Justin’s Next Move

Lots of people are giving Justin Trudeau advice on what he should do next.  “Here’s how you save yourself”, is their theme, but the advice itself is all over the map.  They tell him to tough it out, or to push his alternative narrative (also called the Butts story).  They tell him to fire some more staffers, to carry out a review of interdepartmental communications, or to go quiet and let the story fade away.  They tell him to be strong with JWR and Jane Philpott, to assert his authority.

Since I had the audacity to express an opinion on the JWR side of the SNC-Lavalin story last week, I have been thinking about this question as well.

My conclusion is that most of the pundits are missing the key issues Justin needs to address.  They are talking politics, and messaging, and issues management, and all that stuff. 

They’ve entirely lost sight of the fact that he’s the Prime Minister of Canada. 

As Prime Minister, what are the critical issues related to this problem that he has to address right now?  There are two that matter the most:

  • Wasted Talents.  You have two very capable, and potentially valuable, members of caucus whose skills are not being used.  They remain committed to the overall agenda of the government, and they can provide significant assistance in moving that agenda forward, but right now they are being wasted.  You can’t waste the talents of your best people and still govern as well as you should.  Not only that, but if they are personally disaffected, they will bring down the ability of other members of your team to do their best job as well.  You have to fix this.
  • Priorities.  There are a number of priority policy directions that need to command the attention of your government and your team.  Fighting fires is a distraction that you can’t afford.  Sure, this is an election year, but the best way to win the election is to get back to the policy directions that are important.  You have to shift the focus back to what matters, and the sooner the better.

I see people nodding in agreement, but also – cynically – mouthing “That’s all well and good, but how does Justin achieve this?”

The answer is probably that Justin should stick to what he’s good at, play to his own strengths.

Those strengths are not being the boss, telling other people what to do.  He didn’t get where he is by being the smartest person in the room, nor by being intellectually intimidating or even decisive.  He is not going to scare or bully people into doing what he wants, a la Stephen Harper.  Aside from his obvious lineage advantage, he got where he is by listening to other people, surrounding himself with talent, adopting and supporting core principles (inclusion, a fair society, etc.), and clearly communicating to the public and his colleagues what matters.

Following his own natural strengths, Justin should arrange a private meeting with Jody Wilson-Raybould and Jane Philpott.  Initially, it should be a meeting between just the three of them, in his office, with no aides, assistants, or others in the room.  (Others can be added once the discussion is well advanced.)

Ideally, Justin starts the meeting by asking for, and getting, agreement amongst the three of them that nothing said in that meeting will leave the room.  It is intended to be a frank discussion amongst them about the current situation, and what to do about it.

Assuming they will agree to that (which I don’t doubt they will), then Justin’s agenda for the meeting should be two things:

  • Common Goals.  Make clear to both of them that he and the government still share their core objectives and beliefs, which is why he hasn’t considered kicking them out of caucus or otherwise punishing them, and he is not planning to do so.  Emphasize their common goals.  Go through some of them in detail, if the meeting dynamic allows for it. 
  • What Do They Want?  Ask them what they want to happen that will bring them back, fully, onto the team, working with him and no longer fighting about anything.  Really ask.  This is not for show.  This is the reason the meeting is off the record.  The point is to let two very smart and dynamic people tell you honestly what they would like to see happen now.  The job of the Prime Minister in this situation is to listen.

Now, despite the important of listening, Justin should not go into the meeting without thinking through some of the possibilities, and how he might feel about them.  He should be ready to explore options that, a week ago, might have been unacceptable.  He should be willing to consider that they are intelligent and capable, and what they want may well be good ideas worth considering, even if he initially doesn’t like those ideas. 

One of his goals, of course, should be to make the conversation as constructive as possible, so that they have the same openness to new approaches to resolve the situation and move forward.

What could come up in the meeting?

Will Justin resign over this “scandal”.  He should be definitive.  No he won’t.  In fact, if they ask him to do so, that is fairly clear evidence that some or all of JWR’s strategy in this whole thing is to become Prime Minister sooner rather than later.  That would change the whole nature of the discussion.  On the other hand, this is unlikely to be raised, because it is not likely part of her strategy.

