advisors, but focus instead on closing loopholes.

There is a rule, for example, that salaries paid to family members of a business owner are only deductible by a corporation if they are reasonable.  That rule dealt with the prevailing “sprinkling” strategy of the day.

Not in that rule, but much like a rule (at least in the 1980s), was that salaries to adult family members would not be challenged CRA if they were $15,000 per year or less.  This assessing practice, which is now probably closer to $25,000 or $30,000, is just a practical reality.  CRA cannot spend oodles of money claiming that a twenty-five year old daughter is not adding $20,000 of annual value to the company by providing advice to her mother, the owner.  It would cost CRA more to collect the small tax differential than it’s worth.  As well, this assessing practice saves the small business owners a lot of unnecessary grief.

The same reasoning applies to dividends.  Aggressive dividend sprinkling is an unfair advantage, and there is usually enough tax differential involved that the reasonableness test can be used.  Small dividends from a parent’s company to adult family members represent minimal tax leakage, and maximum enforcement cost.  Who is to say that a thirty-year-old daughter who is a medical student shouldn’t be paid through dividends to sit on an advisory board for her parent?  Do you really want to take that one to court?

My suggestion is that, for children over the age of twenty-five, the new rules only apply if the dividends paid in a year are $25,000 or more.  Anything below that is presumed to reflect the inherent value in having family members engaged in the business.  This has the added benefit that the smaller the business, the more likely this de minimis rule is applied.  That means that the extra tax will apply most often to those who are in fact “wealthy Canadians”, and for others their lives will be made simpler.

Third, there are many corporate structures in which shares are held by family members, or trusts, and the motivation is almost entirely rational family ownership, not tax planning of income.  The estate freeze is the classic example.  In many of these structures, there is no intention to pay dividends to the family members or trusts.  They are holding shares to facilitate an eventual intergenerational transfer of the business.

A problem could arise, though, if the corporation has to carry out a reorganization or similar transaction.  In many of those situations, the law deems transfers of shares to be dividends, even though at the end of the day the economic position of the shareholder is unchanged.

The government’s proposals do not appear to deal directly with this problem.  It would be helpful if, before the proposals are brought forward in legislation, the Department of Finance goes over the various scenarios that might apply, whether in estate freeze situations or otherwise, and ensures that the sprinkling rules don’t produce unintended consequences.  At this point, it is not clear that they have done that.

Passive Income

Context.  The government is concerned that private companies will accumulate retained earnings that are taxed at the lower corporate tax rate, and then reinvest those after-tax earnings in passive investments.  Because the tax is lower in corporations, the amount that can be reinvested is higher than an individual would have available to them in similar circumstances.  This gives the private company an unfair advantage, even if later, when the money is paid out to shareholders, it is subject to an extra tax cost.

The government is proposing to impose an extra tax on these passive investments in corporations, to remove this advantage.  The proposal is still a little murky, because the final approach has not been determined.  The outline, however, is known.

Analysis.  This is not a good idea, for two main reasons.

The vast majority of businesses that have passive investments do so as a cushion for the inevitable downtown.  Like it or not, most businesses have some cyclical aspects to them, whether they be lumpy cash flow, susceptibility to economic cycles, or just the ebb and flow of the seasons or customers’ buying patterns.  A well-run business will have a bank line to smooth the day to day ups and downs, and savings that can be drawn on when things get really bad.

In addition, some small businesses try to have a sinking fund that they build over time to replace major capital assets.  A fishing captain needs to spend $250,000 on a boat in thirty years.  Saving a little each year – building a nest egg – is the smartest way to finance all or part of that cost.  That is especially true if the goal is to maintain the business for subsequent generations.

Any extra tax on passive investments amounts to a penalty for prudent long term cash management.  A front end tax means that the amount that is available to support the business, or invest in new business assets, is substantially reduced.  Or, from the business owner’s perspective, he or she has to work harder or longer to save up the same amount of money in the business.  A back end tax means that investments used to strengthen the economic viability of the business are ultimately penalized.

The other reason is that a tax on passive investments will almost certainly change how business owners deploy their money.  It will mean they are less likely to invest in new machines and other production type equipment with cash, since building up the cash will generate a penalty.  They will borrow for that kind of assets.

On the other hand, when they do have excess money, they will invest in general plant:  buildings, land, etc.  Why would you rent your factory when you can direct your savings into the mortgage payments on a factory, and hold a long-term investment without the penalty tax?

If they can’t invest their money in appreciating general plant, then the alternative is to take the money out of the company and invest it personally.  Sounds OK, right?  No, it isn’t.  Money invested outside of the company will be invested with a different purpose, and will be more susceptible to erosion due to personal spending choices.  The business will be weaker, and in the long term will suffer.

The ability to reinvest earnings in passive investments is a key part of running a business.  If the government wants to prevent abuse of this flexibility, it should set a limit on passive investments that are considered to be part of the business, e.g. twice the level of liabilities, or 1.5 times the replacement value of the business assets.  Those passive investments should be exempt from punitive taxation.  If businesses are used as a smokescreen to get favourable tax treatment for a true passive portfolio, that will still be limited, since investments above the exempt level would still be taxed more heavily.

Removing Funds from Corporations Tax Free

Context.  The government is concerned that, through a series of indirect transactions, a business owner can take money out of their company tax-free by converting salary or dividends into capital gains.  The technique, called “surplus stripping”, is partially blocked by existing rules.

However, those tricky tax planners have figured out some ways to avoid those rules.  These methods are generally only viable if the money involved is substantial, because the legal and accounting costs to set this up can be pretty high.

Analysis.  The government is legitimately limiting the ability to avoid tax when the surplus is taken out of a company.  While the proposals could result in some double taxation (capital gains and dividends) if an avoidance transaction is unsuccessful, that is treated as a risk that arises in aggressive tax planning.  I agree.

The main difficulty here is that this is a complex area, and the tools available to the tax planners outstrip the ability of the government to shut down all avenues of tax minimization.    It is likely that this will continue to be a cat and mouse game well into the future.  Tax planners have no limits on their creativity.  They are already designing ways around these new rules.

Lifetime Capital Gains Exemption

Context.  The lifetime capital gains exemption (LCGE) allows individuals to earn a capital gain on shares of a private corporation that carries on an active business.  Currently the maximum you can claim under this rule, in your lifetime, is about $835,000, or $1 million for a farm.  The purpose of the rule is to recognize that small business owners take big risks, and on the sale of their shares should be allowed an extra tax benefit commensurate with those risks.

