Energy #16 – The Big Build

A friend of mine is married to an engineer.  The other day I told her that, lacking any other evidence on capital needs, the Ontario Energy Board said in 2011 that the engineers in the electricity distribution companies should simply go out, look at their system, and see what work needed to be done.  That would be the basis for their new capital budgets.

She laughed.

“I love my husband, but engineers are the best people in the world at finding legitimate ways to spend money.”

The result was the Big Build.  Egged on by the OEB, distributors have gone on a spending spree.  Electricity distribution infrastructure – assets that are supposed to last for 40 years or more – have almost doubled in ten years.  11% more customers; 96% more assets.

The numbers don’t lie.  From 2005 to 2015, $17.8 billion in capital spending has resulted in $8.8 billion in assets (net of depreciation) being added to the distribution grid.  That doesn’t count transmission infrastructure, or private investments.

Because of changes in accounting rules, and declines in market interest rates down to record low levels, the impact of that Big Build on rates has been hidden so far.  That is about to change.

What’s worse, there’s more to come.  Seeing no stop sign from their regulator or their shareholders, the distributors plan to keep pouring more money into capital assets.  In the next six years, 2016-2021, their forecast is that they will spend another $12.8 billion, adding after depreciation another $7.2 billion to net distribution infrastructure.

The neat thing about capital spending, you see, is that the company doesn’t have to pay for it right away.  They pay for it over the life of the asset, like a mortgage.  (It’s a mortgage with an interest rate of about 7%, but it’s still like a mortgage.  Just an expensive one.)

Oh, wait.  Did I say “they”.  My mistake.  That should be “you”.  The distributors aren’t going to have to pay for those assets for the next forty years.  No, no, no.

The customers have to pay.

(Just in case you wondered, yes, the customers ALWAYS have to pay.)

Background

Electricity distributors have to spend money on capital.  It is the nature of their business:  they run the capital infrastructure that gets electricity from the transmission grid to the end user.  Maintaining, replacing and building capital assets is the essence of what they do.

There are basically four types of capital assets to be purchased:

  • Expansion: the infrastructure needed to connect new customers to the grid.
  • Sustainment: the infrastructure to replace old or broken assets, i.e. spending needed to maintain the same service.
  • Service: new assets required because existing assets have to be moved or replaced for non-distribution reasons (like a road widening).
  • Toys (sometimes referred to as General Plant): buildings, fleet, furniture and computers, central equipment, and new technologies.

In theory, the costs of Expansion capital are an investment that pays for itself, either with immediate reimbursement from developers, or with additional revenues from new customers.  Service capital is also often wholly or partially reimbursed by other levels of government.  Good Toys – ones that have been chosen based on a solid business case – will pay for themselves through increased revenues or decreased costs.  They are the cheapest way to solve a problem, or improve efficiency, so they are by definition cost-effective.  (Other Toys – also sometimes referred to as “Shiny Baubles” – have to be justified in other ways.  There is a course in engineering school on that.)

The rest of capital is just an additional cost, but it doesn’t have to increase prices.  If a utility is replacing an old building, or an old bucket truck, or old wires and transformers, the original costs have declined over time due to depreciation, so, adjusted for inflation, the new spending – if it’s done correctly – is just to bring costs up to where they were in the first place.  In many cases, there is the potential for increased efficiency with the new assets, so it should be a win-win.

In fact, if a distributor’s customer growth rate is 1% (the Ontario average), it can replace older assets at a rate equal to about 130% of its annual depreciation, and still keep rate increases at or below inflation.  If depreciation is $10 million this year, the distributor can spend $13 million on replacement assets, and customers will be fine.  This can be done year after year.

This is not rocket science.

What Is Actually Happening?

All electric utilities have been increasing their capital spending for the last ten years, with the express encouragement of the Ontario Energy Board.  Not only that, but they plan to continue to do so for the next several years, again with prodding from the regulator.

This effect is found in all parts of the industry, but it is most obvious in electricity distribution.  As noted earlier, distributors have increased their net capital assets (called “net PP&E”) by $8.8 billion since 2005.  In new plans provided to the OEB, distributors are forecasting similar increases over the next five years, likely another $7.2 billion added to net PP&E.  Based on the current trajectory, net capital assets of distributors will be $25.1 billion by 2021.  That’s about 2.6 times the level in 2005, for about 15% more customers.

What does that mean?

Well, the $8.8 billion of additional capital, on top of operating cost increases of more than $700 million, should have resulted in rate increases over the last ten years of 48%, a compound annual growth rate of more than 4% per year.  In dollar terms, the distribution bill for the average Ontario customer should have increased from $548 per year in 2005 to $810 per year in 2015.  Within the next five years, that should increase to about $1050 per year.

But wait.  The OEB is going around telling people that they have kept distribution rates to the level of inflation for the last few years.  How can that be?  Are they lying?

No, they aren’t.

The answer is that, except for Hydro One (which marches to the beat of its own, unique, 4% per year drummer), distribution revenue per customer (a rough proxy for rates) has increased an average of 1.73% per year from 2005 to 2015, which is almost exactly the rate of inflation.

However, once you remove Hydro One from the data, two other things also become apparent.

First, over the last ten years, distributors have seen their interest costs drop by about $310 million per year due to lower market interest rates.  Interest rates are at their lowest levels in memory, although they are not likely to remain there forever.  This has generated an underlying decrease in rates of more than 10%.

Second, in the 2011-2015 period external changes to the accounting rules for distributors meant that their depreciation rates and other accounting “costs” had to change.  This didn’t affect Hydro One at all, but for most of the rest of the distributors the effect was to reduce their costs, through an accounting change, by about $230 million each year.  The still spent the same money, at the same time, for the same things.  New accounting rules spread the cost over a longer period of time, making it look like their annual costs are lower.  This has generated a further hidden rate decrease, about 7%.

These are savings that should have reduced rates, benefitting the customers.  Between them, these two effects were like winning the lottery.  The distributors didn’t do anything to save money;  they simply lucked into reductions in their annual costs.  These decreases were enough that rates could have stayed at almost the same level, with no increases, for that full ten years.

But no.