Will the new AG, David Lametti, direct Kathleen Roussel to offer a deferred prosecution agreement to SNC-Lavalin?  It is time for Justin to get off the fence on this, and say that whatever Roussel decides will be what happens, and the AG will not interfere at the request of, or with the assent of, the PM.  Lametti will be told in no uncertain terms that his role is to preserve the independence of the AG and the DPP.  Given the decision of Justice Catherine Kane in Federal Court yesterday, this is necessary anyway.

Will Justin return JWR to her role as MOJAG (Minister of Justice and Attorney-General)?  The answer must be no.  Whatever mistakes were made in the mechanics or optics or even substance of the Cabinet shuffle, Justin should not undermine the authority of his position as first minister by reversing the changes.  If he does, he is toast, and he might as well just resign.

Will Justin publicly apologize to JWR?  One way or another, the answer probably has to be yes, but you can apologize by actions as well as by words.  On the other side, although JWR may want an apology, it may not be in her long term interests to get one, at least not directly.  A message of “families can fight but still love each other” may be better for everyone involved.

Will JWR accept the Cabinet position of Minister of Indigenous Services if it includes a new mandate letter, i.e. to get rid of the Indian Act?  She’s fought against this law for years, and all three in the room believe that the Indian Act should go.  There is no better way to send a message that the relationship between Canada and First Nations is really changing than to put an opponent of the Indian Act in charge of getting rid of it.  Not only that, but it allows both Justin and JWR to come away with a victory.  JWR accepts the position Justin originally offered, reinforcing his discretion to choose his Cabinet.  Justin formally mandates JWR to achieve something she has wanted for years. 

Will the government split up the roles of Minister of Justice and Attorney-General, as a number of legal commentators have been stating recently (and, in some cases, for years)?  Again, the answer should probably be yes, if for no other reason than it shows real, positive institutional change arising out of this situation.

Will Justin fire Michael Wernick, Clerk of the Privy Council, for stepping beyond his proper role and pushing political issues on other staffers and on a Minister?  This is a tougher one, and the possibility of actually firing him is probably not fair, or realistic.  On the other hand, Wernick is 61, and has worked for the federal government for 38 years.  He is in a position to retire on a full pension, having reached the highest level of the federal public service.  This can probably be arranged.  It may cost an OC after his name, but he probably deserves one anyway.

Will JWR publicly admit that the Butts/Trudeau version of what happened is not a lie?  That is, while it isn’t how she perceived it, it is a legitimate if quite different way of looking at the same facts?  JWR didn’t get the string of successes she has over her career by being unwilling to accept different perspectives.  This is likely doable, in some form or another.

Will Gerry Butts come back into the government in some role, and will JWR and Jane take the initiative on that?  This is also more complicated, but keep in mind that JWR and Butts and their spouses have been, at least in the recent past, personal friends.  They should probably both make the effort to get over this problem from a personal point of view, and maybe Jane Philpott can help with that.

Will JWR and/or Jane participate in a high-level subcommittee of Ministers to look at how to deal with the SNC-Lavalin situation if, as expected, it is convicted?  You might think they would be toxic to that group, but in fact they are creative problem-solvers who know how to be pragmatic when it’s necessary.  Once a DPA is off the table, they may be more than willing to help solve what is a legitimate public policy problem.      

There are lots of other possibilities to consider, plus of course unexpected ideas and proposals that JWR and Jane will come up with.  All should be taken seriously.  If Justin is truly the great listener, this is his chance to show it.  Be prepared not just for what you expect, but for what you don’t expect.

Naturally, there is the possibility that Jody Wilson-Raybould and Jane Philpott simply won’t play, or will play but be unreasonable.  Whatever they would be able to work out with Justin, they may conclude that they can’t trust the government to actually follow through.  You can’t discount this scenario, but it is not a reason to pass up on a “We can work it out” opportunity.  Every attempt to find common ground in a dispute has failure as a potential outcome.  Success is also a potential outcome.  Until success is no longer possible, the risk of failure is simply irrelevant.

On the other hand, if they are willing to find a common way forward, this situation could turn into a victory for everyone (except SNC-Lavalin, of course).  Justin’s style of collaborative leadership is shown to work.  The Liberal caucus is back to full strength, with two star team members racking up goals and assists once again.   The party has an easier time attracting other star candidates, given what happened here.