It has long been common practice for entrepreneurs to ensure their close family members have shares, so that when the business is sold each family member can earn a tax-free gain.  Sometimes this is simply to split the gain between family members for personal reasons.  More often, though, it is to multiply the individual limit by the number of family members.  If there are five family members, for example, a gain of up to $4,175,000 can be received by the family tax-free.

Many serial entrepreneurs put shares of their company into a family trust for their kids, often while the kids are still minors.  If the business doesn’t fare well, the cost of the setup is low.  If the business succeeds, on the sale of the shares there is big pot of money available in the trust for the kids’ futures.

The multiplication of the LCGE, and the use of family trusts to hold the proceeds, have both long been accepted by the government.  Indeed, from time to time requests to increase the dollar limit on the LCGE have been answered by the fact that, for many small business owners, the limit is really much higher.

The government now wants to change the LCGE in three ways:

  • Shares subject to the dividend sprinkling rules would also be ineligible for LCGE.
  • All capital gains on shares while a person is under 18 would be ineligible for LCGE.
  • Gains on shares held through family trusts would be ineligible for LCGE.

Analysis.  This alters decades of express policy allowing flexibility in the use of the LCGE.  While in general controlling LCGE abuses has merit, there are at least three reasons why the current proposals will do more harm than good.

First, the prohibition against using a family trust will result in small businesses issuing shares directly to kids, whether minor or adult.  There is a different psychology where a child actually owns shares in a parent’s business, rather than having an interest through a family trust.  The actual ownership of shares can create feelings of entitlement, challenges to parental authority, and legal disputes.  Shareholders’ agreements and other expensive tools to limit those impacts are not well-aligned for that purpose.

The end result is that the no-trusts rule will likely result in the sustainability of many small businesses being undermined by infighting and other negative impacts.

This is true even if the shares are issued to minors, with the added problem that denying LCGE to minors solely because of their age is almost certainly contrary to the Charter of Rights.  This is especially true since there is proposed to be an anti-avoidance rule – reasonableness – that would otherwise protect the fisc.  If a benefit to a minor is otherwise reasonable, how is it constitutional to apply punitive tax treatment to that benefit only because of their age?  Any nexus between tax leakage and the taxpayer is already shown not to be present.  There is no legitimate policy reason why the same reasonable benefit to a 17 year old and to a 19 year old should be taxed differently.

Second, the new rules fail to recognize that, for many small business owners, they take risks and drive the Canadian economy in large part to create a legacy for their family.  For some, they are looking to pass their business on to their kids.  For others, involving their kids indirectly in their business is a powerful way of helping them grow up.  For still others – and particularly for new immigrant families – the risks of a small business are worth it only because of the owner’s responsibilities to his or her family.

The proposed new rules say, in pretty stark terms, “your business is just about you, and should have nothing to do with your family.”

In my view, it is simply bad public policy to ignore the legacy-driven strength of many small businesses.  Anything that undermines public support for that legacy hurts the small business owner, and through them the economy.

Third, if these proposals are to proceed the lifetime limit probably should be reconsidered.

The LCGE has been successful in part because the entrepreneur sees the pot of gold at the end of an often stressful and high-risk rainbow.  This is not wealth, in the sense most people think of it.  It used to be called, in the vernacular, “f**k you money”.   The small business owner works eighty hours a week, puts second and third mortgages on the family home, and endures sleepless nights, all in pursuit of financial freedom, the proverbial ability to say “f**k you”.   It means earning the right not to allow anyone else to decide how you live.

$835,000 no longer qualifies as f**k you money.   Years ago, the conceptual number was $1 million.  Today, maybe it is four or five times that, maybe a little less, but it is certainly not $835,000.

This has not been a problem, in part because so many small business owners were able to multiply the taxable gain to reach $2-3 million.  If that is no longer possible, the incentive value of the LCGE is dramatically reduced.  At some point, it becomes a wasted tax expenditure, a tax cost with no concomitant economic benefit.

The solution is that, if the LCGE is to be tightened as proposed, the lifetime limit should be increased to at least $3 million.

Conclusion

Taxpayers and their advisors have in some cases taken sufficiently full advantage of the small business tax rules that unfair tax outcomes have occurred.  It is legitimate for the government to seek to limit that.

However, the current proposals from the government should, in my view, be re-thought so that they are more carefully targeted, and they don’t stifle entrepreneurship in the pursuit of tax fairness.

   –  Jay Shepherd, September 21, 2017

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Parenting

WARNING:  This article may contain twists and turns that you were not expecting.

I was in a very nice restaurant with three friends, having dinner.  It was about seven o’clock, maybe a little earlier.  Because the place was full, we were in the bar area, but it was still very nice.

Honestly, I was trying to focus on the conversation amongst my friends.  It was actually quite engrossing; a riff on the convoluted psychological makeup of Trump supporters, and how they were similar to Bernie supporters, or something like that.

I really tried; I’m not exaggerating.  I was interested and, at least for some of the time, fully engaged.

On the other hand, anyone who has spent “quality” social time with me will know that I have a tendency to get distracted if I see something intriguing happening around me.

Just ask my kids.

What was playing out at the next table was a vignette that insisted on getting my attention.  Three adults – two men and a woman – at the table.  No food, just alcoholic beverages (a beer, a glass of red wine, and some mixed drink with a lime in it).   The men were in their mid-thirties or so, one a little older, the other a little younger.  The woman, who had a laptop open in front of her, was probably late twenties.

The dynamic of the three was clear.  The younger of the two men was the boss, and the other two worked for him.  He was a big, confident man.  Fit, strong-looking, with a powerful voice and an imposing visage.  He was giving instructions (at one point dictating invoices, for example, which the woman was producing) and eliciting dialogue from the others on decisions he was planning to make.  It was quite respectful, but there was no doubt the hierarchy of the three.  It was a friendly business meeting, but still a meeting.  The boss was unquestionably the dominant personality in the group.

Periodically the meeting was interrupted by phone calls.  The boss took them, dealt with them quickly, and then came back to the meeting.  Everything was proactive on his part.

Orbiting these three adults like a somewhat erratic comet was a seven-year-old girl, full of energy, hair flying, interacting with the servers, with other customers, and with the three adults.  Particularly, I should add, the boss, who was obviously her father.

