Energy #25 – “Innovation”

At the end of November the Ontario Energy Board released the report of the Advisory Committee on Innovation.  This committee has apparently been working feverishly (and in secret) to develop proposals to assist the OEB in making innovation by utilities a real “thing”.

Where should we begin?  Oh, my goodness, this is truly a bad one.

Let’s start with the composition of this committee.

As is so often the case, the OEB decided that the best way to get input on policy is to start with what the utilities want, so they set up a committee that is mainly utility executives and their consultants.  No customers at all.  The OEB doesn’t seem to get it that the customers – who pay for everything (including the OEB) – should always be at the table.

But that’s old news, and clearly not the worst problem here.  No, the worst problem is that the advisory committee on innovation is sorely lacking in people who know anything about…(wait for it)…innovation.  Two have some innovation experience – from MarS and from Spark Power – but in both cases their near term goals are presumably to build partnerships with utilities.  Neither could be expected to leap wholeheartedly into advising the utilities how to become more innovative themselves.  (No criticism of them.  They have jobs to do too.)

Of course, if you want to talk about utilities and innovation, you have to have some people in the room who know about utilities.  If you have too many, though, then the logical thing to do is get some experts on innovation and bring them into the room as well.  Have them engage the utility people, so that some interplay of ideas can arise.

I’ve written about innovation by utilities before.  It’s a difficult concept for them, because frankly it’s just not in their DNA.  Running a utility is about operational excellence and avoidance of risk.  Many in utility management are very good at that.  Taking chances is not a personality trait routinely sought in utility executives, and for good reason.

On the other hand, utilities – despite their monopoly status and therefore protection from most market forces – still face challenges.  Some of those are external, like continuing expansion of distributed energy resources (aka DER), and some are internal, like finding new ways to keep costs down.  Utility innovation to tackle those and other such issues could help them, and help their customers.

Happily, utilities aren’t the only “old economy” businesses that need to find ways to be innovative.  Many more traditional companies have been faced with pressures to adapt to changing competition, changing markets, and changing customer expectations.  Some have even been successful.

This is not a wheel that needs to be reinvented.

So, did the Advisory Committee on Innovation seek help from people who have been through that process?  There are experts in change management whose whole careers have been spent helping traditional companies adapt and become more innovative.  Many of those experts specialize in exactly the types of problems being faced by Ontario utilities: how to help a “stick to your knitting” company respond to change.

The meeting materials for the eight meetings of this committee are posted online.  They tell who was there, what was discussed, and similar things.  Unless there were other things discussed which have not been made public (perish the thought), they tell a pretty clear story.  There were no external experts in innovation brought in to assist.  Even the experts chosen to assist the committee are utility regulation experts, not innovation experts.  As if they needed more utility regulation knowledge in the room.

So, if you didn’t want to go to the international experts, how about tapping some of your own customers?  (Remember the customers?)  Do you think that between the members of the Association of Major Power Consumers of Ontario (AMPCO, the big electricity users), or the Industrial Gas Users Association (IGUA, the big gas users), or Canadian Manufacturers and Exporters (CME, the manufacturing companies), they couldn’t have offered some of their own senior executives who have led change management, new product development, and innovation strategies within traditional companies?  People with real experience?

Did anyone even ask?

The fact is that the committee selected by the OEB to advise on innovation was replete with risk-averse utility executives and consultants with no experience leading innovation initiatives in old economy companies.  None.  Zero.  (You can’t make this stuff up.)

Of course, NONE OF THAT REALLY MATTERS, because it turns out the committee didn’t talk about innovation anyway, and they certainly made no recommendations about how to actually make utilities more innovative.

What the committee talked about is updating the basic regulatory structure for Ontario utilities – called the Renewed Regulatory Framework – which has been in use now for about five years.

It is hard to know whether the focus on the RRF, rather than on innovation, was because the committee members hijacked the agenda, or because that was intended by the OEB all along.   If you look at the slides for the very first meeting, much of the focus is on the RRF, and on alternatives to the RRF (e.g. in California, Great Britain, New York).  The slides were prepared by the OEB for presentation to the committee, so there is at least some sense that the RRF emphasis was driven by the OEB.  On the other hand, the OEB might have intended those slides to be context only, not realizing that the committee members would talk about virtually nothing else.

The RRF discussion was in fact nominally couched in the innovation context.  The main question asked at the first meeting – and the motif throughout all of the rest of the meetings – was “Are we compensating the utilities the right way?”  That is, does the regulatory construct that forces utilities to spend on capital in order to get profits the right approach in today’s environment?  How can utilities be innovative if they can only make money by capital investments?  Many of the most innovative approaches to the future and to changing markets will not be capital intensive, and, if successful, will not even be high spending activities.

Thus, the committee engaged in lots of blather about alternative approaches to compensating utilities: i.e. alternative methods of generating utility profits.

Sadly, almost all of those compensation models were based exclusively on spending.  Whether the spending was capital costs, operating costs, or both (TOTEX – the UK model), the underlying assumption of most was that profits would be some percentage of spending.  “If you want to increase your profits, spend more money”.

Don’t utilities or the regulator realize that incenting companies to spend more money is contrary to the interests of the customers?  In the competitive markets, are profits primarily or exclusively based on spending more money?  No?  Then, why would that be the case for monopoly companies?  Duh.

That’s one of the reasons why it is useful to have customers in the room when you are having these discussions.

Quite predictably, given the constitution of the committee and the initial theme of revising the regulatory model (rather than enabling innovation), the committee came back to three themes that utilities have been harping on for years (in all contexts):

  • Less Regulation. Lighten up on the regulatory process.  Make more things prescriptive, without any public review of what we’re actually doing.  Reduce the time and effort spent proctoscoping our budgets, and forecasts, and profits.  Trust us more, and regulate us less.  
  • Expand the Scope of our Regulated Business. Let us participate in more competitive markets, using customer money, and trading on the utility brand.  Allow us to use our downside risk protection to gain an unfair advantage over truly innovative companies that are offering new solutions for our customers (and risking their own investors’ money to do it).  Further, give us powers to limit the freedom of those competitors, using the pretext of our “responsibility to manage our system”.  Make it easier for us to increase our profits and hobble our competitors, without increasing our risk.
  • Give Us More Customer Money to Spend. Set up an innovation pool of customer money that we can spend on projects that we think will improve our businesses.  Allow us to capitalize certain operating expenses (like conservation spending), so that the immediate impact to customers is lower, and we can leverage that reduction to get more customer money to spend now.  (The customers will simply pay it later.)  Further, allow us to earn profits on that spending today.

It’s funny.  None of that seems to involve benefiting the customers.  All of it seems to involve benefiting the utilities and their shareholders, or reducing their risks from distributed energy resources and other external threats.

So is less regulation good for the customers?  Well, the utilities would call it “more efficient” regulation, but that is really code for “if you tell us the rules, and then look the other way, we can game them”.