And, of some importance, JWR is back on track to being Prime Minister after Justin.  Whether not that continues to be a crucial personal goal for her, the fact is that bringing her back to the front benches, within a context of reconciliation of strong personalities, now puts that job back within reach.

Finally, if Justin – with the co-operation and creativity of JWR and Jane – can pull this off, the Liberals almost certainly win a majority in the next election.  Vindication of a new way of governing will set the Liberals apart from the Andrew Scheer-led Conservatives, especially if the international press revert to their previous fawning over Justin’s New Age approach to leadership.

Do I have any expectation that the Prime Minister will actually follow this course of action? 

No.  His advisors are primarily political operatives, who will see this as a political problem to be resolved.  Treating it as a Prime Ministerial problem will not be top of mind.

Too bad.

  • Jay Shepherd, March 9, 2019
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Jody Jody Jody

Star Cabinet Minister.  Early front-runner to be the eventual successor to Justin Trudeau as Liberal leader and potentially Prime Minister.  Jody Wilson-Raybould was not part of the party establishment, to be sure, but she was absolutely the party’s emerging voice. 

So how did she manage to screw this up so fast?

[Outrage!  How did SHE screw it up?  No, how did THEY screw her?  Don’t waste time with your angry tweets just yet.  See below.]

Let’s recapitulate.

JWR – A Star is Born

Wilson-Raybould was appointed Justice Minister and Attorney-General in 2015, part of Justin Trudeau’s historic 50/50 gender-balanced cabinet.  She brought more than just her extra X chromosome to the table.  A Crown prosecutor early in her law career, she went to the B.C. Treaty Commission as advisor, commissioner, and for a time acting chief commissioner.  Then, for six years, until she moved into federal politics, she was a highly popular Regional Chief of the B.C. Assembly of First Nations. 

Fluently bilingual, she nonetheless represents a Vancouver riding, and is becoming more and more influential with B.C. voters as time goes on.  At 47, her star has been getting brighter and brighter.

Sounds like a future Prime Minister, what? 

(Her father in fact told Justin’s father at a public hearing in 1983 that Jody, then 10, planned to be Prime Minister one day.)

It’s much more than that, though.  Throughout her career to date, two things have been apparent. 

First, don’t try to mess with her principles.  She doesn’t see the humour in it, and she has a steel will to go with her normative thinking.  She’ll be pragmatic when necessary, but there are lines she will not cross.

Second, and probably more important, she gets shit done. 

Without going through the whole list of her accomplishments, some of them more than a little surprising, it is clear that when you have something tough that has to get done, call Jody. 

People who are able to get things done come in all shapes and sizes.  In this case, all evidence is that Wilson-Raybould’s technique – aside from often being the smartest and/or toughest person in the room – is to empower the people around her, and then have their backs.  In short, don’t make it all about Jody.  When infighting amongst B.C. Chiefs was getting in the way of real progress, she listened to each of their concerns (their real concerns, not just what they said), and responded constructively with solutions that could work. The squabbling didn’t go away entirely (seriously, did you think that?), but there was a lot more cohesion and common ground. She did that.

That doesn’t mean sucking up.  She has a history of bluntness in private conversations where people are being silly.  For example, as B.C. Regional Chief she famously told then Prime Minister Stephen Harper that he had screwed up indigenous peoples’ policy.  (Then she accepted a pitch to run for the Liberals.  That’ll teach him.)

In one sense, she doesn’t sound a whole lot like a normal politician, and maybe she isn’t.  On the other hand, more than a few people think that a little less politics and a little more action is what we need anyway. 

All good for JWR (catchy, right?; if they can have AOC, why can’t we have JWR?), except for SNC-Lavalin.

SNC-Lavalin – A Canadian Success (?) Story

Now, if JWR is all good, some would say that SNC-Lavalin is all bad.  Not really – they employ 50,000 people, after all, and are one of the most successful engineering firms in the world – but no-one would accuse SNC-Lavalin of being the most principled company ever.  Unless the only principle that matters is profit.

The more than 100 year history of Montreal-based SNC, and its merger partner Lavalin (Quebec City based), is replete with some of the most iconic engineering projects in Quebec, Canadian and even world history.  The James Bay hydroelectric project, the new roof for the Montreal Olympic Stadium, 407 ETR, the Bennett Bridge in B.C.  It is a long list.