The servers, all female, were doting on her.  While her father was trying to run a meeting, they were getting her ice cream, and soft drinks, and just making sure she was happy.  When she was ready to eat the ice cream they helped her commandeer a table next to her dad so she could focus on the treat, and stay close, but not interfere in the meeting.

The father was the best.  Without missing a beat in his meeting, or his phone calls, he kept his daughter in his focus.  He was joking with her, happy to be with her.  Not thirty seconds went by that he wasn’t talking to her, giving her his attention.

It is a difficult thing to do, run a meeting, deal with customers and suppliers on the phone, and interact with a child at the same time, but he did it, and it wasn’t just for show.  When she interrupted to ask for more attention, he gave it freely.  There was little doubt where his priorities were.  More than once he simply stopped what he was doing to play with her for several minutes at a time.

His daughter was not necessarily happy that she only had part of his attention, but she was accepting what she had, and she was enjoying at least that part.

Observing what was happening, you could empathize with the father as well.  On the one hand, clearly he was running a business that was demanding all of his attention.  On the other hand, his seven year old was there, and she was also demanding all of his attention.  He was juggling both, generally successfully, but with the emphasis on his daughter when the choice had to be made.

Life can certainly suck.  Sometimes you have to handle all of your priorities at once.

In the middle of playing with her father, the girl suddenly shouted “Mommy, mommy, mommy,” and ran towards the door.  Then, just as quickly, she ran back to her dad saying “Mommy’s here”.  He got up, took her out of the bar, and when he came back ten minutes later, he was alone.

“Her mom has finally been able to finish work, so she’s taken Diana to Starbucks.”  He was relieved, but not necessarily in a positive way.  He had enjoyed being with his daughter, even while having a meeting.  It was just taxing.

So far, so good.

Then, he had to add: “My wife should be looking after her more, but she wants to work, and I can’t really stop her.  I can look after the money – for her, for the kids.  There’s more than enough.  My business is solid.  My wife is just not willing to be their mother full time.  She feels a need to get back into her profession, be successful.  Sometimes I have to be the parent.”

The other two looked at him – a bit dully, I would say, but remember that he’s their boss.

Their silence prompted him to say more.  “I want my three daughters to have a stimulating home life.  My wife is smart, well educated, a respected professional.  She should be making sure that they are always challenged intellectually.  I don’t want my daughters to be limited in their lives.  They should think:  the sky’s the limit.”

“But,” he says, “my wife is more concerned about her own career than about making sure our daughters are brought up right.”

The woman was looking down at her laptop, but then she looked up. “How are you balancing your business with her career?”  The comment was perhaps gutsy – not consistent with her previous subservient attitude – but he didn’t jump all over her.

“In the end,” he said, “I have a business to run.  That’s what puts food on the table.  My wife has to understand that the kids are her responsibility.  She was OK with my oldest daughter, who’s now in high school.  It wasn’t even too bad with my middle daughter.  But, with Diana she doesn’t seem to have the same focus on her parenting role.  I don’t know what to do sometimes.”

So, stop right there.

This is not time you have heard a father who loves his kids, but is tone-deaf to their real needs, or to the concept of shared parenting.

On the other hand, you were a little shocked that he would have such backward views.  I have described him as a well-off, urban father in his thirties with a spouse who works as a professional.  Yuppies, in other words.  Yuppie fathers are not supposed to say things like that.

You also assumed the ethnicity of the people in the story.  At the very least, you assumed they were white.  That was part of the reason why you were shocked.

But that is not the case, not in this story.  The two employees were white.  The father/boss was black, as was his daughter and his wife.

Aha.

You see, that changes everything for you, doesn’t it?  Now you are no longer shocked.  Now, you “understand” why the father/boss had such gender biased views of the parenting roles he and his wife should play.  Now, the fact that he wants his daughter to be empowered is a credit to him.  Kudos to the black father who wants his daughters to have everything in life.

Racism is about expectations.

This article is not actually about parenting;  it’s about racism.

I lied.

Just as disclosing that the father and daughter were black affects your view of the situation, so would saying that the mother was wearing a hijab.  The same would be true if the family were described as Filipinos, or as Hispanic.

I didn’t give them an ethnic label in this story, and as a result almost every reader of this article assumed they were white.  The effect was to engender feelings of surprise that the father would be as sexist as he was.

Expectation:  white people are not as sexist as non-whites.

So now, once you have your implicit assumption put to you, will you embrace it?  Will you agree that white people are not as sexist as non-whites?

The answer, for most of you, is that you will resist with all your might.  That sort of statement is racist.  Canadians don’t believe things like that.

A few of you might fight back, saying that yes, statistically people in some ethnic groups are more consumed by outmoded gender rules.  Yes, men in the black community are more likely to be sexist.  Or Muslim men.  Or Filipino men.  Or Hispanic men.  (I could go on.  Not white men, of course.  No, no, non.)

But let’s assume for the moment that those “statistics” are true.  (Just assume it.  Humour me.)  Does that mean that it is appropriate to expect a black man to be sexist, but not a white man?

Eight nanoseconds of reflection will show that is not true.  Everyone reading this knows at least one black man who is a fully engaged and interactive father, an equal parent to his kids.  Everyone reading this knows at least one white man who takes the more traditional (British, French, German, Hungarian, Polish…you name it) parenting role, i.e. being a parent is something that women do.

Biases come in all shapes and sizes.  In all cases, they are expectations that, because of some attribute or another (skin colour, ethnicity, religion, etc.), a person will have some other attribute or predilection.  We know intellectually that the connection between the stereotype and the assumption is generally not true (except sometimes in a probabilistic sense, and often not even then).

We still have the biases, though.  We still expect people to be a certain way because of the colour of their skin, or the language they speak, or the ethnic background they possess.

We assume because we are lazy.  We don’t want to be.  When it is pointed out, we recoil, and try to avoid the truth.

The fact is, though, that in this story your perceptions almost certainly changed as soon as race, or religion, or national origin, was added to the story.  It doesn’t even matter your own ethnicity, or religion, or background.  Adding a descriptor like race changed things.  (Yes, there are exceptions.  Are you really one of them?)

But here’s the worst part.  I saw this story unfold in real time, so the race of the father and daughter were not a surprise.  Did I already have the racial bias embedded in my expectations as I was watching?  The answer is:  How would I ever know?  To me, it seemed to be just people acting in the sorts of ways that people do.  A father enjoying time with his daughter, while juggling his business responsibilities.