Do you really want to make regulation more efficient?  File rate applications that don’t seek rate increases two or three times the rate of inflation.  Stop paying external “hired gun” lawyers and consultants $800-$1500 an hour – out of customer dollars – to support your high rate increases.  Stop lobbying the government and the regulator for changes that benefit your business (also using customer money).

Expanding your regulated scope of business?  How does it benefit customers to allow you to compete against companies that are already subject to competitive pressures?  Do you, utility management, have experience in competitive markets?  No?  Well, then why are you going to be successful at it, using our money?  That can only be if you are allowed to trade on the lower risk, and on the utility brand, i.e. compete unfairly.

The effect on the market is to stifle innovation, not increase it.

You can compete in those markets right now.  You just have to do it through affiliates, using investor dollars rather than customer dollars.  The reason you don’t is because, on a level playing field, for the most part you can’t succeed in the competitive markets.  (Yes, yes, I know there are some exceptions.  Good for them.  Those exceptions are not Toronto Hydro, Alectra, Hydro One, or even Enbridge.  Sorry.)

And then you want the regulator to give you more of our money to spend?  Let’s just unpack that.  You want customers to invest in your adoption of innovation.  But, you don’t have that expertise, and you have taken no steps to develop it.  You don’t have any proposals, and you have done nothing to even generally sketch out where you’re going.

Like any investor funding innovation, the customers will say:  “Show us your business plan, and show us that you have the right people to execute it.”

What?  No plan?  No people?  No problem.  How much do you want?

What is this – the dot-com bubble?

There are legitimate challenges facing the traditional regulated energy companies.  For wires and pipes companies, there is a very real question whether they will still be needed in the future, or if so whether they will have the same role as today.  It is fair for them to ask whether, if they invest in assets now, that money will turn into stranded assets in the not-too-distant future.  For some regulated generators, it is at least doubtful if their generation will be needed for the full thirty or forty year amortization of their investment.

But that money the regulated companies are investing today is customer money, and you can be damned sure that, if assets are stranded, it will be the customers (or the taxpayers, much the same thing) that end up bearing those costs.  Remember Ontario Hydro?  Who’s paying for that mess?

So let’s take the discussion back to innovation.  Just a reminder:  the committee was the Advisory Committee on Innovation.

Here are some of the things we should have seen, and didn’t:

  • Narrower Monopoly Scope. What aspects of the utility business are no longer natural monopolies, or can be altered so that they become truly competitive?  Is customer care really a monopoly function?  Take that a step further.  Maybe the whole last mile can be competitive, with market-driven companies competing for the business of the customers (perhaps packaging connection, customer care, and metering with self-generation, efficiency, and storage), and utilities having a narrower role as common carriers only.  Maybe if we want innovation, we unleash the power of competition to drive it, as so many other sectors have in the past.
  • Learning from Telecom. This is not the first time a utility business has faced fundamental change, and had to adapt.  Telecom, and before that railroads, were regulated monopolies.  Why has the OEB not commissioned studies of how those changes happened, and what we can learn (good and bad) that could be applicable to regulated energy companies?  You know that there are people who have studied those historical evolutions ad nauseam, right?  It seems like energy regulation is starting from scratch.  Why is that even necessary?
  • Competition for Service Territories. Is there some reason that the LDC in, say, Burlington has the absolute right to serve new customers within its current geographic area?  Why can’t new entrants compete to provide service to those customers?  Indeed, why can’t existing LDCs bid to take over part of an existing service territory of another LDC if they can serve it at a lower cost?  Why do customers have to continue to suffer with Hydro One, when another LDC can do a better job, for less?  It is at least conceivable that allowing some healthy competition for service territories would encourage companies to be more innovative, whether by improving their service offerings, or reducing their costs, or responding in other ways more directly to customer preferences.
  • Utility Innovation Plan. Generally, in the business world, before you go asking for something, you have to have a plan.  It is shocking that not one of the Ontario utilities has, on their own dime, brought together external experts and their own resources to develop an innovation master plan for their company that can be considered by the regulator.  If they seriously want to become innovative (spoiler alert – they don’t), then shouldn’t they do their homework before asking for money?  Don’t say “change the rules so we can innovate”.  Say: “Here’s a plan that can benefit our customers.  We have recruited the people to deliver it, and we are willing to take some risks.  These are the regulatory actions needed to allow that plan to go ahead.”
  • Customer Consultation. More important than all of those things, though, the OEB should have started the process by convening a group of customers to advise it.  The OEB should have said to that committee:

“You are faced with changing offerings in the market.  You are at risk of being saddled with enormous stranded costs.  The utilities are not always responding in ways that protect you, and innovation is sorely lacking.  How should we change the regulatory system so that you are better protected, and the utilities are incented to act more in line with your interests?”     

This whole exercise is about the customers.  They are the ones really at risk, and the ones who will ultimately pay for any regulatory mistakes.  A regulator that is appropriately focused on the customers – whose interests it is there to protect – would start by looking at how the customers are at risk, and what options are available to protect them.  And, it would do that in partnership with those very same customers.

The Advisory Committee on Innovation appears to have been – at least so far – a failure.  The committee was made up of people with little knowledge of innovation, who didn’t in fact talk about innovation, and didn’t ever focus on the interests of the customers.  The OEB took the wrong approach, and it shows.

Perhaps the subsequent consultation planned by the OEB will rectify those shortcomings.  (We can only dream.)

Sadly, that is not the likely outcome.  The OEB appears to have already telegraphed its agenda:  Modify the regulatory structure to favour the utilities even more, and make the customers pay for it.

Oh, and by the way, that’s not going to involve any innovation, it seems.

   –   Jay Shepherd, December 24, 2018

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Solving the Big Problems

The other day I was part of a fascinating and quite serious discussion about a subject we rarely talk about:  solving the big problems.

The people around the table were smart and engaged individuals, many of them with decades of personal history of fighting to change society for the better.  All of them admitted that they had not even considered – usually since they were in their twenties – whether it was even possible for humans to solve the big problems.

The general tone was …perhaps the best word is “defeatist”.

The International Monetary Fund estimates the size of the global economy in 2018 at $135 trillion (yes, with a “t”) using the purchasing power parity metric, and growing at a rate of 3.5% per year in nominal terms.  One per cent of the world economy is still more than the economy of most countries in the world.  China alone is over $25 trillion, and the U.S. is over $20 trillion.  Just one year’s economic growth is almost $5 trillion, more than twice the GDP of Canada.

There’s lots of money around, if we know how to use it well.

And yet, globally we still have big problems that we seem unable to address in any effective way:  famine, poverty, global warming, gender equality, endemic diseases, child exploitation and abuse, homelessness…I could go on.

Why can’t we, as a global society, pick a problem and deploy sufficient resources to beat it into submission?  It could be one of the bigger “big problems” – global warming, perhaps – or even just one of the smaller ones, like malaria.  Whichever one we choose, get the best minds together and figure out how to do it.  Then, as Nike would say, just do it.  Allocate the money, and implement the solution.  (Then move on to the next one, and so on.)