Along the way, though, SNC-Lavalin has been dogged with accusations that it regularly used an “end justifies the means” approach to winning and implementing big projects.  As it grew, particularly internationally, SNC-Lavalin was often suspected of using less than legal methods.

Who knows whether all of that was true?  Maybe some of it was just competitors jealous of the success SNC-Lavalin was able to achieve, time after time.  Maybe some of it was SNC-Lavalin just driving the same way as all the other companies on the same road, breaking the same rules but no worse than anyone else.  (“Hey, officer, I was just keeping up with the traffic.”)

Whatever the reason for the accusations, it is a fact that SNC-Lavalin has had more than its share of charges, executives indicted, and things like that. For some time, SNC-Lavalin has been blacklisted by the World Bank for projects they finance, expressly because of bad behaviour.  When you look at all of those charges, etc., you can see a pattern.  Bribery, corruption, competing based on under the table payments rather than based on merit, and that kind of thing seem to be demonstrated, at least in some cases, as far back as 1995. Some people would say there’s no reason to believe they started then.  They may go back much earlier.

No point in going through the whole list of accusations and charges.  Two of the many scandals are of most importance today:  the Arthur Porter kickbacks, and the Libyan bribery charges.

The sensational Arthur Porter scandal involved more than $20 million of “consulting fees” paid by SNC-Lavalin to the CEO of the McGill University Health Centre at the time that SNC-Lavalin was bidding to get, and ultimately won, the $1.3 billion contract to build the new MUHC hospital.  Porter resigned, and was later arrested in Panama on fraud charges related to the contract, but died in Panama before being extradited or tried.  SNC-Lavalin CEO Pierre Duhaime was charged, and ultimately pled guilty a month ago.  Two others have also been charged and convicted in the case.

The case arose largely because of the Charbonneau Commission looking into bid-rigging and bribery in the Quebec construction business.  As it unfolded, it appeared the leader of that scheme was – you guessed it – SNC Lavalin.

The reason the Porter scandal is particularly important is that, in 2012, Duhaime was replaced as SNC-Lavalin CEO by Robert Card, whose marching orders appeared to be to clean up the SNC-Lavalin corporate culture, i.e. instill for the first time a sense of right and wrong.  Several top executives were persuaded to leave, and SNC-Lavalin claims today to be a singularly honest and ethical company that will never have scandals like the Porter affair again. It had put its sorry past behind it.

SNC’s Gadaffi Problems

There is no point in getting into any great detail about Libya, because the matter is right now before the courts.  After a tip from the Swiss, the RCMP investigated SNC-Lavalin’s activities in Libya from 2001 to 2011, and as a result in 2015 charged SNC-Lavalin with fraud and corruption relating to bribes paid to members of the Gadaffi family, and other corrupt practices (contrary to the Corruption of Foreign Public Officials Act here in Canada).  Conviction would result in SNC-Lavalin being excluded from federal government contracts for ten years.  The company is already in the middle of a similar ten year ban by the World Bank. 

They were, as they say, in deep do-do.

One other piece of background is important.  In the summer of 2018, after more than a year of public consultation, the current government enacted a Remediation Agreement Regime that would allow those charged with certain offences to avoid conviction (and a ten year ban) if they accepted punishment, admitted what they did was wrong, and did certain things to clean up their act.  This is called a deferred prosecution agreement, or DPA.  It is entirely in the discretion of the prosecutor whether to offer it, or to prosecute the crimes alleged.  Even before the new rules were passed, SNC-Lavalin pounced on it, first in line, seeking its application to their Libya situation.

Now back to Jody.  Remember JWR?  This piece is about JWR.

SNC-Lavalin is being prosecuted by the Director of Public Prosecutions, an independent federal prosecution arm that reports to the Attorney-General, i.e. Jody Wilson-Raybould.  JWR is a noted hawk in opposition to political interference in prosecutions (and all other aspects of the criminal justice system), so when Kathleen Roussel, the Director of Public Prosecutions, was faced with whether it was appropriate to offer SNC-Lavalin a DPA, JWR left it up to her. 

Roussel has spent almost twenty years with the federal government, primarily as a prosecutor with increasing levels of responsibility.  She is widely respected.