Instead of passing those savings on to customers, the distributors have used the money to fund capital costs, not just annually, but for many years to come.  In effect, they said “With this extra $540 million a year, we can afford a much bigger mortgage.  Let’s get an $8 billion new house.”

If you back out just these two fortuitous changes (there are others), the rate of increase of distribution costs over the last ten years – and therefore bills before these decreases – is about 4%, the same as Hydro One, and mostly driven by high capital spending.  What has happened, in fact, is that distributors have been pumping money into capital assets, but the financial pain to customers that should have resulted has been masked by these other cost changes.

Interest rates are not going to go down any more, and there are no major accounting changes on the horizon.  Now there will be nowhere to hide.  The capital spending over the last decade is already starting to hurt, and ratepayers have to continue to pay for it for many more years.  Continued capital spending at these record high levels is going to make it hurt even more.

And what is the regulator, the OEB, protector of the customerTM, saying about this?

“Don’t stop now.  Keep spending.”

The Initial Problem

Some smartass (who may in fact have been one of my kids) once said that I never saw a spreadsheet I didn’t like.  Certainly I have an unnatural need to put data into spreadsheets, so much so that I was once called a “closet economist”.

I deny that, but I do admit that it was a set of spreadsheet models that drove me to reach this sad conclusion: we have allowed capital spending to get out of control.

I am not a fan of bald opinions.  I like to see facts, data, evidence.  My experience is that you can find the truth better that way.  We have data.  We can see what it says.

In 2005, the electricity distributors spent a total of $869 million on new capital assets, which was about 137% of their depreciation that year, pretty close to a reasonable replacement rate.  However, many distributors complained that, since they had just gone through a three-year rate freeze, they needed to spend more on capital.  In 2006, they increased their capital spending by about 25%, and then in 2007 they increased it by another 25%.  By that time, their capital spending was up to $1.347 billion, which was 190% of depreciation.

Over the next couple of years, Hydro One kept increasing its capital spending up to 227% of depreciation, but the rest of the distributors cut back a bit, to about 174%.  Still high, but better.

Then, in 2010, there was another big jump.  Hydro One continued plodding ahead slowly, but the remaining distributors bumped their capital spending up by another 31%.

There is a story behind that.  The Electricity Distributors Association, in 2008-2010, put a big push on, with government and the regulator, for distributors to be allowed to increase their capital spending.  The technique was simple:  keep repeating the “need” to increase capital spending until everyone believes it must be true.

Evidence?  Facts?

Please.

In 2011, a new Chair was appointed to the OEB, a former distribution company CEO who had also been active in the Electricity Distributors Association.  That new Chair launched (or re-launched, more correctly) the Renewed Regulatory Framework for Electricity.  One of its key tenets was continuation, even expansion, of the increased levels of capital spending seen in 2010.

By 2015, capital spending was up to $2.23 billion per year, 258% of depreciation.  Even that wasn’t the whole story.  Hydro One was still trundling along, and it was still at 226% of depreciation.  The rest of the industry had increased its spending to 281% of depreciation.  To put that in perspective, at that rate you can replace all of your assets – assets that have an average 40 year life or more – in less than 15 years, and still have money for growth as well.

What does this mean?  From 2005 to 2010, Hydro One added $1.7 billion to its net assets, and the rest of the industry added another $1.4 billion.  From 2010 to 2015, Hydro One added a further $1.9 billion, but the rest of the industry added a whopping $3.8 billion.  Not only did they spend money on poles and wires, but it was also an opportunity to build hundreds of millions of dollars of new (and fancy) head office buildings, as well as purchase many new technologies that, for some inexplicable reason, don’t seem to reduce other costs.

We often treat Hydro One as the major culprit when it comes to distribution issues, and they do indeed have very high prices and problematic cost controls.  On this one, though, it is now the rest of the distribution industry that has seen the writing on the wall, and decided that they can have as much capital to spend as they want.

In the venture capital game, there is a saying:  “Take the money, stupid”.  The same is true here.  Capital spending is in vogue.  Distributors have noticed, and are taking advantage of the opening.  Who knows how long it will last?

And Then It Gets Worse

To understand the role of the OEB in all of this, you have to go back to the early days of the Renewed Regulatory Framework for Electricity.

When the distributors and their association were jumping up and down, in a frenzy about the need for more capital spending, some of the customers in the room wanted to see some evidence that there was a particular need for additional capital spending.  The customers, before paying for the Big Build, wanted to see past capital spending data.  The data was available, in various forms, for fifty years or more.

For example, if in the 70s there was a large buildout in capital spending, then it would be reasonable to expect that forty years later there would be a need for extra capital spending to replace those assets.  Like kids in the baby boom, the assets would be getting old together.  If a large number of assets are getting old at the same time, you will have a spending bulge.  You could even calculate how much that bulge should be, and figure out ways to soften the blow.

Or, if there was evidence that for the most recent ten years there was underspending relative to long term averages, that would suggest a need for a short-term capital spending catch-up.  If you spend less than you should for a while, eventually you have to spend more to catch up.

As noted earlier, this is not rocket science.

Instead, the OEB had the brilliant idea to require every distributor to do an asset condition assessment, and then prepare a formal, five-year distribution system plan (DSP).  This is basically a five year plan for future capital spending.

To no-one’s surprise, the spending forecasts were big.  Letting loose the engineers to assess what has to be spent on capital is like asking a priest how often you should pray.  Even if they’re “right”, however that might be defined, their estimate is going to be a lot higher than what you get from anyone else.

Further, OEB told the distributors that, once they had their asset condition assessments, they had to consult with local customers to make sure the customers were onside with the spending plans.  This has led to focus groups and surveys with questions like “If we have to spend more money on capital to prevent blackouts, do you think we should do that?”, and “Would you prefer that we replace older assets before they break down, or wait until they break and cause an outage before replacing them?”

(No, I am not making this up.)

No-one asked the questions “Should we increase your rates 10% to reduce your outages by one every three years?”, or “We normally don’t replace light bulbs and other non-essential assets until they fail;  should we continue to do that?”

We now have distribution system plans for 43 of the 67 existing electricity distributors.  If you plot their spending plans on a graph, relative to their past spending, you can generate a representative forecast of capital spending in distribution over the next five years.