How hard could it be, if we are all committed to the outcome?

(I heard that snort of laughter.)

Yes, of course these things are big problems because they’re BIG problems.  On the other hand, we can take a computer that fills a room and put one in everyone’s pocket within forty years.  Surely we can generate just as much progress in ensuring everyone has enough food.

It is, from the moralist’s point of view, shocking that our society can put a smart phone in the pocket of a child in Africa that doesn’t have enough to eat.  It makes you ask questions about our priorities.

Asking those questions is not naïve.  It may be optimistic, but it is not naïve.

It turns out that the views of a group of big-brained people on the subject of solving the big problems have more diversity than one might expect.

Cynic.  Some people, perhaps predictably, believe that we are all far too selfish to actually dedicate big-time resources to helping other people.  We will look after ourselves, and dabble a bit in charitable donations in order to assuage our guilt at being better off than others.

For the cynic, that means not only unwillingness to solve the food problem for that starving child in South Sudan.  It also means resistance to ensuring that we don’t saddle our own grandchildren with a world  wracked by environmental catastrophe.  Our selfishness, they say, means that we will use resources for ourselves first, and only make resources (and mindshare) available to others to the extent that we don’t need them ourselves.

We don’t actually share, they say.  We simply give our excess resources – our waste – to others.

Conspiracy Theorist.   A variation on the cynic sees the situation even worse, one could say.  Most of us would be willing to share our resources to make the lives of others better, long term, but our society is controlled by a small number of individuals who are not willing to give up their success and power.  They stand in the way of society doing what needs to be done to solve the big problems.

So, for example, global warming is a problem that could be solved.  There are technological solutions that could be developed and implemented, from known solutions like the shift to solar power, or climate control, to other solutions we haven’t even discovered yet.  Like instantaneous global communications (inconceivable at one time), this is a result we can have if we want it.

However, if we do that there will be winners and losers.  The losers would be those currently in power (the fossil fuel industry, for example), and the winners would be our grandchildren.  To the conspiracy theorist, those who would be the losers are actively preventing the rest of us from solving these big problems.

Fatalist.  The very idea that big problems can be solved at all is simply wrong.  Many of these things are natural to the human condition.  There is no “solving” them.  There is only living with them, and coping as best we can.

Famine, they say, is not caused by lack of food.  It is caused by unequal distribution of food and populations between peoples and countries.  We will always have some people with more, and some with less.  The fact that there are extremes, and therefore some children are starving while others are gluttons, is because human society has never been characterized by equal distribution of resources.  Not even food.

The fatalists also agree with Malthus, who wrote more than two hundred years ago that population growth will always outpace food production, and lack of food for some people is the natural way that population is controlled:

“The power of population is so superior to the power of the earth to produce subsistence for man, that premature death must in some shape or other visit the human race. The vices of mankind are active and able ministers of depopulation. They are the precursors in the great army of destruction, and often finish the dreadful work themselves. But should they fail in this war of extermination, sickly seasons, epidemics, pestilence, and plague advance in terrific array, and sweep off their thousands and tens of thousands. Should success be still incomplete, gigantic inevitable famine stalks in the rear, and with one mighty blow levels the population with the food of the world.”

In essence, the fatalists say that we have these various “big problems” – not just famine, but disease, etc. – because that is nature’s way of controlling human population.  In this respect, we are no different from other animals, whose numbers are similarly controlled by food shortages and other bad things happening to them.   For humans, the literary short form often used is The Four Horsemen of the Apocalypse, an adaptation of the story from the Book of Revelations.

The fatalists therefore say that there is no point in trying to solve the big problems.  They are just part of the natural order.  

Tower of Babel.   Another type of fatalism is those who believe that human society is a kind of Tower of Babel, where we can never communicate with each other well enough to work together.   The Tower of Babel story (and similar ones in other cultures) is particularly a propos, say the adherents of this theory, because it is a mythology of God preventing humans from building a tower to the heavens.  In ancient terms, this is the equivalent of working together to solve big problems.

There is ample evidence that humans would have insurmountable challenges if they tried to select one of the big problems, then concentrate their efforts on solving it.  Just selecting the first priority to work on would be enormously difficult.  Different people – leaders and others – and different religions and different countries would have vastly different views of the top priorities.  Many would want to choose multiple problems to solve, rather than try to agree on one to start with.  Many others would want to choose a small “big problem”, like a kind of pilot project.  “Let’s not bite off more than we can chew.”

Even if you could get agreement that, say, global warming is the big one we should address first, there would be many possible ways of achieving the result.  Aside from each solution having different winners and losers, there would also be disagreement about pace, and mitigation of impacts along the way, just as we have seen today.

In this theory of human society, diversity of views and perspective is indeed a strength, but it is also a barrier to collective effort, one that simply cannot be overcome.

Realist.   During this lively discussion, there was some, although not complete, agreement that more experienced minds will inevitably see the idea of collective action on big problems as being unrealistic.  (“Immature”, one person said.)  This is not about whether people have a hard time agreeing on things, or whether there are winners and losers, or whether nature doesn’t want this.  It is about how individuals actually view the world.

Most people, they say, learn during their lives that being a promoter of change is to put a target on your back.  Change requires leadership, and most kinds of change subject the leader to negativity, resistance, or even ridicule.  As we mature, we realize that if we want to accomplish change, we have to aim for incremental, small-c change.

“Do what is doable”, as they say.

Society evolves, goes this theory.  Just as fish didn’t lose their gills and become land-dwellers in one generation, so too society doesn’t turn on a dime.  For change to happen at all, it has to happen slowly, baby step by baby step.

Interesting, though, that a few people feel strongly that accepting slow, evolutionary change as being inevitable is a sign of individual weakness.  For them, the fact that a problem is a big problem just means that we have to be stronger, and bolder, to tackle it.

“If you don’t try,” said one, “you know for sure that your level of success will be zero.”

Pessimist.  Finally, there were the two pessimists.  Are people selfish, they said?  Sure.  Are they subject to the laws of nature?  Sure.  All of those other theories are true, but they aren’t the real story.

The real story, says the pessimist, is that people are stupid.  To tackle the big problems, humans generally – not just a small elite – would have to get their minds around those problems.  The general population would have to understand and internalize the problems sufficiently well to support diverting resources to the solution.

That will never happen, because most people are either unwilling to think about these problems, or unable to fully grasp their significance.  Faced with trying to pay this month’s electricity bill, the average person in a developed country is not going to give famine in Africa any real attention.  In part, it is “out of sight, out of mind”.  More than that, though, it is too horrible to fathom, and the solutions too complicated to comprehend, so better just not to dwell on it at all.

The pessimists believe that the general public will always support reversion to mediocrity in our leaders, and therefore in our government policies and priorities.  True visionaries will get a brief look, but then they will be replaced by someone who is less risky, and will tack in the other direction.  Anyone who aspires to greater things will be turfed pretty quickly.

Big change will never happen because people are too stupid to want it.

 

Overall, many around the table felt that all of these factors are in play.