No-one knows why Roussel decided not to offer a DPA to SNC-Lavalin as part of a plea deal.  She is actually not allowed to talk about it and, given her history, she won’t.

Perhaps it was simply SNC-Lavalin’s long history of sordid allegations, and some sense that DPA’s are not supposed to be for the true “bad guys”.  That would certainly be consistent with the spirit of the legislation.  Somebody has to be bad enough to go to jail.

Perhaps, as CBC has alleged in a recent story, this has something to do with the federal government’s poor history in getting convictions in corruption cases, particularly those related to SNC-Lavalin and its executives.  As reported by CBC journalist Dave Seglins, the federal prosecution service has been chasing SNC-Lavalin for years, spending millions of dollars on the various corruption cases relating to the company, yet has zero convictions.

This is speculation, of course.  

What we do know, though, is that Roussel said no to a DPA for SNC-Lavalin, and JWR backed her up.  That was in September of last year.

The Public Interest Rears its Ugly Head

SNC-Lavalin may have cleaned up their contracting practices, but they are still zealous lobbyists.  They had literally everyone they know talking to everyone they knew in government, including the Finance Minister and the Prime Minister’s Office.   

The SNC-Lavalin pitch is two-fold.

First, this is a company that, whatever its past history, has cleaned up its act.  Now model citizens, they are exactly the kind of company that should be allowed to walk away from a past transgression, chastened but not completely destroyed.

Second, SNC-Lavalin is a major company that employs a lot of people, especially in Quebec.  While they are not in the “too big to fail” category, they are strategically important to Canada and Quebec.  A conviction and ten year ban would be a significant blow, and there is no guarantee the company would survive that blow, at least in its current form.  It might even – perish the thought – be the target of a foreign takeover.

Oh, and there is an implicit third part to the pitch:  who knows what Quebec voters will do to the Liberals in the next election if a federal government prosecution seriously injures this important Quebec company.

If you listen to the JWR testimony before the House of Commons Justice Committee (it’s long, but worth the time spent), a pretty clear picture emerges.  In a series of in-person and telephone meetings with JWR and her staff, the Finance Department, the PMO, and the Privy Council Office debated how to deal with the prosecution of SNC-Lavalin, while at the same time avoiding any collateral damage – whether to the Quebec economy or to the Liberal party – as a result of a conviction.

Leave aside the political considerations for a moment, because that’s more complicated.  The job of the PMO and the Department of Finance is to look after the public interest.  If any event has the potential to harm the public interest, they have to look for ways to either prevent it from happening, avoid the harm it will cause, or mitigate it.  A death blow to SNC-Lavalin – at the hands of the federal government, no less – might well qualify in that category.

When you look at it that way, they really had no choice.  They had to approach JWR and seek solutions, actively and with all the strength they could muster.  They couldn’t just ignore the problem.  Logically, that would mean considering whether the use of the newly-allowed DPA technique could achieve the right balance between punishing a wrongdoer and protecting the public interest.  (It would also have to include things like amending the ten year ban legislation to exempt SNC-Lavalin, a much more difficult way forward.  Or, supporting SNC-Lavalin’s Quebec competitors to ameliorate the fallout from SNC-Lavalin’s demise.  And so on.)

Just as the U.S. government bailed out Wall Street banks that were really quite obvious bad actors, but had to be saved in order to achieve an overall public interest, so too the Canadian government had to consider how to act in the public interest in this case.  As the Cabinet Minister responsible, JWR was a key part of those discussions.  That was a given.

There is also nothing wrong with those discussions being vigorous, even to the point of being – what’s a nice word? – animated.  You would expect a group of high level officials, sitting around JWR’s office trying to figure this problem out, to engage in a debate that is somewhat less than genteel.  Pat-a-cake this is not.  You solve problems by aggressively testing people’s positions, seeing whether there is more common ground than first appears.

It is not like this was JWR’s first rodeo.  She had been part of tough discussions before (medically assisted dying, cannabis legalization, etc.), and there is no allegation that she is a shrinking violet in those situations.  By all accounts, including her own, she didn’t have any problem handling the pressure of the debate.

But, what you can’t do with the Attorney-General, when discussing a prosecution, is either of two things.  Directly or indirectly.