In Canada, a black boss or a black father, or both, is nothing unusual.  We see it all the time (in contrast, perhaps, to some other parts of the world).  When the situation unfolded, those things appeared to be irrelevant.

Then, when the father revealed his true views of the situation, was it surprising?  Certainly it was.  He seemed like he was so in tune with his kid.

But, was it less surprising because he was black?  Did I subconsciously see his words later as “expected”, because of his skin colour?  The answer is, I don’t think so, but how on earth would I know?

Racism is not just refusing to rent your apartment to someone because of their race or religion or ethnicity.  It is not just choosing the white person for the promotion over the non-white.  It is not just streaming the white or Asian kid into the academic courses and the black or Hispanic kid into the trade-oriented courses.

Racism is about expectations.  If we want to challenge racism, whether in ourselves or others, we must first challenge those underlying expectations in ourselves, whenever we encounter them.

Of course, those expectations don’t always wear name tags.  We sometimes have to look hard to find them.

  –  Jay Shepherd, September 4, 2017

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Lives #12: A Star

[This is the twelfth in a series of stories about interesting people I’ve known, called “Lives”.  I don’t know whether you would call it non-fiction, or fiction.  I’ve changed the names, and some of the details, so that the individuals are not identifiable.  However, I think I’ve stayed true to the essence of what really happened.  The point is what can be drawn from the story, and at least that part is 100% true.]

Dao is a Thai nickname that means “star”.  Not star like a celebrity, but star like a light twinkling in the sky.  Dao does my laundry while I’m in Bangkok, but that’s only a tiny part of her story, as I’ve recently found out.   In her case, maybe both meanings of “star” should apply.

Star Laundry – a completely suitable name – is actually a hole in the wall shop on the ground floor of a ten story apartment building near Lumpini Park (in central Bangkok).  There is no sign.  There is a price list out front, in English, but then you have to go down a dark hallway, much like in a tenement, to get to her back room business.

Once you get there, you enter a room about eight feet by twelve, in which the back wall is all washers and dryers.  The ceiling is no more than six and a half feet high.  There is no counter.  You enter her work area, and she is there working.  She counts your laundry on her folding table, fills out a form with a carbon insert, and lets you know when it will be ready.  All very business-like.  Usually, there are two or three cats of various hues lounging about, supervising the transaction.

The first time you go into this shop, you don’t notice any of that.

Dao was, when I first met her, a tall, attractive, dark-skinned Thai woman in her early thirties, dressed for business: elegant skirt, blouse, heels, makeup, jewelry.  Nine years later, she hasn’t really changed.  A new customer will think, as I did, that she’s another customer, or maybe the owner of the business, or maybe the sales person, because clearly this is not the person actually doing your laundry.

Funny how we all have stereotypes.  Dao tells me that one time a new Japanese customer came in, took one look at her, and walked right out.  When he came back an hour later, and saw she was still there, he angrily demanded to know when there would be someone there to clean his clothes, because he wasn’t about to wait forever.

But it is Dao who washes the clothes.  She just doesn’t see any reason why she has to dress “like a poor person” when she goes to her job in Bangkok.  She has always loved fashion, even as a kid, and she tells me that coming to her business every morning looking good makes her feel good about herself.

This makes her already memorable, but there is more to it.  Dao’s story does not include ever working in a bar.  In this way, she might be seen to be atypical, but she’s not.

To understand why this is important, you have to know that Dao is from Isaan, the region to the north east of Bangkok.  Many Bangkok tourists labour under the assumption that all attractive young women from Isaan work in the bars and other establishments where sex is sold.

That stereotype is quite consistent.  Young girl grows up in a poor family in Korat or Khon Kaen.  She starts working on the family farm when she is ten or twelve to help out, and soon drops out of school, never to get to high school.  She learns how to work hard, but doesn’t have much formal education.

By the time she is fifteen or sixteen, she has started to show her good looks.  That creates both a problem and an opportunity.

The problem is that the local boys come calling, and that is likely to lead to more poor kids.

Or, she can go to work in Bangkok, sending money back home every month to look after her family.  That is the opportunity.

The core of this story is an Isaan culture (also common elsewhere in Thailand, and other countries) rooted in duty to family.   A young person growing up in Isaan often sees looking after her family as the most important role in her life, and her parents and siblings (and neighbours and friends) reinforce that point of view.

The foreigner has an issue of “blind man and elephant”, so for him (or her) “working” in Bangkok means working in a bar, selling sex.  That is the “opportunity” that draws young girls from Isaan to Bangkok.  Hundreds, maybe thousands, of books have been written about the Thai bar girl, and she is always the poor girl from Isaan with a duty to provide for her family, and a desire to escape from poverty.  (Do a Google search:  it will blow you away.)

Thais, by the way, don’t make that assumption at all.  They know better, and their paradigm of the young girl from Isaan, trying to make a go of it in Bangkok, is quite different.  It is much more like Dao.

Which brings us back to Dao.  At the age of fourteen, a very pretty young girl, she was the middle child in a family in a small village outside of Nong Bua Lamphu (a small city in Isaan).  Most days they didn’t have enough to eat.  She knew – as did everyone else around her – that someone had to go to Bangkok to work.  Her older brother was needed on the farm, and didn’t really like to work very hard anyway.  Her younger sister was still too young to leave home (and not really very pretty).

All eyes turned to Dao.  And, more than either of her siblings, Dao felt the weight of her duty to her family.

So what about Dao? She had already left school (technically still a student, but not really), and for two years had worked to look after the chickens and cow and fields.  In her spare time, she dreamed of being a model.  She had the fine face for it, and she loved fashion.  In Nong Bua Lamphu, though, she was never going to be a model.  Ridiculous, and she knew it.

On the other hand, she was too young to work in a Bangkok bar, and in any case she was very resistant to the idea.  She was willing to help her family.  But sell sex?  Not what she wanted in her life.

A cousin of Dao’s worked as a maid in Bangkok, and that family – an extended Thai Chinese family with a lot of money – needed another assistant maid to work and live in.   Dao was willing, and twenty-seven years ago she left her home at age fourteen to work and live in Bangkok.