All seemed to agree, though, that the end result would be the same.  No matter what your theory, the result is that humans cannot, and will not, solve the big problems.  Humans are simply not capable of doing so.

Depressing, perhaps, or maybe just realistic.  I didn’t have a solution either, or even words of hope.  No-one did.

Still, it’s an interesting if somewhat sad exercise in understanding how society works.

  –  Jay Shepherd, December 9, 2018

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Energy #24 – Hydro One’s Phantom Taxes

Hydro One is planning to collect more than $1.5 billion ($2.0 billion in rates) for taxes it will never pay.   The Ontario Energy Board seems poised to let them do that.

This has created a bit of a controversy.

As a former tax lawyer with knowledge of the case, I have been asked numerous times to explain this issue.

All right, already.  Here is my explanation.

Caveat #1:  I have represented the School Energy Coalition, a major customer group, throughout the process described below, and weighed in on the issues.  In this article, I am trying to keep my views out of it, and just describe the various aspects of the problem without taking a position.

Caveat #2:  The specifics of the issue are in fact quite complicated.  This article simplifies as much of it as possible, without changing the fundamental factors at play.  If you are a tax specialist, this article is not going to help you understand the details.

There are three components to address.  First, there is the interaction of the relevant tax rules, and how that plays out.  Second, there is the application of the fundamental rate-making principle, which controls cost recovery by the utility.  Third, there is the somewhat unusual process that has unfolded so far to deal with this issue.

The Phantom Tax

Companies that are owned at least 90% by a province or a municipality are not subject to normal (i.e. federal) income tax.  They are exempt from that tax.   But, Ontario electric utilities in that situation are subject to an identical amount of tax levied by the Ontario government (called PILs, which stands for “payments in lieu of taxes”).

Hydro One was one of those exempt companies, because it was owned by the Province of Ontario.   It paid the same amount of taxes as other companies, but it paid them all to Ontario.

Then they did an IPO, and more than 40% became owned by others, mostly pension funds and mutual funds.

Once they decided to do that (but before they completed it), two things happened.

First, they became subject to federal income tax (plus the related Ontario income tax), just like any other company.

Second, they ceased to be subject to Ontario PILs, but on the way out the door they had to pay a “departure tax” to the province of $1.5 billion.

The way it works is that when you leave one set of tax rules (the PILs rules) to go to another (the feds), you are treated as having sold all of your assets for fair market value for both purposes.

For PILs, this means you pay an extra tax.  Some depreciation deductions you have taken in the past are reversed and taxed, and any gain over the original cost of assets is a capital gain, also taxed.

Let me give you an example.  Assume Hydro One paid $1 million for a substation in 2006.  It has taken $500,000 in deductions for depreciation (called capital cost allowance) in calculating its Ontario PILs since then.  Now the substation is worth $1.3 million, and is treated as sold at that price.  The $500,000 of depreciation deductions taken to date were obviously not necessary (its value didn’t decline), so are recaptured and taxed fully.  Half of the additional gain of $300,000 is taxed, so $150,000 is added to taxable income.  In total, tax is paid on $650,000.

When you do that with all of Hydro One’s assets, you get a total departure tax bill of about $1.5 billion, payable to the Ontario government.

Hydro One wanted to write a cheque for that tax, of course, but didn’t actually have $1.5 billion lying around.  Its shareholder – that very same Ontario government – stepped in and gave them $1.5 billion for some new shares, which allowed Hydro One to give that $1.5 billion back to the government as a tax.  Before these transactions, Hydro One was 100% owned by the province.  After these transactions, Hydro One was still 100% owned by the province.  Both Hydro One had exactly the same amounts of money before and after these transactions.  Nothing had been changed, but the tax had been “paid”.

In fact, government officials expressly justified those transactions to the Legislature (Standing Committee at pages 419-420) on the basis that the money was just going around in a circle, and there was no net impact to Hydro One or the province.

On the other side, the federal income tax applies only on the increased value of the assets after the pretend sale at fair market value.  This means that Hydro One gets to take much larger depreciation deductions going forward than it would have otherwise had available.

The effect of those higher deductions is that, for about the next twenty years, Hydro One will not actually have to pay federal (or related Ontario) income tax.  The total amount of tax it will be able to avoid is – wait for it – about $1.5 billion.

(The two amounts – the departure tax and the future avoided taxes – are not identical for various technical reasons, but they are close, because they are calculated using mostly the same inputs.)

So, the underlying foundation of this problem is that Hydro One paid a $1.5 billion tax, but got it right back from the province, so it wasn’t out of pocket.  At the same time, Hydro One became subject to future federal taxation, but will avoid the first $1.5 billion of those taxes.

All good, right?

The Ratemaking Paradigm

Rates for electricity transmitters and distributors (Hydro One is both) are set on the basis of recovery of the costs incurred to transmit or distribute electricity.

Most costs are calculated the same way for accounting purposes as for rates purposes.  However, the longstanding rule for tax costs is that the accounting amount is not used.  Instead, the utility forecasts the actual taxes it will pay in the year, and that is the amount that it recovers through rates.

This makes a big difference, since usually the accounting provision for taxes is much higher than the actual taxes payable.  (The reasons for that are not important here.)

On the face of it, this would mean that Hydro One would not include any amount in its costs for taxes until it actually becomes taxable again, i.e. in about twenty years.  Rates would be lower by more than $2 billion over that time frame (since taxes have to be grossed up to be recovered in rates…don’t ask me to explain that math).

There is a second rule, and that is that costs incurred for reasons other than transmission or distribution of electricity are not recoverable in rates.  That, of course, stands to reason:  why would customers pay for costs that are not related to the service they are buying?

For example, it is well accepted that the $1.5 billion departure tax cannot be recovered in rates.  The departure tax happened because the shareholder wanted to do an IPO.  It had nothing to do with the service being provided to customers.

The other side of that argument – as Hydro One argued – is that the federal tax savings are also unrelated to providing the service to customers.  They also arise because of something the shareholder did to benefit the shareholder.

Thus, Hydro One argued that it should be able to calculate the taxes it collects in rates as if nothing had happened, i.e. pretend that it had not gone public, and it did not have the twenty year tax shelter.  It would, on their theory, collect taxes each year as if it were going to pay them as usual, but then just keep the money.

The Four Theories of the Case

Not everyone agreed that Hydro One should be able to recover $1.5 billion in taxes that it would not actually pay.