Remember, annual capital spending in 2005 was $869 million, but by 2015 it had increased to $2.23 billion per year.  We can look forward to capital spending in 2021, based on current plans, of about $2.2 billion, i.e. maintaining the current high spending rate.  That should result in another $7.2 billion added to net distribution assets in just those six years, a further 75% increase relative to that 2005 base.

Oh, and one other thing I forgot to mention.  The regulator says that if they want to spend more than their plans, they can come in any time for permission to do so.  Just in case, you know.

What Can we Do?

This is where I’m supposed to provide a creative, insightful answer to this problem.  This is where I say “If we just do X, all of these concerns will magically disappear”.

That is not to be.

We’ve already spent the money.  We can’t get it back.  We can’t sell the assets that we bought with that $17.8 billion.  We’ve borrowed to pay for them (at a high rate of interest), and now we have to pay that off.  There is no-one else to pay.  The shareholders can’t pay, and even if they could, they are almost all governments, so if the shareholders pay, that still means us (or our kids).

Bottom line, we have to suck it up.  We foolishly let our local utilities borrow on our credit cards to spend our money, and we let our regulator/protector be their cheerleader.  Actions have consequences.  Now we have to pay.

At best, what we can do is tell the utilities, and their owners, and the regulator, to stop spending money we don’t have on things we don’t need.  Don’t make it any worse.

Will they listen?  That I can’t tell you.

    –  Jay Shepherd, March 18, 2017

Posted in Energy, Politics | Tagged | 1 Comment

Lives #9 – So How Would You Have Reacted?

This is a story about Jeanne.

Jeanne’s story encompasses her whole life, really, but even she would acknowledge that her husband Bobby’s death was a turning point.  Many things happened before and leading up to his death.  Some of them were good, even great.  Some of them were very romantic.  And, some of them were proof that her life was not perfect.

Yet, it was her reaction to that event – Bobby’s death -, and the ripples her reaction created, that changed her life in ways she did not expect.  When Bobby died, Jeanne was 43, and most certainly not ready to be a widow.  She responded accordingly.

Jeanne is originally from St. Jerome, a small town an hour or so north of Montreal.  When she met Bobby, she was 21, a bilingual legal secretary in a large Montreal law firm.

As Bobby described her later, she must have been the most beautiful young woman he had ever seen.  If you listen to her, however, she was a “horsey-looking” Quebec country girl who, like many French women, knew how to look her very best.  Clothes, makeup, walk, gestures, all designed to enhance her attractiveness.  Even thirty-nine years later, she is still striking, but in all probability her description was closer to the truth than his.

Bobby, on the other hand, was a salesman for IBM, back when (in the late 1970s) Big Blue still sold large computers to big companies.  Her take on him at the time was that he was a successful, well-dressed, and urbane older man (33) who literally made her swoon when she talked to him.  Despite being an Anglophone, he even spoke passable French, meaning that he would be able to talk to her unilingual parents.  (Bobby would not have rejected her description, but he knew better.  In his eyes, he was boring, his sales job essentially wasting a perfectly good degree in mathematics at a time when such a degree was not that common.)

The prosaic truth is that both Bobby and Jeanne wanted more than anything to have a family, and each saw in the other the perfect partner to succeed in that goal.  Jeanne was an attractive and intelligent young woman, brought up in a large Quebec family.  Bobby was an established and successful businessman whose dream was to coach his kids’ hockey teams.  Both were ready – “right now” ready – and not interested in waiting.

Sometimes the right people meet each other at the right time.

I could go on, but sure enough they got married, within a year in fact, and over the next two years had first a boy, then a girl.  They bought a house in Mississauga, and life was good.  In the mid 1980s Bobby started to shift from hardware to software, and did a little less traveling as he moved up the ranks.  Jeanne planned to work, but the house and the kids were a full-time job, so until the kids were both in school they agreed she would stay at home.  She took night school courses toward a degree, but his income was enough for the family.

All good.

For the most part, it actually was all good.  Bobby never stopped being in love with Jeanne, and even twenty years after they were married he was convinced that he had just lucked out in finding her. They fought sometimes, because she was not really the “little woman” type, and she was quick to speak her mind.  And, he was not exactly Casper Milquetoast.  However, their marriage was a good one, grounding a strong family life.

They had two setbacks.  When the kids were teenagers, in the mid-1990s, Bobby took a lucrative offer to move from a weakened IBM to an apparently great software startup.  He signed on to a compensation plan with a lot of performance bonuses built in, but the software didn’t sell well.  He landed on his feet at another startup.  Less money, but a job.  Jeanne went back to work, and because she had been going to night school for years, she was able to score a pretty good government job that gave them more financial stability.  They weren’t going to lose the house, and they probably could still keep saving for the kids’ university.  Their financial dynamics changed, but they were fine.

It was the second setback that was the real problem.  Bobby, at 52, was diagnosed with pancreatic cancer.  Their lives changed big time.  While they never faltered in their commitment to their 17 year old son and 16 year old daughter, they also had to focus on chemotherapy and radiation treatments.  Bobby’s ability to work rapidly dropped to almost nothing, and the small company’s long term disability plan was, shall we say, rudimentary.  Jeanne could keep working, but her time spent with Bobby limited her ability to get promotions.

She told me later:  “The funny thing was, our financial situation wasn’t really bad.  Sure, we didn’t have a lot of money coming in, but we had some.  We took out a mortgage on the house, which was almost fully paid for anyway.  And, if I’m being honest, we both knew he was going to die.  There was more than a million dollars in insurance on his life, between the company and our own policies.  No-one had to worry about money.  No matter what we did, that problem was eventually going to solve itself.”

Bobby fought the cancer for three years, with Jeanne’s determined support.  I knew them both then.  Neither was perfect.  Bobby complained that his employer was not “in his corner”, but when he said it he sounded like he was whining.  Jeanne told me, to Bobby’s face, that one of the biggest problems for her was that Bobby couldn’t have sex any more.  She was intending to make a complimentary but perhaps inappropriate statement about Bobby’s sexual prowess.  Sadly, it came across as a complaint.  They tried really hard to be there for each other, but in fact their perfect family was being destroyed by cancer.  They hated it, and that showed.