You can’t say “This prosecution has to be stopped, because we’ll lose too many votes in Quebec if you convict them.”  Politics may be the art of the possible and all that, but if you equate the public interest with your own electoral success, you have crossed a line.  Maybe this happens all the time, in government (“maybe?”, you say), but in relation to the application of the Criminal Code, it is not OK.

And, you can’t say “The Prime Minister wants this prosecution to stop, and if you want to stay on as AG, you have to do what he wants.”  The Prime Minister has many powers, but directly determining whether anyone is prosecuted for a crime is not one of them.  Nor should it be.

It is alleged that the “pressure” on JWR to overrule Roussel and order a DPA may have breached both of these boundaries. 

Clearly some political staff raised votes and elections in discussions with JWR and her staff, and she characterized some of the discussions as political interference.  It happens all the time in government, of course, but it was probably ill-advised here.  Thankfully, there is no suggestion that either the Prime Minister or the Finance Minister themselves crossed this particular line (except for one comment by the PM that he retracted right away).  That would be a bigger problem.

It is also alleged that JWR was shifted to Veterans Affairs because she was insensitive to the imprecations of the PMO on the SNC-Lavalin case.  We’ll probably never know for sure, but what we do know is that no-one made an explicit or implicit threat to remove her if she didn’t do what the PM wanted.  In fact, what we know is that the PM specifically and personally told JWR that the ultimate decision was up to her, not him.

Bottom line, whatever pressure was applied, SNC-Lavalin is being prosecuted.  If there was undue pressure, it was not effective enough to get JWR to change her mind. 

Did anything improper happen?  Likely not.  A little too much political analysis for the situation, but not egregiously so. And undue pressure?  Given the power of the PMO in Canadian government, if there had been actual undue pressure the result would have been different.  Further evidence of that is the Prime Minister’s willingness to let JWR testify, waiving most of the privilege restrictions that would have limited that testimony.

Trudeau and his government may pay a political price for this incident, but it is unlikely that they did anything seriously wrong.  They looked for a solution to a public interest concern.  Did they look too aggressively?  Perhaps, but in the end everyone was still trying to do the right thing.

JWR’s Strategy

For JWR, though, this is a bit of a disaster, and you have to ask what her strategy was in taking this approach.

Until this hit, JWR was undoubtedly one of the most effective members of the Trudeau cabinet.  With her strong CV, and good public presence, she had to wait another 3-7 years, and she would be one of the front-runners to replace Justin when he leaves.  If Justin is happy with two electoral victories, he resigns in 2022 and there is a leadership convention. Alternatively, if he wants a third term – ten years or more at the helm, a psychological hurdle – then he resigns in 2025 or 2026. 

If JWR had maintained her strong role as a member of the Liberal team, and not screwed up along the way, she would have been a front runner in either case, at the age of either 51 or 55. 

To do that, she would have had to engage with the PMO and other government officials, and help them find a solution that accomplished their public interest goals while respecting the independence of the prosecutorial role.  She’s smart, and she has a history of being able to do exactly that kind of thing.  It didn’t have to involve a DPA.  Creative minds can find other solutions.

So why didn’t she?

There are four main possibilities.

First, she may have tried to do that, but just screwed it up.  She may have misread the importance of the issue to the rest of the government, or she may have gotten her back up at some point when she should have been more constructive.  At some points in the process it appears that she saw the problem as “their problem” to deal with, not hers, which is a mistake for someone in Cabinet. There are lots of ways that, pursuing the right strategy, you can simply get it wrong, particularly in a situation as sensitive as this one.

If that’s the case, it’s sad in a way.  It may show that she is less of a star than we all thought, or it may just be evidence that we are none of us perfect.  Her road to the PMO has still suffered a big setback.

Second, she may have sensed that Justin Trudeau is vulnerable right now, and decided that her opportunity is now, not later.  Justin will lose the 2019 election and leave federal politics.  JWR, the one who left Cabinet in order to stand up for her principles, will be there in the 2021 leadership convention, the same strong CV supporting the claim that she is the next great thing.

As a political strategy, that’s very high risk, as John Turner found out years ago.  Political memories are longer than they first appear, and right now there are many Liberals who think JWR has stabbed their darling Justin in the back.