There were basically four ways of looking at the problem:

  1. Prepayment.  The payment of the $1.5 billion departure tax was a prepayment of federal taxes that would otherwise have been payable over the next twenty years.  Collecting phantom taxes each year in rates effectively collects the departure tax from customers over time.  This approach can be used to argue against collecting the taxes in rates (the departure tax is not normally recoverable from customers) or to argue in favour of collecting phantom taxes (Hydro One is being kept whole, and the customers are losing nothing).
  1. Standalone.  The departure tax was unrelated to the service to customers, but so are the future federal tax deductions.  Neither should impact rates.  This was Hydro One’s basic argument.  It supports ignoring the extra deductions, and thus collecting the phantom taxes in rates.
  1. Windfall.  The departure tax was not actually paid, since it was immediately returned to Hydro One and there was no change in anyone’s economic position.  Therefore, the normal rule should apply, which is that actual tax payable should be collected from customers in rates.  In effect, there is a windfall, and as between the customers and the shareholders it should go to the customers.  The last time there was a similar situation, when the electricity distributors first became subject to Ontario PILs tax in 1999, this is the basic rule that was followed.  Any windfall tax benefit went to the customers.
  1. Split the Benefit. There is a $1.5 billion tax benefit available from this set of transactions.  It should be split in some rational and fair manner between the customers of Hydro One, and its shareholders.

The Process That Has Unfolded to Date

This tax question arose initially in the Hydro One Transmission rate case for 2017, the first after the IPO.  The arguments described above were all made, at considerable length.  The general consensus emerged that no-one understood it completely.

Really?!

In a long and carefully reasoned decision, the OEB took the fourth approach, splitting the tax benefit between customers and shareholders.

That portion of the Hydro One Transmission decision was written by Peter Thompson, a Board member and a former lawyer for customer groups over almost fifty years.   Although all three Board members agreed with his analysis, and the decision is actually rendered on behalf of all three, Mr. Thompson’s writing style is distinctive.  Thus, notwithstanding the protocol that no-one discusses who wrote what part of any decision, Mr. Thompson’s tens of thousands of pages of submissions and arguments over the years make his authorship obvious.

In the Board’s analysis, the $1.5 billion of tax benefits should be divided into two parts.

The part that relates to the depreciation previously deducted, but not ultimately needed, represents deductions that have already been taken by Hydro One to arrive at past rates.  Those deductions are now available again under the federal act, but the customers have already had the benefit of those deductions once before.  To give them the benefit again would be double counting, and unfair, so that part of the tax benefit goes to the shareholders.

The part that relates to assets being more than their original cost – the pure capital gain – is nothing more than a windfall.  That part of the tax benefit goes to the customers, under the normal rules for tax windfalls.

(There was a second and more complicated breakdown, based on ownership of Hydro One shares as between the province and third parties, but in the end only the first breakdown was included in the calculation of the split.)

An apoplectic Hydro One appealed everywhere they could:  both the internal appeal process at the OEB (called a Motion for Review), and the external appeal to Ontario Divisional Court.  For that much money – about $900 million lost in the split of benefits – it stood to reason that they would appeal.  They have no real downside, so why not give it a try.

Under the Motion to Review process, the OEB establishes a new panel of Board members to review the previous decision.  The test is whether there is a material error in the original decision that, if corrected, would result in a different outcome.   For example, did the Board in making the original decision misunderstand the facts, or misapply the law or the OEB’s policies?

The practice has developed that the OEB first determines whether the motion is really serious, called the “threshold test”, and ask parties to make submissions on that question.  In an unusual step, the review panel on the motion determined that it would not ask for input on that issue, and made a preliminary determination that the threshold test had been met.  This appeared to some to be a statement that the review panel thought Hydro One had a good case to succeed on their appeal.

(There are some who allege that “the fix was in” with respect to the review panel, i.e. that somehow the government wanted the original decision to be changed.  I might as well deal with that directly.  The possibility that OEB cases are predetermined based on backroom activities is remote at the best of times.  In this case, it is even more unlikely.  When Hydro One filed its appeal, there was a Liberal government in place.  Between then and the issuance of the review decision, a new PC government was installed.  For the “fix” to “be in”, those two governments would both have had to be influencing the OEB, sequentially, and in the same direction.  This is not credible.)

After seeing extensive written submissions, and then hearing oral argument by the parties, the review panel concluded that the original decision was wrong.  While the analysis in the review decision was not very comprehensive, it appears that the review panel accepted the arguments of Hydro One, i.e. that the departure tax was actually paid, and that the future tax deductions arose out of the same transaction.  As a result, they represented a real transaction (rather than a windfall), not related to the provision of services to customers, and the customers should not get the benefit of the tax savings.

However, instead of simply deciding the issue on that basis, the review panel decided to send the case back to the original panel, to change its decision to be consistent with the findings of the review panel.

That’s where the matter stood this morning, awaiting decision by the original panel.

The Procedural Twist

This turn of events created an interesting procedural anomaly.  Two of the three members of the original panel – the Chair Ken Quesnelle, and the person who wrote the tax section of the decision, Peter Thompson – had come to the end of their terms as Board members.  Under the rules, they could no longer be appointed to new Board panels, but they could continue to deal with matters with which they were already seized at the time their appointments ended.

What this meant is that the full original panel – Quesnelle, Thompson, and continuing Board member Emad Elsayed – could complete the case by rendering a revised decision.

In a surprising move, the Board instead determined that a new panel would be formed, dropping Thompson and adding Cathy Spoel, one of the members of the review panel, but retaining Quesnelle and Elsayed.

This has created two problems.

First, the Chair of the OEB can generally determine who is on any panel for any matter.  However, Mr. Quesnelle cannot be appointed to a new panel, because he is no longer a Board member.  Thus, the new panel appears to be improperly constituted.

Second, the decision of the review panel was to send the matter back to the original panel, which had already heard the evidence, and thus was in the strongest position to render the final decision.  A new panel would not be able to take the original panel’s place, because it would not have heard the evidence.  This would not be implementing the review panel’s decision.

Since the “new” original panel was decided on, no further action appears to have been taken (until today – see below).  It is not known whether this problem will affect the final resolution of this matter, or whether the legal issues with the panel’s composition will give rise to legal challenges from customer groups or others.

Today a Procedural Order was issued by the new original panel telling parties what they wanted.  It did three interesting things.

  • The proceeding has a new “matter” number. This is not consistent with the original panel making the decision, but it is probably not a big deal.
  • The new original panel stated that the threshold question was not answered by the review panel. Only part of it was answered, and the question of whether the errors were enough to change the decision was not yet decided.
  • The new original panel decided that further evidence is not required, but submissions are required on the issues of whether, assuming the review decision is correct, the tax decision should be changed.

Hydro One is expected to make submissions on this issue on November 20th.  Customer groups and other stakeholders will make their submissions on December 4th, and Hydro One will have an opportunity to reply on December 18th.

Conclusion

Whatever happens with the last-minute procedural twist, the likely result is pretty clear, despite the ambiguity suggested by the new original panel.  As it originally requested, Hydro One may well be allowed to collect $1.5 billion in taxes – about $2 billion in additional rates – from customers for taxes it will not actually pay.

Now you know why that is, and how it happened.

Don’t you feel better?

If you want to follow the arguments and the decision on this issue, you can see them when filed here.

  • Jay Shepherd, November 6, 2018
Posted in Energy, Politics, Tax Policy | Tagged , , , | Leave a comment

Hardball

My short story “Hardball” has now been published in Unlikely Stories.  If you’re interested, you can find it at Unlikely Stories.com.  It has also been longlisted for the Aftermath Short Story contest.