They spent their twenty-first wedding anniversary in the hospital, Bobby hooked up to an IV and waiting for some kind of last chance surgery.  It never happened.  He died that night.  Jeanne was there, but she had stepped out to talk to the nurses when the moment came.  It was all she could talk about for months.  She wasn’t beside him when the time came.  It was her failure.

So Bobby died.

They knew he was going to die.  They tried to prepare for it.  They made sure their wills were in order.  They talked to the kids.  They did everything they should do.  But, as these things tend to be, it was inevitable.  He died.

And there sits Jeanne.  She has been married since before her 22nd birthday.  Her adult life has revolved around her husband and her family.  And her husband is now dead.

A few months after Bobby’s death, she described it to me this way:  “You’re 43 years old.  You have two kids still relying on you.  Your husband has been sick for three years, and just died.  You’ve had no sex – no real intimacy at all – since you were in your thirties, and you suddenly feel very old.  How would you react?   What I’ve decided is, I’m not ready to be old.”

Now, before you judge her, Jeanne was certainly devastated by the loss of Bobby from her life.  It hurt her not just because she never stopped loving him, but also because he was the father her kids needed, and still needed.  She was hurt, and lost, and scared.  And, as she said, she was not old.

Bobby died in December 1999.  In June 2000 a friend at work set Jeanne up on a blind date, and she agreed to go.  It didn’t work out, but it was like that event flicked a switch in her life.  She started dating, almost aggressively, agreeing to go out with anyone who showed interest.  Her “beauty based on style” stood her in good stead.  She elicited interest from a broad range of executives, professionals, and tech geeks.  Married, divorced, separated, single, even marital status uncertain, many were interested.

Over the next three years, Jeanne jumped on the dating bandwagon, going out with probably twenty or thirty – or maybe even more – different men.  Most were only good for dinner and (kind) rejection, but some lasted a few dates, and a couple even a few months.  Socially, it was the most active Jeanne had ever been in her life.

Her kids did not see it as mom’s social life.  While she rarely brought men back to her house, she did stay late or overnight at their houses, or in hotels.  She didn’t hide it.  Her kids were adults.  They would understand.

To them, however, it was simple:  “Mom’s a slut”.  As she later understood, they had also lost Bobby, and her dating by itself appeared to be disloyalty.  As her son said, bitterly:  “Couldn’t you have waited a little longer?”

To which she replied:  “I started grieving the loss of your dad when the doctor gave us the bad news.  I waited four years before trying to find someone new.  How much is enough?”

I witnessed this intense, biting exchange.  Strong but fragile 45 year old mother, tall 22 year old son who looked like a football player.  Both with flashing eyes, full of anger, but close to tears.  Only love could make people that angry.

It all came to a head in 2003, one night that in the broader scheme of things was irrelevant, but ended up being a tipping point in Jeanne’s life.

Jeanne had met a 38-year-old accountant from Hamilton who was tall, and good-looking, and reminded her a little bit of Bobby when he was younger.  They went out several times, and then on a weekend trip to Vermont for skiing.  He was intelligent, good company, and made her feel good.

The incident that precipitated her crisis started as an early dinner in downtown Toronto, after which they were going to “go dancing” or something similar.  He had booked a room at the Four Seasons, thinking correctly that after dinner with wine and liqueurs, it would be better not to try to drive home.  She thought it was perfect.  They could change to dancing clothes, even rest a bit before hitting the clubs.

Except, what happened was that they ended up in bed.  Then they ordered a bottle of good Scotch from room service, then went back to bed…  At 2:00 AM, drunk to the point of incoherence, Jeanne suddenly saw everything around her as … not what she wanted.  She felt like a teenager, doing something naughty.  But, she was not a teenager any more.  Over her friend’s objections, she called a taxi and took the long ride home to Mississauga.

She never saw him again, and when he called she told him, quite simply, that she was changing her life.  She wasn’t cold, but neither was he going to be in her new life.  Thanks, but bye.

The next day was her 47th birthday.

Three years after Bobby died, Jeanne brought her frenzied dating period to an abrupt end.  It wasn’t that she thought it was wrong.  She just realized that her dating was about being young again.  She was rejecting Bobby’s death, and her subconscious feeling that his death also meant she was too old to live.  She was single, and she wanted to act like an attractive single woman.

What the incident brought home to her was that she was no longer that twenty-two year old girl.  Her kids were older than that.  She was a real person, but she was not that person.  By riding the carousel, she was forgetting that she had grown, become a different person, over the years.

Jeanne later told me that when she sat down to talk to her kids about it, she spoke to them in French.  “French is a better language to express that kind of emotions,” she said.  “They understood what I was going through.  It wasn’t as hard as I thought.”

There is perhaps some irony that, within six months, Jeanne was for the first time alone in her big suburban house.  Her son went to do his MBA in Montreal, and her daughter moved to a condo in downtown Toronto with a roommate.

Her relationship with them was very good, though.  Her “period of grief” (“en deuil” in French) became just a running joke between them.  A good example was a couple of years later, when Jeanne’s daughter insisted on taking her into Aren’t We Naughty, an adult products store, because she “seemed sad”.  The kids never stopped teasing Jeanne for having been a teenager in her forties, and she took it just fine.  She put her en deuil period on the shelf, neatly packaged but decidedly part of the past.

Since then, there are more chapters to Jeanne’s story already, and undoubtedly more to come.  In 2008, she became a grandmother when her daughter had a baby, and then again in 2012 when her son became a parent.  (Her kids got her a coffee mug saying “World’s Youngest Grandmother”.)  In 2010 she was promoted to a more responsible job, one that included extensive international travel.

Jeanne still met guys from time to time, but she wasn’t really “looking”.  It just happened, and she took it in stride when it did.

Then, just after she became a grandmother for a second time, she met Marc – another accountant.  Eighteen months later, Marc and Jeanne were married, both of them surrounded by their happy children and grandchildren.  Jeanne was 57, not a teenager any more, but excited and positive about the future.

Why am I telling this story?