The job as a maid lasted a year and a half.  It had the advantage that she lived in, and worked essentially around the clock.   Because she was always on duty, she couldn’t spend her salary.  She could send money – sometimes 3,000 baht (about $120) – back home every month.  It made a big difference to her family.

The disadvantage was the same as the advantage:  always on duty.  Only a farm girl could work that hard, but it was still very hard.

On her sixteenth birthday, Dao moved out of that live-in placement and found a job working in a men’s store in a suburban mall.  The salary was a little more, and the hours were less, but she had to pay for rent and food, and she still spent twelve hours a day, six days a week, on her feet.  For that, still only 3,000 baht a month went back home.

Once I asked Dao why, at that point, she didn’t consider working in a bar.  She had the looks, and she had the energy.  She could have worked less, and earned more.

She told me she has been asked that question many times (always by foreigners), so she has given it some thought.

“If there was no other choice,” she told me, with a long sigh, “then I guess I would do that.  I’m not comfortable with it, though.  I’m not comfortable with sex with no love.  That was always a problem for me.

“So, I made sure I had other choices.”

Dao was not quite nineteen when she heard about the laundry job.  It was not really a laundry job.  The absentee owner of an apartment building wanted someone there all the time to look after the building – like a superintendent – and when the person was not busy they would work in the laundry that was already renting space on the ground floor.  It was two jobs, so it was a lot of work.  But, also more money.  Dao took it.

It was hard work, but it was made easier a year later when one of the apartments became vacant, and she was allowed to live there as part of her salary.  She was still able to send money back home. But now her older brother was in Bangkok, and he sometimes needed money.  She started looking after him too.

Pause for a second.

Dao was nineteen, alone in Bangkok for five years, and dedicated to looking after her family.  She worked almost all the time.  Once a week, she went out with her friends, and tried to enjoy her life.  It is difficult when you’re tired, and you have no money.

She stuck at it, but when Dao turned thirty, she realized that she was not getting anywhere.  She worked hard every day.  She sent most of her money to her family.  Her dream of being a model was dying.  What was her future?

She went to the owner of the apartment building with a proposition.  She would take over the laundry premises as the new owner, and continue to take care of his building.  He would stop paying her salary, but give her a free apartment and free laundry premises.  She would look after herself.

Otherwise, she would have to leave, because she had no future there.  It was a gutsy ultimatum.  Typical of Dao.

The owner said yes.  The laundry tenants left, and Dao took over.  The name of the laundry was changed to Star Laundry, and Dao was there every day, running it.  Doing everything.

When I first met Dao, she had owned the business for a little less than two years, and she was already making good money.  Today, nine years later, she is a successful businesswoman, with loyal customers and a healthy income.

But what is her life?

Dao is an intelligent and attractive woman with a successful business where she is meeting people every day.  She even speaks excellent English.  The first question for a Thai woman in this situation is where is the man in her life? She is a heterosexual with normal desires, and she has tried to find the right man.  When I asked her what is the biggest change she would like to see in her life, she told me she wanted a man she could grow old with.

Even working as hard as she does, she should have been much in demand.

As she describes it, she has been “unlucky” with men.  Many of her customers are foreigners, either ones who live in Bangkok full time or ones who travel there regularly.  She says that they don’t understand her responsibility to her business.  Also, she says, by now she is too old for many of them.  (Sad.)

If you drop into her shop, and you take one look at her, you can only conclude that she gets approached by men once a week, maybe more.  Not all of them can be pigs.  (No, really.)  She has just never found the right one.

Despite not having a partner in her life (she hasn’t given up), and now being at the point where she probably will not have children, Dao has fashioned a pretty happy life.   But it’s not what you expect.

She wakes up at 5 AM, kisses her two cats, washes her face, and goes for a 5K run in Lumpini Park.  By 6:30, she is in the gym, weight training.  She has done both the running and the weight training every morning, seven days a week, for the last ten years.  By the time she is finished, and has dressed (well) for work, she is able to arrive (with the cats) about 8 AM to open the shop.

Dao tells me that when she first started the morning routine, she often didn’t want to do it.  Now, she says, she can’t stop herself.  When she gets to work, she is smiling and happy and ready to face the day.  Her morning routine does something to her, something good.

Star Laundry is open twelve hours a day, seven days a week.  Dao is always there, except when she has to be elsewhere in the building, dealing with tradesmen, tenant issues (the tenants are mostly workers from Myanmar and Cambodia), etc.  When there is nothing to do, she reads fashion magazines and tries to keep the cats from sleeping in the dryers.

Every day, she calls her mom in Nong Bua Lamphu and talks with her for twenty minutes.  She has done this for twenty-five years, and she expects to do it for the rest of her life.  For her mother, who went blind from glaucoma ten years ago, it is the highlight of her day.  For Dao, her day would not be complete without talking to her mom.  It makes her feel good.

If you ask her whether she is happy, she will say yes.  Not every day.  Not all of the time.  But most days, and most of the time, she is happy.

If you step back and think about her life, it might not seem that great.  She works constantly.   She has never had the opportunity to have her own family.  She closes her store for two weeks a year, one week to go home to see her parents, and the second week to lie on a beach in Koh Samet.  Even when she goes out with her friends, she is tired, and she has to be home by 10 to get up the next morning.

But life is all about perspective.  Dao, and many others in a similar situation, would have no hesitation in saying that she has a good life.

Dao has internalized her duty to her family, and she delivers on that duty.  Her parents (and her brother, her sister, and their kids) all depend on her successful business.  Her hard work is the embodiment of her purpose in life – looking after her family.

In an unguarded moment, she tells me:  “Some people don’t know why they are alive.  I see them every day… sad, sad, sad.  I know why I’m here.  Maybe that’s why I’m happy.”

Dao could have been a bar girl, for all the same reasons.  She made a smart choice, and now in her forties she is still able to look after her family.  And still happy.

What Dao is doing is not really different from what many Isaan natives are doing in Bangkok (or many rural natives are doing in cities all over the world).  They are working hard to look after their families back home.  It is their duty: the central reason that they are on this earth at all.  Sure, a few of them are bar girls.  Most of them, though, are housekeepers, and office workers, and retail salespeople, and factory employees, and other things, including business owners.

All of them are people who work hard and, like Dao, meet their family duty.

  –  Jay Shepherd, August 22, 2017

 

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Who Knew Freedom of Speech Would be So Complicated?

This article originally started with the sentence “I can’t remember the last time I agreed with Jeffrey Lord.”  That may no longer be true.