Posted in Short Stories | Tagged , , , , | Leave a comment

The China Clause

This article attempts to sort out the increasing amount of misinformation on the “China Clause” in the USMCA.

(Yes, I know.  They couldn’t find a better acronym?)

I haven’t read the whole 1809 pages of the United States-Mexico-Canada Agreement.  I may be crazy, true enough, but I’m not that crazy.  I’ll leave that to the international trade lawyers, who everyone knows are certifiably nuts.

I have, however, read Section 32.10, the China Clause, and a number of related sections.  It may be useful to unpack what the section does.  And, what it doesn’t do (i.e. tie anyone’s hands).

When Does It Apply?

The section applies only if a one of the parties to the agreement wants to negotiate a “free trade agreement” with a country that any of the parties has determined is a “non-market economy”.

“Free trade agreement” is not defined in the USMCA, perhaps surprisingly.  However, that may not matter.  In trade law, any agreement that seeks to reduce tariff barriers to promote the freer flow of goods and/or services between countries is considered a free trade agreement.

So, trade doesn’t have to be free, in the normal use of the word, for the agreement to be a free trade agreement.  The old NAFTA still allowed a lot of tariffs, but it was a free trade agreement.  The same thing is true for TPP (Trans-Pacific Partnership) and CETA (Canada-Europe Trade Agreement).

On the other hand, the Paris Climate Accord is generally accepted as NOT a free trade agreement, even though of course its provisions affect trade, directly and indirectly.  Tax conventions, which control cross-border taxation, are generally not considered to be free trade agreements either.  And so on.

So, if Canada wants to negotiate any agreement with China (just to pick a random example) that reduces tariffs, that would be a free trade agreement.

The section does not apply to every potential free trade agreement, however.  If any of Canada, the U.S. or Mexico already has a free trade agreement with a country, the parties to the agreement are free to negotiate with them at any time.  The USMCA doesn’t apply.

For example, Canada has the TPP and CETA.  There are in fact dozens of existing free trade agreements to which one of the three USMCA parties is also a party.  The countries that are party to those agreements are exempt.

China is not in that category.

And then, what is a “non-market economy”?   Ignoring the large body of law surrounding that term, the simple definition is that it is an economy in which the government intervenes to control or restrict domestic prices for goods, either across the board or on a sectoral basis.

Just on the face of it, virtually any economy in the world could be considered to be a non-market economy.  Canada certainly is, with respect to dairy.  All European countries have price controls of one form or another.  Even the U.S. intervenes in the market to control certain prices.

Thankfully, there is also a history to this (and a lot of legal precedent), and that’s where it gets interesting.

When China entered the World Trade Organization in 2001, it was on condition that China be designated, from the outset, as a non-market economy.  The reason for that was that, under WTO rules (GATT 1994, for the cognoscenti), goods imported from a non-market economy could be subjected to anti-dumping duties (special tariffs that bump the price of goods up to market value) that allowed the receiving country a broad discretion.  If the U.S. imports goods from Great Britain, there are restrictions on what anti-dumping duties can be imposed, generally based on domestic British prices for those same goods.  If the U.S. imports goods from China, there are almost no restrictions.

China was, thus, a non-market economy, but that designation expired in 2016, after fifteen years.  It was as if China was on probation at the WTO for that period.

Immediately upon the expiry of that provision, China filed an application with the WTO to be declared a market economy.  That application has been winding through the slow WTO process for almost two years, and remains unresolved.

What the USMCA says is that, if any of the parties to the agreement have, on the date of signing the agreement, determined for their trade law purposes that a country is a non-market country, that country is deemed to be a non-market country for the purpose of the USMCA.

In November 2017 the U.S. declared China to continue to be a non-market economy, despite the expiry of the WTO provision, and filed a brief so arguing before the WTO.

Hence the name “the China Clause”.

China isn’t the only country on the U.S. list.  Vietnam is too, but Vietnam is safe, because it is a party to the TPP, to which Canada is also a party.  Section 32.10 doesn’t apply to Vietnam.

A number of other countries, like Ukraine and Russia, have been taken off the U.S. list in recent years.  They are also safe.  Other countries remain on the U.S. list, but Canada has almost no trade with them.

Interestingly, Canada also has anti-dumping rules relating to non-market economies, and just this year proposed new regulations to strengthen those rules.  Yes, China is one of them.

The result of all this is that yes, if Canada wants to do a trade deal with China, the USMCA will kick in, but that is not the case with most other countries.

One other issue is perhaps relevant.  The WTO may determine that China is in fact a market economy.  That is the order China is seeking.  The U.S. is a signatory to the WTO, and would be subject to that determination.  While they may well defy the WTO (which the U.S. President hates) and go on their own, but it is at least arguable that, if China wins at the WTO, the USMCA should no longer apply to free trade negotiations between China and Canada.

What Happens If It Applies?

Let’s say, though, that if Canada wants to enter into a free trade agreement with China, for example, it has to comply with USMCA 32.10.  There are three requirements.

First, Canada must advise the U.S. and Mexico at least three months in advance of starting negotiations.

Second, Canada must advise the U.S. and Mexico, at any time that they ask, what Canada’s objectives are in the negotiations.  However, this requirement is phrased as “as much information as possible”, which could be interpreted as requiring only limited, high level information that would be relevant to the other parties to the USMCA.  Canada does not, it seems clear, have an obligation to disclose its entire negotiating strategy to the U.S. and Mexico.

Third, Canada must provide to the U.S. and Mexico, at least thirty days prior to signing the agreement, the full text of the agreement.

Once more, a little unpacking is in order.

The Prime Minister has stated publicly, numerous times, that Canada is seeking to negotiate new trade arrangements, and a closer trading partnership, with China.  The most recent public statement was immediately after the USMCA was announced.

It would therefore surprise the hell out of me if, the day after the USMCA is formally signed, Canada does not provide a formal notice to the U.S. and Mexico that it will be negotiating new trade terms with China.  Of course they will.

Stand back and contemplate this for a moment.  If Section 32.10 were not in the USMCA, would Canada go ahead with negotiations with China without first telling the U.S. and Mexico what they are doing?

Are we crazy?  (Well, I am. We already established that.  However, the Canadian government is not.)

Thus, the requirement to tell the USMCA parties that we plan to negotiate with China is nothing, because we would have done that anyway.  It is not, after all, a secret.

So then, what about the second requirement, disclosure of our “objectives” in the negotiations?

Going into a negotiation – whether on trade or on anything else – a party’s objectives are usually pretty obvious to everyone.  To the extent that they aren’t at the outset, they will have to be pretty quickly, because these are negotiations between governments.  Like all politicians, those on Canadian side will have to explain what they are doing, both in public and in the House of Commons.  Everyone will know their objectives.

Nothing new there.

The third requirement is a copy of the agreement, thirty days before it is signed.  You mean, like the full text of the USMCA was released publicly thirty days before it is to be signed?

Oh.