Third, JWR realizes that she is not a lifelong Liberal, and her next leadership opportunity is to replace Andrew Scheer, not Justin Trudeau.  If she crosses the floor to run for the Conservatives, she can probably deliver Vancouver Granville to them.  As long as Justin still wins overall, that leaves the Conservatives ready to replace Scheer (and tack back towards the centre), and JWR as a rising star to replace him. 

Lots of people have switched sides, but how many federal leaders have come to that role, and then become Prime Minister, after switching sides?   Are there any in the last fifty years?

Fourth, not everyone wants the brass ring.  It is always possible that JWR is completely satisfied with the many accomplishments she’s already achieved, and realizes that she doesn’t need to be Prime Minister (despite her father’s famous statement to Pierre) – or even be in the politics game – to continue to make meaningful change in society.  On this scenario, she decides not to run in the 2019 election, and fades off the front pages despite the wistful tears of her fans. 

This is actually the scenario that most favours JWR’s future.  She may end up as National Chief of the AFN, if she wants the job.  Down the line, what government would not want to appoint her to a court of appeal or, eventually, the Supreme Court of Canada?  Maybe she would rather be Chief Justice than Prime Minister.

Conclusion

The SNC/JWR scandal that is enveloping the Trudeau government is fascinating first and foremost for its potential to cost Justin and the BoysTM the next election.  Whether it will or it won’t is certainly beyond the capabilities of my current model crystal ball.  I would need the new, AI-inspired crystal ball to deal with that question.

The future of JWR, though, is just as fascinating, yet perhaps more susceptible to analysis.

I have no ultimate answer, of course.  She remains one to watch.  Her star, though, is less vibrant than it was.

  • Jay Shepherd, March 3, 2019
Posted in Politics, Social Change | Tagged , , , , | 3 Comments

Inspirations from Life: The Complete “A Word from Father Roy” Collection

[Normally my posts are my own original writing. In this case, I wanted to bring to your attention a new book, written by my 93 year old father, the Reverend Roy Shepherd.]

For those of my friends and colleagues who are interested in spiritual writing, my 93-year-old father’s first book may be of interest. “Inspirations from Life: The Complete ‘A Word from Father Roy’ Collection”, was released on January 24th by Friesen Press. It can be ordered in e-book, trade paperback, or hardcover at the link below. It is also available on Amazon, Barnes & Noble, Chapters/Indigo, iTunes and other major bookselling sites and stores, but it is generally cheaper if ordered direct from the publisher.

For the last thirty years, my dad, the Reverend Roy Shepherd, has been a priest specializing in Christian congregations that are undergoing a process of change. From parish to parish, he has helped them to move forward, and in the process he has shared with them brief stories – homilies, you might call them – that connect the teachings of the Bible to everyday events. Those 250 stories, published over the years in church bulletins, have now been compiled into a complete set.

The book will be most of interest, I guess, to Christians, particularly those who would like to understand more clearly the lessons from the Bible. I know some people already have partial collections that they use as daily devotional readings. People of other faiths may also be interested: Muslims, Jews, Buddhists and Hindus often share many of the same basic spiritual beliefs as my dad’s parishioners.

If you find this interesting, please share this post with your friends. Yes, I am trying to make my dad’s book go viral. If it does, of course, I will then have to explain to my dad what going viral is, but I’ll do my best. Please share.

The link to find out more, and order the book, is here. https://books.friesenpress.com/…/Reverend-Roy-Shepherd-Insp…

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Diversity

The other day I had the pleasure of attending a corporate event put on by an old friend of mine.  It was the grand opening of the new, expanded office of his very successful Canadian software company. 

It is a feel good story.  Entrepreneur has a great idea, hooks up with the right partners, and works with that team to grow the company into a worldwide leader in its space.  Installations in seventy countries around the world, and growing.  Technological excellence that has left its competitors behind, struggling to catch up.

The story is even better still because the company went from nowhere – battling larger, incumbent companies that had established and entrenched client bases – without going to the venture capital industry for money.  They built their success on skill, tenacity, and toughness.  They built an A-list roster of customers despite the many challenges they faced.

As you can imagine, lots of people attended the event – the mayor, customers, suppliers, and of course, their now much larger employee complement.  But amidst the beautifully designed new space, and the wonderful technology tools that they have implemented to use in their work, the most striking thing of all was one that should not have been striking.