It’s true that his conservative views are about as far away from my more liberal approach to public policy, and current events, as one could imagine.  While his arguments sometimes make me think (more so, for example, than other conservative spokespeople like Kellyanne Conway and Sean Hannity), in the end I generally see the flaws in those arguments, and I reject them.  Our disagreements reach the greatest heights when it comes to Lord’s good buddy, Donald Trump, about whom I have been known to provide the odd jab (here and here).

But if Jeffrey Lord was indeed fired by CNN simply for tweeting “Seig Heil”, that was wrong.  People on both the left and the right should be outraged.

Free speech only exists if we defend the freedom to express themselves of those with whom we disagree just as strongly as we defend the speech of our allies.

Here’s what happened.

A liberal group, Media Matters, was organizing a campaign targeting the advertisers on conservative commentator Sean Hannity’s show.  Their express goal was to silence Hannity, whom they characterized as a “propagandist” for the Trump administration.

Just as conservatives attack liberal commentators and media personalities, so too some liberal groups attack the conservative voices.  This Media Matters campaign was going a step further, trying to get Hannity off the air because, in their view, he doesn’t tell the truth.

Lord, who has been writing articles (polemics, really) defending free speech for years, came to Hannity’s defence in a series of articles attacking the Media Matters campaign.  One of the most recent, on August 9th, characterizes the Media Matters campaign as a fascist attack on the first amendment of the US Constitution.

Other commentators have correctly pointed out – disagreeing with Lord – that fascism is about government limiting freedoms, and the first amendment is also about what governments can and cannot do.   Lord’s thesis appears to be that, in this day of a broader and more divergent flow of information, it is possible for groups within society to limit free speech without the intervention of government.  That, in his view, is also wrong, and is in any case a step down the slippery slope towards government censorship.

Whether you call it political correctness, or you call it an attack on freedom of speech, (or you call it some people being right, and others being idiots) this is obviously a live subject for debate in today’s society.

I don’t entirely agree with Lord’s attempt to equate private campaigns with government censorship and fascism.  Private campaigns are also a type of free speech, so you have to be careful in making this connection.  I do agree, however, that stating your views is something different from trying to prevent others from stating their views.

Lord comes down firmly on the “attack on free speech” side of this issue.  His conclusion in this article elicits the perils of fascism, by saying:

“Make no mistake. Hannity today, someone else tomorrow. The time to fight back against the Media Matters Fascists is now.  But let them speak for themselves — always. Whether the Media Matters Fascists like it or not, this is still America. And there must be no intention of silencing them either.”

During the course of his analysis in the article, Lord presents (for effect) his version of how Media Matters would revise the first amendment to the US Constitution.  He characterizes what they want, ultimately, as a first amendment in which the government decides what anyone can say.  Tying this to Mussolini and other fascist regimes, he quips:

“The American Spectator [where Lord’s article was published] has been unable to confirm reports that the original draft of this Media Matters revision ended with the words: “Seig Heil!””

In short, Lord’s point was that Media Matters was promoting fascist positions.  The “Seig Heil” was a tongue in cheek way of emphasizing that.

Later on the 9th, Lord and Angelo Carusone, the head of Media Matters, engaged in a Twitter battle, with no clear winner emerging.  (I found it petty, more than anything else. Twitter can be like that.)

Lord then did a followup column on the 10th, reiterating his view that the campaign against Hannity (and previous Media Matters campaigns against other conservative commentators) was at its root fascist.  He stated his central point thus:  “This is America, Angelo. Not Fascist Italy, Nazi Germany or Communist Russia.”  By implication, America is one place in which the right to free speech is sacrosanct.

Carusone responded angrily on Twitter, and Lord responded with the tweet “Seig Heil”, an obvious reference to the prior story.

Within hours, Lord was fired by CNN.  In their statement, CNN said:  “Nazi salutes are indefensible …Jeffrey Lord is no longer with the network.”

Lord was no more doing a Nazi salute than dancing a jig.  He was calling a liberal organization fascist.

Was he wrong in his conclusion?  Well, that is open for debate – legitimate debate, in which there are two sides to the story.

Was he wrong to use the Nazi term, even as a way of emphasizing his point?  That again is open for debate.  For some people, Seig Heil is a highly charged, even painful, phrase.  For others, it is old news, no longer the lightning rod it once was.

In either case, if he was wrong was it enough to be fired?  The answer is:  clearly not.  The worst he could be accused of is seeking an interesting (but perhaps in poor taste) way of making a point that others don’t agree with.

Sounds like why he was on CNN in the first place.

Lord’s response after being fired could be fairly characterized as “bemused”.  Or, if I can paraphrase his subsequent comments:  “You fired me for this?!”  Lord did note that his contract is up at the end of the year, implying that it was not certain he would be back anyway.  Thus, I conclude that it is at least possible that CNN simply seized on this errant tweet as an excuse to end a relationship that they no longer found useful.

On the other hand, if we take CNN at their word that it was the tweet that engaged their wrath, they would seem to be in the wrong here.  They shut down Lord for no other reason than he was exercising his right of free speech.  How is that morally acceptable, or consistent with their own values?

In my view, both liberals and conservatives should stand up and object to Lord’s firing, and both for the same reason:  free speech must be be defended.

Ironically, what Jeffrey Lord is entitled to (from liberals) is the same defence that he himself gave, freely, to liberal TV host Bill Maher just a few weeks ago.  In a June 14th article entitled “In Defense of Bill Maher’s Free Speech”, Lord (who probably agrees with Maher about as often as I agree with Lord) weighed in on the controversy surrounding Maher’s use of the term “house nigger” to describe himself.

Lord’s interesting take on the Maher firestorm was that a mistake – crossing a line – should not be enough to undermine Maher’s right to freedom of speech.  The term “nigger”, said Lord, is a word that causes pain, and Maher should not have said it.  On the other hand, Maher immediately admitted his mistake, and immediately had a show where his critics were given the opportunity to punish him for that mistake.

Should there be further consequences?

Many said that Maher should be fired by NBC for his use of the verboten word.  Lord’s conclusion was the opposite:

“Is it a good thing Bill Maher apologized? Yes. He made a mistake. And as his guests on his follow-up show made clear, it was a serious mistake. But not for a minute should he have lost his job. Free speech, among other things, implies the freedom to make mistakes. And move on.”