The bottom line is that the Canadian obligations under USMCA (or the obligations of the Americans or the Mexicans, if they are the ones negotiating with China) are to disclose things that will be known to the other parties anyway, and will for the most part be public knowledge.

What does that mean?  It means that in a very limited class of cases – basically negotiating with China – you have to tell your closest trading partners the things you would have told them anyway, or they could read in the newspaper.

Oh, my.

What Are the Remedies?

The best part of this analysis is the remedies section.

Do the U.S. and Mexico have any right to participate in our negotiations with China?  No.

Do the U.S. and Mexico have any say in the terms of our agreement with China?  No.

The sole remedy of the U.S. or Mexico (s. 32.10(4)) is that, after we sign the agreement with China, they can give us six months notice of termination of Canada’s participation in USMCA.  The USMCA continues as an agreement just between the U.S. and Mexico after that.

On the surface, that may sound like it gives our two trading partners substantial leverage.  If we do a deal with China that makes them unhappy, we’re out.  The world will come to an end.

Just one little thing.

Section 34.6 provides that any party to the USMCA can, at any time – and for no reason at all – terminate the agreement on six months notice.  If and when they do, the agreement continues as between the other two parties.  If the U.S. doesn’t like our deal with China, it can at any time use section 34.6 to terminate USMCA.  Canada and Mexico will not continue the deal without the U.S., so it is over.  Unless, of course, Mexico wants to continue with the U.S. and not us, in which case we are back to exactly the result in section 32.10(4).

If Canada or Mexico does a trade deal that the U.S. doesn’t like, the section 32.10 remedy doesn’t matter, because the U.S. holds the hammer anyway.

Interestingly, if the U.S. does a trade deal that Canada or Mexico doesn’t like, the section 34.6 termination provision doesn’t give us a hammer.  We aren’t powerful enough.  Section 32.10, on the other hand, allows us to kick the U.S. out of the deal unilaterally.  We won’t, probably.  But we can.

The U.S. may not have thought this through.

Conclusion

The end result of the China Clause is that nothing much has changed.

Mostly, this clause will not apply at all.

In the limited cases where it does, everyone will behave exactly as they would have behaved otherwise.  If negotiations with China produce tensions, the U.S. has the same remedies they had already.

One of the most important skills in negotiating is the ability to identify something that the other party wants and values, but that you can give to them without giving up anything yourself.

Canada appears to have done exactly that.

–  Jay Shepherd, October 6, 2018

Posted in International Affairs, Politics, Trade | Tagged , , , , | Leave a comment

Oh, Brett, How Could You?

As the #MeToo Movement has gathered steam over the last year or two, I’ve made a point of keeping my mouth shut.

It’s not because I have no opinions.  (What, really?)

No, it’s because the treatment of women by men in our society is a subject that has all too often been hijacked by male voices.  Recently, this has been changing.  In the last couple of years, it has been female voices that have come to the fore, each one empowering others to speak up.  That’s a good thing, so best for me, and other men, to shut up and let it unfold.

Into this scenario we now see injected the more topical, but still important, question of the stacking of the United States Supreme Court by conservative judges.  The latest, and perhaps the most dangerous, is Brett Kavanaugh, scheduled to be the subject of a committee vote this week.

Kavanaugh’s confirmation is being put in jeopardy by an accusation that, thirty-six years ago, when he was 17, he attempted to rape a 15 year old girl at a drunken private school party.  That young girl, now Dr. Christine Blasey Ford, a Professor of Psychology at Palo Alto University, has reluctantly come forward to tell her story.   At first trying to keep her anonymity, she drew the matter to the attention of two elected officials in a private letter.  When the details came out, and it became a hot story, she gave up her secrecy and penned an op-ed in the New York Times.  She has also said she will appear before Congress if asked.

While there has been some puffing by various people about the timing of this, two things give one some pause.

The more obvious is that Dr. Ford submitted to a formal polygraph test, and passed.  Lie detectors may be less than 100% accurate, true enough, but the successful polygraph certainly increases the probability that she’s telling the truth (even if, depending on your own politics, her personal credibility wasn’t enough for you).

The less obvious confirmation of Dr. Ford’s account comes from Mark Judge, Kavanaugh’s high school friend, and the other boy in the room when the incident occurred.  While Mark Judge says he does not remember anything like the incident in question happening, he did write a 1997 book that describes in some detail the alcohol-fueled, hookup-focused culture of his – and Kavanaugh’s – high school years in a toney Georgetown private school.

As the heat on this story has ratcheted up, we also now have dueling supporter lists, letters from dozens of female character witnesses who knew Brett Kavanaugh when he was in high school, and either back his likely innocence, or back the likely truth of Dr. Ford’s story.

As with everything in Washington, this has devolved into the fine art of politics.  The intrigue is perhaps heightened by the fact that the story involves an important Bethesda Roman Catholic prep school, Georgetown Prep.   (Neil Gorsuch was a student there a couple of years before Kavanaugh.  Remember him?)  It also involves a Supreme Court candidate who spent his career wading through the Washington swamp, working for Ken Starr to impeach Bill Clinton, then working on the election campaign and in the White House of George W. Bush.

So let’s unpack this.

Any philosophy major (or scientist) will tell you that if you have a difficult question, on which you can’t tell if a hypothesis is correct, one way to work through it is to assume the hypothesis is true.  Then, assess the implications.

In this case, it is not a leap to assume Dr. Ford’s account is true.  Not only does the actual story appear to have pretty solid support, and a credible person recounting it.  In addition, the story dovetails with what we all know goes on regularly when teenagers and alcohol join forces.  Add to that the environment of an elite private boys school in the Eighties, and the instinctive reaction to Dr. Ford’s story is “of course”.

But assuming it’s true, what does that mean for Brett Kavanaugh?  Leave aside your political leanings for a second, and even your intuitive sense that he is a man who made his career sucking up to people in power.

If seventeen-year-old Brett Kavanaugh did in fact try to have sex with a fifteen-year-old girl at a private party in 1982, but instead screwed it up and just embarrassed himself and scared the shit out of the girl, does that disqualify him from being a judge of the U.S. Supreme Court today?

There are those who say that there can’t be any forgiveness, because if we just keep letting these things go, they will never stop.  Actions have consequences, as they say.  If it took a long time for his predatory actions to catch up to him, better late than never.  Now make him pay for what he did.

There are others who say that the stupidity of a drunken, horny seventeen-year-old boy is not news.  Indeed, if he had never done anything this idiotic in his life, you might wonder whether he was a real person.  If you look back at the people you know who came of age in that period, how many of them were truly innocent?

Further, Kavanaugh has had thirty-six years since then to demonstrate that he is not a sexual predator.  All evidence suggests that he has no such leanings.

It is at least arguable that, on the assumption that Dr. Ford’s account is 100% accurate, Kavanaugh’s confirmation should not be affected.  Old news.  Whatever he did as a stupid teenager, it is his life as an adult that should guide any assessment of his appointment.