Of the hundred-plus people in the room, at least thirty ethnicities were represented.

In one sense, it could have been expected.  The CEO and co-founder is of South Asian descent, via Fiji.  The CTO and other co-founder is of mainland Chinese descent.  When the company was only six people, fifteen years ago, it was already diverse.

Companies, though, grow within their environment, so one might not have been surprised if the diversity when this one reached hundreds of employees had been reduced. 

Not so. 

The current executive team, now eleven, includes (in addition to the South Asian and Chinese backgrounds of the founders), members with at least Spanish, Armenian, Filipino, and Russian heritage, and that’s just what I can think of off the top of my head.  (As well, I might add, as four women, already a higher percentage than any other software company I’ve seen.)

At the event, I had a chance to talk to some of the employees.  Their ethnic backgrounds were maybe too many to count: Polish, Ukrainian, Caribbean (no, I don’t know specifically where – why ask?), Korean, Italian, Irish…  I could go on.  You get the point.

When I thought about this later, I considered whether diversity this…”thorough” is perhaps the best word… is a function of the technology business.  I know, for example, that sometimes the tech teams in big American companies have higher representation from some countries, like India and the Philippines and eastern Europe, than is seen the rest of those same companies. 

So I checked the executive management teams of some of the large technology companies:  Apple, Google, Microsoft, Amazon, Oracle, Facebook, and others.  What do you see?  They are all 80-90% white males. 

It is actually more stunning when you take the trouble to look at each one.  As I went through them, I expected that I would find one company, at least, that had a team as diverse as my friend’s company.  Each time, I saw the same thing – 10-20% women, almost all of the rest white males.

Now, don’t get me wrong.  There is nothing wrong with being a white male.  Some of my best friends are white males. 

As am I.

Yet, when I looked around the room at this corporate event, I was not seeing a company representative of the software industry.  I saw, instead, a company representative of the community around them.  Located in Markham, this company reflects the diversity of that city, and the whole Toronto area. 

Some of you are now saying “OK, OK, we get it. Toronto is diverse. Big whoop. What’s your point?”

The point is this.  If you go to the company’s website, their recruitment page says only this about “Equal Opportunity”:

“We go beyond accepting differences —  we support it, we celebrate it, and we thrive on it.”

What they don’t do, as I saw at their corporate event, is talk about it.  That’s because, when you look around the room, their diversity and inclusiveness is both self-evident, and natural.  Not one person in that room talked to me about the company’s diversity.  It’s not something that is top of mind.  It just is. 

They will talk casually about their own experiences, if you ask them, and countries like China, Russia, Brazil, India, Estonia and many others come up in those experiences.  Their lives have been lived at distances that are global, not provincial.  Their experiences are the richer for it.  When they talk about the company, though, they appear to be blind to the ethnic mix around them.  Their colleagues are just people like them.  They don’t have to try to be diverse. 

Good companies have diverse talent sets among their staff.  They need that, because not everyone can be good at everything.  Some jobs require empathy, some precision, some exuberance, some a steel will.  I’m sure places like Google and Facebook have diversity like that.

Perhaps, though, Canada is building an additional advantage that we haven’t yet fully tapped, or even understood.  We are proud that we are diverse, certainly (although we sometimes call it tolerance, which maybe misses the point). 

But Canadian diversity is about strength, not just kindness and acceptance.  Companies (and other organizations) like the one I saw the other day can compete on a global scale in part because of the diversity of Canadian society, and thus the diversity of the workforce they tap.  Those companies are stronger because of it.

Let’s not kid ourselves.  Companies in other countries are going to catch up.  It is happening already, I’m sure.  Today, though, Canadian diversity is what they call in B-school a “defensible market advantage”. 

Amid all the xenophobia (sometimes erroneously called “populism”) we are seeing today in the U.S., Europe, and elsewhere, Canada keeps trucking along, blithely willing to be different, and the better for it. 

We often focus on diversity being a moral issue (hence our “pride” in it), and of course it is that too.  However, we shouldn’t lose sight of the other reality: diversity as an economic issue, one that will benefit our kids, and their kids, well into the future.

– Jay Shepherd, January 20, 2019

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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

Posted in Energy | Tagged , , , , | 4 Comments

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

Posted in Lives, Social Change | Tagged , , | 4 Comments

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