At Jeanne’s wedding in 2013, someone from my past, who knew Jeanne when Bobby was sick and afterwards, made an offhand comment to me:  “This Jeanne is nothing like the woman we saw after Bobby died.”  Implicit in his tone was some kind of criticism for her past excesses.

I thought about that, and told him I didn’t agree.  This is exactly the same Jeanne.  Back then she had some things to work out in her life.  She did, but throughout even that difficult period she never lost any of the good things that made up her character.

This is a “walk a mile in her shoes” type of story.  Jeanne has lived, and continues to live, a good life, her actions for the most part admirable.  Her reaction to Bobby’s death was not Jeanne doing something wrong, nor does it warrant opprobrium.  Something bad happened.  She handled it the best way she could.  And, in the process, she grew.

How would you have handled it?  Any better?

     – Jay Shepherd, March 8, 2017

Posted in Life Lessons, Lives | Tagged , | 3 Comments

Multiple Sclerosis

Those of you who know me will be aware that for many years I have focused some of my charitable fundraising, and giving, on the Multiple Sclerosis Society of Canada.

I didn’t have any particular connection to MS when I first got involved, and I frankly didn’t know a lot about either the disease itself, or the MS Society.  I did some homework at the time, and then over the years I learned a lot more.

Through anecdotes and short pieces, I have provided some of you with bits and pieces of information about MS, but I thought now might be a good time to do a more complete piece on the disease: its causes, impacts, treatments, and – one day – cure.

A word of caution, though.  I’m not an expert in the field.  This is a piece of reporting, i.e. things I’ve learned, rather than things I know well.  I am counting on the people I know who are real experts to leap to their feet in outrage if they see anything wrong, so I can correct it.  After all, this article is not supposed to be fiction (as much as I might like it to be).

What is MS?

Multiple sclerosis is so named because the disease causes multiple scars (sclerosis=hardened tissue) on the brain and nerves, as seen in autopsies of MS victims.  Other “sclerosis” diseases include Lou Gehrig’s disease (ALS – amyotrophic lateral sclerosis), arteriosclerosis (also called hardening of the arteries), and many others.  The name is descriptive of a category of symptoms – i.e. the hardened, scarred tissue – not a group of related illnesses.  MS and arteriosclerosis are not really similar;  ALS, while sharing some symptoms with MS, is not an autoimmune disease; and so on.

First diagnosed about 150 years ago by French physician Jean-Martin Charcot, MS is an autoimmune disease in which the body’s defences attack the protective myelin sheath around nerves, particularly in the spinal cord and brain.  Nerves with a damaged sheath, or one replaced by scar tissue, can’t communicate properly, resulting in deterioration of neurological functions.

The cause of MS is not known, but there are a number of important clues.

MS incidence correlates well with distance from the equator.  If you were born further from the equator, there is a much higher likelihood that you will have MS.  For my friends in Thailand, for example, they don’t need to worry.  The likelihood of a Thai having MS is almost zero (1 in 133,333 people), and Indonesia is even less.  None of the countries of South East Asia even have a charity devoted to MS.  They don’t have enough need for it.

Canada, on the other hand, has the highest rate of MS in the world, 1 in every 344 people.  Denmark is second, at 1 in 410.  Sweden is third, at 1 in 529.  Most of Europe is worse than 1 in 1,000, while most of South Asia and Africa are better than 1 in 10,000.   While some of the differences could be the result of local diagnostic practices, and awareness of the disease, it has long been known that MS is a disease of the temperate (northern and southern) climates, rather than tropical climates.

This correlation with latitude is even true within countries.  Incidence in the northern USA is twice that of the southern USA, and incidence in southern Australia is twice that of northern Australia.

Although a correlation to Northern European ancestry was once thought likely, the jury appears to be still out on that.  On the one hand, some northern peoples, like the Inuit, have very low rates of MS, suggesting that genetics rather than birth location is the tie to MS.  On the other hand, some non-European groups, like Palestinians, have higher rates of MS, making the genetic link less clear.

Most telling, though, is that children born in places far from the equator have a much lower incidence of MS if they have moved to a more tropical region prior to the age of fifteen.  Perhaps related to that, there appears to be a clear relationship between birth month and MS, with children born prior to the winter at greater risk than those born in the spring. Both of these suggest the possibility of an environmental cause for MS.

That is not to say genetics play no part in it.  A number of studies have shown that some patients may be genetically predisposed to MS.  However, much of this work – at least at this stage – appears to show only that some people are more susceptible to autoimmune diseases generally, not just MS.  One exception is studies showing that identical twins have a 30% chance of having MS if their twin has it, whereas other siblings, including fraternal twins, have only a 2% chance.  The connection, if any, between genetics and MS continues to be a matter of some debate in the MS research community.

Another factor in understanding the cause may be the fact that MS strikes women at a rate twice that of men.  A further subtlety is that, in women, hormonal changes appear to affect the symptoms of the disease.  For example, during pregnancy, women with MS often have a remission of symptoms, then after the birth there is a relapse.

There are basically two types of MS:  relapsing and progressive.  In the first and most common type, relapsing (called RRMS), there are episodes of symptoms, interspersed with periods symptom-free.  In the second type, progressive (called PPMS), the disease slowly gets worse over the person’s life.  About half of those with the first type of MS end up with the second type within the first ten years after diagnosis. While both are considered MS, until the cause or causes of MS are known it cannot be said with certainty that they are two versions of the same disease.  The fact that there are two things we call MS may, through the study of their differences, end up helping researchers to find the cause of MS.

Research into the cause of MS has several directions: genetics (whether as a cause or a susceptibility), environment (for example, vitamin deficiencies), viral (as a direct cause, or as a trigger for genetic or other factors), etc.  Much of the work seeks to understand the interactions between factors, and there are many in the scientific community that believe those interactions will be the key to identifying a real “cause”.

However, like much of medical science, research into the cause of MS is characterized by a disheartening amount of “ruling things out”, which while undoubtedly useful is not as exciting as finding “promising leads”.

Impact on Its Victims

Around the world, there are currently about 2.5 million MS victims, with about 100,000 of those in Canada.  This is rising fairly quickly, just under 200,000 diagnoses per year, which is about seven times the rate at which the world’s population is growing.  There is a good likelihood that the high rate of increase in the known incidence of MS (8%) is due in whole or in part to improved knowledge and diagnostic techniques.  That having been said, without knowing the cause of MS, scientists cannot rule out the possibility that environmental or other factors are causing an increase in the absolute incidence of the disease.