But here’s the thing.  It isn’t really necessary to come to a conclusion on whether his drunken behaviour should affect his confirmation.  What is more important – and clearly relevant to his fitness for office – is his actions today, and his character today.

Today, what we know is that, with a straight face, he told senators that the incident described by Dr. Ford did not occur.  He didn’t say he couldn’t remember, or it happened differently.  He didn’t tell it from his perspective.  He didn’t explain.  He just said it was not true.

Kavanaugh’s response to questions about this incident was almost certainly a lie.

Congress, and the public, may not care very much whether judges were once stupid teenagers.  They should care a lot, though, about whether judges are honest.  They should care a lot about whether, faced with uncomfortable truths, judges try to avoid those truths by lies.  They should care a lot about whether a judge is able to be honest when being honest is difficult.

The focus of the discussion here should not be on #MeToo.  Sure, that is important, and the consequences of past improprieties have a lot of subtle issues that have to be addressed.  It is also important to society that we manage the evolution from a “female victimization” norm to a “female empowerment” norm in a way that achieves the better future, without simply choosing some new victims.

But the Kavanaugh case is not fundamentally about an attempted drunken rape in high school, many years ago.  It is about whether a proposed appointee to the U.S. Supreme Court has the fundamental honesty, integrity, and strength of character to tell the truth.

Even when it’s hard.

People who are afraid to tell the truth don’t make good judges.

  –  Jay Shepherd, September 17, 2018

Posted in International Affairs, Politics, Social Change | Tagged , , , , , | 5 Comments

The Puppet Masters

Just when you think discussions about Donald Trump have reached the apex of breathlessness, a week like this happens.  Between the “gutless coward” who wrote the New York Times op-ed, and that icon of investigative journalism, Bob Woodward, teasing about his tell-all book, we are suddenly standing, wide-eyed, inside a dysfunctional White House.

Shock explodes around the world.  The orange monster flaps about, frothing at the mouth in anger.

Former President Obama, in a brilliant speech that put the somnolent current President to sleep (too many big words?), says that the way the White House is functioning is “not how our democracy is supposed to work.”

Of course, Obama is absolutely right.

But, hidden underneath all of this is the real truth:  none of this should be a surprise.

Since the day he took office – maybe even before that, before he was even elected – Trump’s role has been to be the brainless hand-puppet for Republicans and other conservatives that want to control implementation of a conservative agenda.  Whether you are talking about the cadre of enablers in the administration, or the supposedly fearful congressmen and senators on Capital Hill, all of them are simply using Trump as a tool.

Start with those inside the White House, and in the higher reaches of the administration throughout the government.

Much of the news analysis of the op-ed, for example, focuses on stories of officials thwarting the actions of the President.  They are portrayed as a resistance, fighting the good fight to save the country.

Whoa, there.  The real story in the op-ed is that the officials are supporting and enabling the 80-90% of conservative actions of the President that they agree with.  In many cases, these aren’t even Trump’s ideas.  (He doesn’t really have many ideas himself, after all.)  Those around him set him to chasing their preferred rabbit, then support his tweeting and fulminating while guiding the achievement of the result they want.

It’s not like this is the first time a President has been managed by his handlers, of course.  It was widely suspected that Dick Cheney was the final arbiter in the George W. White House, and rumours routinely alleged that Ronald Reagan allowed himself to be heavily influenced by the big brains around him.

Trump is different, though, in two ways.

First, he is noticeably less intelligent than virtually all previous Presidents (combined? – surely not).

Second, he thinks he’s actually in charge.  Unlike Bush and Reagan, who preferred to be part of a larger group making decisions, Trump is a puppet that doesn’t actually know that’s what he is.  He believes, like Pinocchio, that he’s a real boy (but with no happy ending).

The reason this should be no surprise is that Congress has been doing the very same thing since Trump was elected.

We see this, for example, in the fact that the only legislation getting passed, and the only approvals taking place, are the things that the Republicans already wanted.  Trump’s blatherings about this and that have not had any influence on what is actually being done, either in the House or the Senate.

Tax cuts for their wealthy donors?  Check.

Stack the Supreme Court and federal judgeships for decades to come?  Check.

Clamp down on immigration, in a nation of immigrants?  Check.

Build the wall?  Wait a minute.

This translates to the current election period as well.  Why, oh why, are seemingly principled candidates (OK, I said “seemingly”) loathe to distance themselves from the most outrageous of Trump’s rhetoric?  The prevailing view appears to be that they fear he will use his electoral base against them.  They are, on this theory, sucking up to the schoolyard bully, too afraid to fight back.

That’s not what’s happening at all.  Their willingness to support Trump while on the campaign trail is because they like having him around.  Yes, he’s an idiot.  But, he’s their idiot.

But then, you say, what about the “strange” silence of Republicans when it comes to the Mueller investigation.  Why don’t they simply shut it down?

The answer is simple.  The Sword of Damocles which is the Mueller investigation keeps Trump vulnerable and distracted, and thus helps conservatives control his actions.  Without the threat of being found out by the investigators, Trump might actually try to assert his constitutional authority.  He may not be smart enough to get very far, but he could certainly make it more difficult for those controlling him to achieve their own agenda.

This puppet master reality is also the reason why Jeff Sessions keeps his mouth shut when Trump treats him like garbage.  Sure, he probably doesn’t like being excoriated publicly, but he still has a “boss” that he can manipulate freely.  In the end, Sessions gets whatever he wants from the President, so he’s willing to put up with some tantrums. (Sounds like a Dilbert comic strip, if you think about it.)

The funny thing about this is that, when Trump rages about the “deep state”, he’s not wrong.  There is a deep state at work here, and they are trying to limit what he is able to do as President.

The twist is that it is his own guys doing it.  It’s not the Democrats.  They’re not the ones whose goals are being pursued.  The deep state in this case is a conservative cabal.  The meetings of conspirators in the fancy restaurants of Georgetown are not New York liberals.  They are Midwest and southern conservatives.  You thought Mitch McConnell is spineless?  No, he’s evil.

Ah, but then there’s the other twist.

The conservatives are not the only puppet masters.  Remember Putin?  He is also still trying to manipulate Trump, but with different goals in mind.

Now, from a purely practical point of view, the Washington conservatives are apparently winning this battle of the puppet masters, at least in the short term.  That tussle is not over, though.  Putin is biding his time.

After the mid-terms, there will likely be disarray in Washington, as the Democrats either control Congress, or deadlock it.  Congressional attacks on the President will ramp up, and he will be under more dangerous fire from the progressive side.  The conservative agenda will be (mostly) stymied, Congress and the Supreme Court will be politically opposite (but with narrow majorities), and the United States will be in a relatively weak position on many fronts, both domestic and foreign.

How will Putin take advantage of that situation?  He has many options, but his foundation has been set already.  Trump is his guy whenever Putin decides to activate him.  The Russian President has his hand ready to slip inside his custom-designed Trump hand-puppet, and his goal won’t be to Make America Great Again.

  –  Jay Shepherd, September 8, 2018

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