Lord has also been vocal in defence of Anderson Cooper, when the latter used a crude phrase to challenge Lord on air.  Lord’s message:  “Lighten up”.

I agree.

So, it turns out that I do in fact agree with Jeffrey Lord.  Free speech has value, and we have to fight for everyone’s right to free speech – not just those who agree with us.  I thus agree with his overall (and forceful) support of free speech, and I agree with his take on the Maher controversy, and his somewhat different defence of Anderson Cooper.

And, while I don’t agree with Lord that the Media Matters campaign against Hannity is fundamentally fascist, I do agree – and this is the central point – with Lord’s absolute right to his opinion on that, and with his right to express it, even using emotionally charged language.

The necessary result is that his firing by CNN, if indeed driven by the Seig Heil tweet, is just as wrong as Maher’s proposed firing by NBC would have been.  At worst, Lord should have been asked to explain himself publicly, and apologize for using “colourful” language that caused pain.

But firing?  That appears to be just political correctness.  Or worse.  It could be people just not wanting to listen to points of view divergent from their own.

Of course, that’s exactly why we have free speech:  so that all points of view can be expressed, not just the ones we support.  As Evelyn Beatrice Hall famously said (describing the views of Voltaire and in the process defining the essence of free speech):

“I disapprove of what you say, but I will defend to the death your right to say it.

          –  Jay Shepherd, August 11, 2017

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Energy #18 – How Bad is the OEB, Anyway?

The other day I was having a discussion with someone about a possible speaking engagement, and he said “You can always be relied on to give the OEB a few well-aimed kicks.”

That gave me a little pause.

There was, of course, a “regime change” at the Ontario Energy Board in 2011 with the ascension to the OEB throne of Rosemarie Leclair as Chair.  Regime change is, at its heart, about change, and there’s little doubt that many people in the industry – myself included – have had some resistance to that change.

Human nature.  Not always good, but quite normal.

So yes, I have been known to be a tad critical of some of the actions of the OEB in recent years.  Sometimes I’ve even been right.  Not always, but sometimes.  (Resistance to some change is justified, when the change is unwise.)

In September Chair Leclair is scheduled to speak to the Ontario Energy Association, and deliver what you might call a mid-term review just over six years through her ten year appointment as head of the OEB.  Now may therefore be an appropriate time to talk about some of the things the OEB is getting right.

Oh, never fear.  This writer has not given up on whacking the OEB.  Wait until you read about the relationship between the Fair Hydro Plan and OEB regulatory performance.

But I digress.

Since 2011 there are a number of things at the OEB that are more worthy of applause than approbation.

Staff Renewal

The last six years have a seen a steady stream of retirements from the OEB, as older more experienced hands are being replaced with younger, fresher professional staff.

The strategy is referred to internally by OEB management as “clearing out the deadwood”, and in fairness some of the staff who have now retired were in fact past their “best before” date.  Many of these were people who had made valuable contributions over the years, but were bringing less energy and originality and creative drive to their jobs in recent days than perhaps was optimal.

So the Board lost some institutional memory.  And, some of the people who felt the pressure to retire were in fact not the ones you want to lose, whatever their age.

Not only that, but the same management techniques that put pressure on some employees to retire also created a situation in which many valuable employees had their resumes on the street.  That has declined somewhat over the last few months.  (I don’t know why.)  However, there remains a surprising number of OEB staff who are quietly but actively looking for somewhere else to work.

Still, every organization needs new blood.  The OEB is no different, and as a result of the renewal that has been going on, with older employees retiring and newer people coming on, there is a new energy (no pun intended) at the OEB that should be welcomed.

Now, some will argue that the newer staff are, just naturally, less feisty and more “party line” than their predecessors.  In fairness, that is probably a little bit true, given the more top-down corporate culture at the OEB today.  On the other hand, it is fair to say that people usually take some time to find their voice in an organization.  Many of the recent hires at the OEB are smart, capable professionals.  After a period of feeling their way, they are likely to have an increasingly important influence over the policies and actions of the OEB.  Patience.  Just give it some time.

Overall, though, it is clear that the strategy of renewing and upgrading the OEB’s staffing resources has been a success, and will form a foundation for a stronger OEB in the future.

Board Members

The Board went aggressively in the direction of more part-time members and less full-time members, a move that was widely criticized (including by this writer).

Shifting to part-time members was not completely stupid.  It is, for example, the method used by 90% of tribunals federally and provincially to staff their adjudicative teams.  It delivers maximum flexibility and diversity, and provides a productive role for experienced people who no longer want to work full-time, but still are willing and able to make a meaningful contribution.

It didn’t work at the OEB, largely because the role of Board members is more than just as adjudicators of cases.  They provided, and continue to provide, a worthwhile function in policy development, management, and staff guidance.  That’s pretty difficult to do if you’re only at the OEB offices on a sporadic basis.

Happily, the OEB has decided to move back to reliance on more full-time Board members.  A couple of new appointments have indirectly announced this change.  Behind the scenes, it is more extensive.  The existing part-time members will likely not be renewed, and  there are probably one or two more full-time additions to come.

What’s the phrase?  “Something’s lost, and something’s gained…”

Pivoting back to full-time members means there is probably no room at the OEB for even the best of the part-timers, people like Emad Elsayed and Peter Thompson.   In choosing part-time members, the OEB and its Chair have in a number of cases made inspired choices.  That success may be lost.

On the other hand, the addition of new full-time members like Mike Janigan and Lynne Anderson can be expected to add strength to the regulatory roster.

The most interesting point here, though, is that the OEB listened, and shifted its approach in response to what it heard.  Largely as a result of input from its own staff (and not primarily because of external commentators, I might add), the OEB is solidifying and stabilizing its Board members in a sensible and thoughtful manner.

Gas Demand Side Management

For a decade stakeholder involvement in the evaluation and supervision of conservation plans delivered by the gas distributors was the driving force behind changes and improvements in those programs.  Then, in 2015, the OEB announced that, in conjunction with a substantial increase in gas conservation funding, it would take on a central role in evaluating and monitoring gas DSM.

This move was widely criticized, and I will admit I was one of the most vocal critics.  The OEB will not be able, we said, to hold the utilities’ feet to the fire, as customer groups can.  It is simply not in their DNA.

Well, it is still early days, but the initial returns are in.

They were right.  We were wrong.