People are fond of calling every disease a “deadly” disease, but that doesn’t really describe MS.  Although MS victims have a shortened lifespan – perhaps ten years shorter on average – MS rarely kills people.

So, I don’t call MS deadly.  You could call it a “debilitating” disease, I suppose, but I prefer to call it a “cruel” disease.  MS doesn’t kill you, but it can do a pretty effective job of attacking your ability to live a happy and productive life.

Like most illnesses, the progression of MS is different for every victim.  That having been said, because the basic operation of the disease – damaging the myelin sheath – is consistent, there are a number of impacts you will often see.

For example, it is common that MS patients will have pain and burning sensations, as well as muscle spasms.  The result can be issues with mobility and balance, including vertigo, dizziness, etc.  Many MS victims have problems with their vision, and can exhibit slurred speech, problems swallowing, and other neuromuscular deficits.  Many of these symptoms are common in other neurological disorders.

Specific to MS, particularly in its later stages, is the possibility of problems with cognition and memory.

The symptoms have been seen publicly in the impacts on well-known people who had MS.

Annette Funicello, for example, visited the dreams of many a young boy in the 50s and 60s.  One of the original Mouseketeers on Walt Disney (the pretty one), she went on to star in a series of “beach party” movies with Frankie Avalon in the early 60s.

In 1987, at the age of 44, she first started showing dizziness and other symptoms.  In 1992, faced with rumours that she had become an alcoholic (due to the slurred speech and similar motor disruptions caused by MS), she revealed for the first time that she had been diagnosed with MS.  With a couple of exceptions, she essentially ceased to involve herself in acting, or fan events, or any other public activities and appearances.  Her symptoms got progressively worse.  By 2004, she couldn’t walk, and by 2009 she couldn’t speak.  Shortly after that, she was placed under 24-hour care, and died in 2013 at the age of 70.   A CTV special on her life, including her battle with MS, was filmed a year before her death.  It makes instructive watching.

Another screen star struck by MS was Teri Garr.  Most well-known for her roles in Young Frankenstein and Tootsie, Garr had her first symptoms of MS when she was 25.  Unlike Funicello, Garr experienced a slower progression of the disease, so she was able to hide it for twenty years.  After announcing her diagnosis in 2002, Garr became (and continues to be) a spokesperson for the National MS Society in the US.  She continued to act in movies and TV until 2007.  At that point, due to MS and other health problems, she ceased to be active in the entertainment industry.  She still appears occasionally to speak in support of the fight against MS.

Richard Pryor, one of the most irreverent (at the time, the correct term might have been scandalous) comedians of the 70s, and certainly one of my favourites, was limited by MS for at least the last fifteen years of his life, using a scooter to get around after he lost most of his ability to walk.  He also ceased to perform publicly, although he denied being unable to speak due to the disease.  He died in 2005, at age 65, of causes likely completely unrelated to MS.

Pryor will forever have a place in MS history, though, for his wry comment that MS actually stands for “More Shit”.

I could go on.  Each of these public figures, and the many others we know about, experienced MS in a different way, but for all of them their lives were permanently and negatively altered by the disease.

I have often said that if you choose twenty people you know at random, at least one of them will be been affected, directly or indirectly, by MS: either themselves, or through a relative or friend.  I regularly hear stories from friends and acquaintances touched by the disease in some way.  In each case, the details are different.  In every case, the impact is significant.

Treatment

MS is not entirely untreatable.  Although the overall cause of MS is not known, some of the proximate causes of the symptoms are known, and enough of its physiology is known to allow responses to it.  Research has revealed treatments that can, for some people, control the impact of MS while still falling well short of a cure.

In one sense, the most exciting treatments are those that slow the disease down, but they only work on the relapsing type of MS.  Even then, they are specific to the patient, and don’t work for everyone.  They are mainly fall into two groups.

First, various uses (I want to say “types”, or “flavours”, but I don’t know if that is right) of beta interferon have been shown to reduce the number and intensity of relapses in relapsing MS.  This drug family is usually taken by injection, and it can have a range of strong side effects.  Perhaps the most serious is the potential for liver damage.

Second, there are a series of drugs – some of them very recent – that, through various mechanisms, limit the immune system’s ability to attack the myelin sheath.  Usually taken every day, these immunosuppressants and other immune system medications also have severe, even debilitating, side effects.  An example is Lemtrada, a drug that breaks down certain immune cells.  Although shown to be more effective in limiting MS relapses than other treatments, Lemtrada had a hard time getting regulatory approval because it sports an impressive list of major side effects.  It is still used as a last resort when other treatments fail.

Recent studies of this category of drugs, including one released this month, continue to express concern about the balance between drug effectiveness and negative impacts.  While not recommending against them, researchers are emphasizing that they are a long way from being perfect solutions.

For some years, MS patients relied mainly on treatments that target the symptoms of MS, and for victims of the progressive version of MS this remains their only drug treatment option.

By way of example, corticosteroids have many medical applications as anti-inflammatories, so the inflammation of the myelin sheath in MS is an obvious area for their use.  Drugs like prednisone are used to reduce inflammation in MS patients, and can be effective in limiting the pain and debilitation associated with the symptoms.

Similarly, muscle pain from MS can be controlled to some degree through standard muscle relaxants.  As many sufferers have recently found out in Canada, medical marijuana has also proved to be effective for some people in reducing the impact of some MS symptoms.  These are just some of the examples of symptoms that can be managed by the same treatments in both MS and non-MS situations.

Treatments also include non-drug therapies.

Recent research is suggesting, for example, that regular physical exercise may reduce the disease’s impact on walking and mobility.  For a long time the opposite was thought to be true.  For impairment of cognitive functions, various behavioural therapies have also shown good success in particular cases.

For a while, there was hope that a new treatment proposed by Italian doctor Paolo Zamboni (unrelated to the Zamboni of hockey fame) would prove successful. Zamboni claimed in 2009 that he was able to alleviate MS by opening up the veins of some patients through vascular surgery.  A number of subsequent studies, including one in 2013 by Canadian doctors, and funded by the MS Society, have apparently shown that Zamboni’s theory is not correct.  However, given the controversy surrounding the Zamboni theory, it is likely that the results of a broader study of the Zamboni theory and technique, being carried out in Canada and reporting later this year, will be needed before a consensus is reached on whether it has any basis.

This is not intended to be a full summary of all treatments currently being used.  It merely hits some highlights.  There are more, and some of them are very promising.

For example, recently Toronto’s CAMH reported success in using myelin peptides to protect the myelin sheath, not by limiting the actions of the immune system, but by strengthening/restoring the myelin directly.  Another recent study, funded by the National Institutes of Health in the USA and including American, Canadian, and British researchers, has shown that stem cell transplants may have potential in combatting relapsing MS.

When I am fundraising for the MS Society, I am of course conscious that some of the money goes to make the day to day lives of MS patients better.  Just as much, though, I am conscious that some of it is going to fund these kinds of leading edge research.

The Elusive Cure

When you don’t know what causes an illness, it is more difficult to find a cure, but thousands of researchers around the world continue to pursue this disease on both fronts:  cause and cure.

One of the least understood questions is why the immune system attacks the myelin sheath.  There is research being done to see whether there is a specific trigger for these attacks, either within or outside the immune system. Related to this is the question of whether, whatever the triggering event is, there is a genetic switch that either causes it to be initiated, or allows it to happen.

A significant focus of some research is Vitamin D.  Children who grow up closer to the equator produce more Vitamin D in their bodies due to greater exposure to sunlight.  Some researchers believe this is the connection between place and time of birth, and incidence of MS.  They are trying both to prove the causality empirically, and find neurological explanations that would provide the analytical connection.

Other researchers are exploring the potential relationship between certain viruses, such as measles and herpes, and MS.  Since viruses like these often cause damage to, or inflammation of, the myelin sheath, the theory is that viruses may be the trigger that turns the immune system against myelin.

I would be very pleased to say that the cure is just around the corner.  That would be lying.  It could be.  We don’t know.  Scientists are exploring many lines of inquiry, and we simply have no idea which one will prove successful, and when.

Conclusion

No, no jokes in this article.  I don’t find MS all that funny.

Multiple sclerosis is a serious problem, one that harms the lives of many people.

On the other hand, it is also a problem that we will solve, tomorrow or next week or a decade from now.  All it requires is tenacity.

I am confident that, during my lifetime, MS will – like many other diseases before it – be fully understood, and then cured, and I will finally hear the evening news anchor saying that MS has become a disease of the past.

– Jay Shepherd, February 14, 2017

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Energy #15 – An Answer for the Premier

Premier Kathleen Wynne is looking for a way to attack the rising cost of electricity, an increasingly dangerous political issue in Ontario.

She has already given up the 8% Ontario portion of the HST, sure enough, but the public has largely discounted that because it is less than the 10% Ontario Clean Energy Benefit, terminated last year.  Knowing she hasn’t solved the public’s concerns, the Premier has announced that she will do something further, and there has been a flurry of activity at Queen’s Park, and at the Ontario Energy Board, to figure out just what that should be.

The problem is, most things that might have significant impact will cost significant money, and the Province doesn’t have any money to spare.  Spending serious money to bring electricity costs down for average householders will cost billions of dollars, more than the Province can afford.  Even the 8% HST break was a billion a year cost.  There is really no more money for this.

This article is proposing a way of reducing electricity bills – at least for some Ontarians – that will not have any real incremental cost, but could produce substantial reductions for those affected.  It is not the whole answer, but it would be a step in the right direction.

The proposal?

Declare – and legislate – an open competition for the right to serve monopoly electricity distribution territories in Ontario.

Already I can see many in the industry getting “twitchy”, or even falling off their chairs, at this outrageous suggestion.  Yes, yes, I know that a free-for-all doesn’t really help anyone.

On the other hand, rationalization of the distribution sector is happening at a snail’s pace, despite the merger that has formed Alectra.  Not only that, but too many of the acquisitions are by the most expensive distributor in Ontario, Hydro One, so the customers will actually be worse off in the long run.  Meanwhile, many other economically sensible steps to improve the structure of the distribution sector can’t happen because of the laissez-faire M&A rules in place today.

So instead of the existing approach – essentially benign neglect – and instead of an outright free-for-all, I am proposing a managed move to open competition, with the following rules:

  • Initiation.  Any licensed electricity distributor in Ontario can initiate a bid to acquire a part of the service territory of any other distributor by making public an offer to purchase that territory, and filing it with the Ontario Energy Board.
  • Partial Service Territory Only. The service territory to be acquired cannot be more than 50% of the service territory of the distributor currently licensed to serve it.  You can take part of another distributor’s territory, but not all of it.  Municipalities shouldn’t be forced to give up their local utilities if they don’t want to.
  • Proof of Rate Reductions. The acquiring distributor must demonstrate that their distribution bills for customers are currently lower than those the customers in the acquired territory are paying now, and those bills will continue to be lower in the foreseeable future.
  • Valuation-Based Price. The price offered must be based on an independent valuation.  That valuation, if it is on a discounted cash flow basis, must use the existing and forecast revenues at the acquiring distributor’s rates, not the higher rates of the seller.
  • Share Option. The offer must include an option for the seller to take as much of the price as they choose in the form of shares of the purchaser, provided that the shares would not put the purchaser offside for federal tax purposes (i.e. maximum of 10% of the purchaser).
  • Public Interest. The Ontario Energy Board must determine that the transfer of the service territory is in the public interest.  This will necessarily involve the purchaser filing an implementation plan, and showing the benefits of the acquisition for the customers.

Once a qualifying offer is filed publicly with the Ontario Energy Board, any other distributor would have ninety days to file a competing offer.  Once all offers are on the table, the OEB would hear from purchaser(s), seller, and customers on the pros and cons of the transaction, including any disagreement over the valuation.  If the customers would benefit from the change, and electricity distribution in the Province would be more rational as a result, it would be approved.  That is, the seller would be required to sell on the terms approved by the OEB.