Supervision of gas conservation programs by the OEB is still new, and some of the criticisms were well-founded.  It is costing a lot more money, and in some respects (although not all) it is taking considerably longer.

On the other hand, the early results show that the new evaluation and monitoring appears to be more thorough, and more independent.  A good evaluation contractor was selected by OEB staff.  The approach has been more hard-nosed and empirical than anyone could have expected.  While there is still probably more secret, behind the scenes guidance of their evaluation work than is appropriate, the guidance is now from OEB staff, not the utilities.  That is likely to get better over time.  The Evaluation Advisory Committee is providing solid input to the process.  Key concerns are being identified and addressed.  OEB staff have demonstrated they are willing to listen.

As well, the incessant yapping about arcane issues has been brought under control.  There is still lots of talk, but with OEB staff pushing for debates to be constructive, and constantly demanding resolution of discussions, the kind of open-ended babbling that had been characteristic of some aspects of the process in the past has largely dissipated.

When things work well, it is often mostly because of the people involved, and this is no exception.  That having been said, the OEB had confidence in its people, and set up a structure that appears to be working.  Even if it is still early, kudos are in order for making this work well so far.

Renewed Regulatory Framework

OK, OK.

Before you get your knickers in a knot, yes I am very, very aware that not everything in the RRFE is working well.  Yes, I have not forgotten that the RRFE is indirectly promoting the “big build”.   Yes, I can see how rates are rising much too quickly for many regulated entities.  Yes, a lot of money is being wasted on additional paperwork.  Yes, there is some potential that the RRFE will continue to be biased in favour of the larger, wealthier utilities.

But step back and look at the RRFE as an evolution of regulatory philosophy.   Two things should stand out.   First, there is an emphasis on outcomes.  Second, expectations on utilities have been ramped up.

When the RRFE was first introduced, there was much mocking of the term “outcomes”.   Many in the industry thought it was simply a meaningless buzzword, promoted by the OEB because it was the latest craze, or maybe simply to mollify the OEB’s political masters.  It was like a running gag, in which over a few beers between energy sector people you could be sure that at least one joke would come up with the punch line “outcomes”.

Was it really just a vapid, meaningless word at the outset?  Or, did the OEB intend it to have real importance, but just fail to communicate it well?  Was it the ultimate statement of the “market proxy” concept from the get-go, or was it a nothing that became something through use?

We’ll probably never know the answer to that, but we can see how the meaning and importance of outcomes has solidified in the last few years.   After a series of decisions on individual cases,  the meaning of “outcomes” is starting to become clear.   In competitive markets, customers will pay for something they value.  If a company wants a higher price, it has to deliver higher value.  Results (outcomes) matter.  All the other BS, not so much.

A regulated monopoly is no different.  Customers are willing to pay more to get more.  The OEB’s role – wearing its market proxy hat – is to set rates that reflect the additional value or positive outcomes utilities are delivering to their customers.

That leads to the second philosophical driver of the RRFE:  expectations.  This is inexorably linked to that much-disparaged term, customer engagement.

When customer engagement was first promoted, virtually everyone in the industry thought it meant “selling” the customers on the merits of the utility’s cost and rate increases.  Millions of dollars were spent on focus groups, and phony surveys, all designed to ensure that utilities could prove to the OEB that customers “approved” of their proposed rate increases.

Hence the criticism.

Turns out, the point of customer engagement was not a sales job.  We all got it wrong.  As has become increasingly clear in decisions, and in (sometimes quite blunt) presentations by the Chair and others, customer engagement is about listening to the customers.  It is part of a broader paradigm, i.e. increasing expectations on the utility to take responsibility for their own business.

The intended message appears to be:  Utilities, you are not municipal departments any more.  You have obligations to your customers, like any other business selling a product or service.  We expect you to understand your customers – just as a competitive company must if they want to survive – and provide your customers with the service they want at a price they accept.

As one OEB insider said to me recently,  “Regulation reaches its pinnacle of success when we can say ‘You’re doing exactly what your customers want and need’.  Whenever we as regulators have to tell a utility to do things differently, that is a failure on both their part, and ours.”

We’re not there yet, of course.  But, sending a forceful message to utilities reminding them that they have the primary responsibility for their business, and for serving their customers, is undoubtedly a positive and constructive step.

There are lots of things wrong with the RRFE in terms of its real world implementation.  The underlying regulatory philosophy – a reinvigorated market proxy approach – is the right direction.

The Future of Gas Regulation

Without much fanfare, the OEB appears to be ushering in a new era of gas distribution in Ontario.  The most obvious example of that is the Community Expansion generic decision, but that is not the only example.

Gas distribution has been regulated by the OEB for so long now that it has become stylized, like a Japanese Noh play, with its own set of rules and procedures just as tightly codified as the iemoto system in Noh.  And, just like that art form, it has become largely incomprehensible to everyone but the cognoscenti.

Now, pretty much at the limit of their cost-effective service territories,  there is little left to change for the gas utilities, at least from a regulatory point of view.  Same old, same old, as they say.

The world, however, is changing.  There are new entrants that want to serve Ontario customers, and those customers want to be connected.  Carbon pricing will change the economics of natural gas and energy generally, probably permanently.  Changes in the sources of natural gas are fundamentally altering how natural gas gets to market.  The gas utilities, and others, are going to respond to those changes.  The regulator will be faced with new issues, some of them biggies.

The OEB is not totally on top of all this stuff, by any means.  However, what they have done is take a proactive approach, seeking to learn more about the changes as they occur, and showing a willingness to think outside of the box when needed.

If you had asked me two years ago whether I worried about the long term impacts of these changes on Ontario’s gas infrastructure, I would have said yes.  I’m still worried, because there is still lots to worry about.  However, everyone in the industry can have just a little more confidence, because it is clear that the regulator has these important issues on its radar, and is apparently not going to wait until it’s too late to do something about it.

Conclusion

There’s lots more to like about what the OEB has done over the last few years.  These are only some highlights.

Now, before you sigh with disappointment, there is also lots to criticize.  If my readers remain interested, I may from time to time have something to say.  It will, I suspect, sometimes continue to include the pointy end of the stick.

But with that caveat, it is useful to remember that the OEB is not the evil empire. Good things are happening.  Just as we jump all over the bad, it is appropriate once in a while to celebrate the good.

Not too often, of course….

   –  Jay Shepherd, July 16, 2017

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