Introduction of this kind of managed but open competition could have positive effects quite quickly.

The first transactions in play would likely be in those cities where, right now, part of the city is served by a municipally-owned distributor, and part by Hydro One.  In those cities – Kingston, Sudbury, Thunder Bay, and Windsor, for example – the customers in the Hydro One area often pay up to twice as much for their distribution services.  The local distributors have for years wanted to expand to serve their neighbours in the same city (“chomping at the bit”, one told me), saving considerable money in the process, but have been stymied by Hydro One’s unilateral refusal to discuss it.  This would allow that rationalization to happen.

The same thing is true around some of the other urban areas, where suburbs outside of the city are more sensibly served by the local distributor, rather than by Hydro One.  This is most obvious in areas around Hamilton, London, Ottawa, and Vaughan, but is true elsewhere as well.

It might take a little longer, but this open competition could also open up other merger possibilities.  The Guelph, Kitchener, Cambridge and Waterloo distributors should probably merge, but one sticking point (there are others) is Hydro One territory in between, and on the edges.  A similar impact could be seen if Veridian, Oshawa, and Whitby continue their current merger discussions.  That would be a better territory – and potentially an easier merger to complete – if certain Hydro One areas were added.

Although the most expensive utility, Hydro One, would probably be the target of most of the service territory battles, others could be affected as well.  The new Alectra has St. Catharines, but it may well be that a merger of all the Niagara region distributors could be facilitated if the St. Catharines service territory was also served by the newly merged entity.  Under open competition, this is more likely.

The key here is that, in every case, the acquiring utility must show that rates will go down.  In many cases, these reductions will be substantial.  However, they will not be going down because of government subsidies.  They will go down because lower cost providers are buying out higher cost providers, and then driving further cost efficiencies.  (Just like in the competitive markets, I should add.)

And what about poor Hydro One?  Aren’t they going to be the target of most of these challenges? Aren’t they going to lose hundreds of thousands of customers, and thus some of the market value of their newly-public shares?

The answer to that is three-fold.

First, this would absolutely put the pressure on Hydro One to become more cost-effective.  However, that is a good thing, and I for one would certainly not be shedding any tears over Hydro One being subject to increased market pressures.  All of their customers will benefit from that.

Second, in this scenario Hydro One is getting paid fair value for the service territories it sells.  This is no bargain basement sale.  The stock market may well see the sale at full value of these territories – ones that at some point in the future will likely become contentious anyway – as a good thing.

Third, and most important, Hydro One shareholders will be worried about losing the upside of future growth.  This is solved by allowing Hydro One to take shares in other distributors as part of the purchase price it is paid.  This will diversify Hydro One’s distribution portfolio and reduce risk (including in particular operational risk), while still maintaining full participation in the upside of distribution growth.

As I said, this is not a “solution” to the problem of high electricity costs.  What it could achieve, though, is 5-10% bill reductions for hundreds of thousands of residential customers throughout the Province, at no cost to the government.  Further, it would accelerate the rationalization of the distribution sector, and that in the long term will produce even greater cost efficiencies for customers.

And, let’s not fool ourselves.  What other choices are available to the Premier?  Unless she has sources of funds that we don’t know about (which would be great….but no), any real action to drive down electricity costs is going to be difficult and/or expensive.  You can’t get around that.

This proposal is something that can be implemented now, and can produce billions of dollars of long-term benefits for customers, not through government largesse, but through greater efficiencies.

– Jay Shepherd, February 3, 2017

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Energy #14 – Corporate Governance

It may have been the first time I’ve heard the word “effrontery” actually voiced orally.

The speaker was the Chairman of the Board of a small Ontario utility.  The subject was the Ontario Energy Board’s upcoming “guidance” to be given to utilities on how their boards of directors should be selected and supervised, and how those boards should carry out their responsibilities (called, in legal circles, “corporate governance”).

Since the OEB announced last year that their long-simmering foray into corporate governance was back on the rails, I have been talking to utility management and directors about it.  It has not always been pretty.  The word “effrontery” is one of the more printable terms I’ve heard.  (It derives, by the way, from the Latin word effrons meaning, literally – and I am absolutely not making this up – “without a forehead”.)

Anyway, the result was that I wrote my first try at this article in July, but before being published it was overtaken by events when the Milton decision came out.  I was then going to publish a revised version in September, but the OEB launched a series of consultations in this area, and I decided in fairness that I should hear what was being discussed.  Meanwhile, I continued to talk to utilities and their directors about the initiative.

Those reactions continued to question the OEB’s direction, and role, in what is undoubtedly an important area for Ontario utilities.  The question is whether it is, or should be, an equally important area for the regulator.

Background

Some background may be helpful.

At a stakeholder meeting in 2013, Ontario Energy Board Chair Rosemarie Leclair told utility and customer representatives that the OEB was planning to take a more active role in supervising the corporate governance practices of regulated entities.

No-one said anything.  It was as if she had used vulgar language, and everyone was trying to ignore it to avoid embarrassing her.  She was pretty new to the job at the time, and I think everyone just assumed that she didn’t yet know what areas were outside of her purview.

Afterwards, though, there was much shaking of heads, of the “She doesn’t understand” variety.

All was then pretty quiet for a couple of years, until 2016.  Things were happening, though, behind the scenes.  In 2015 KPMG was asked to do a review of how other energy regulators were supervising utility corporate governance (they aren’t … not in Canada, not in the U.S., not anywhere else).

Unhappy with the KPMG result, the OEB turned to always-cooperative Elenchus Research to provide an analysis of what the OEB could do to take more control over utility governance practices.  Finally, in 2016, the OEB has unveiled a consultation on corporate governance.  The direction is clear.  The OEB wants more control.

It has kicked off with separate meetings in September between the OEB and utilities, and then the OEB and customer groups.

There are two high level regulatory issues within this subject, each invoking a well-known regulatory buzz-word.  First, from the point of view of the utilities, there is the spectre of “micromanagement”.  Second, from the point of view of the customers, there is the bogey-man of “light-handed regulation”.  The OEB denies they are heading in either direction.  Not everyone believes them.

Related to these general regulatory issues are three more fundamental concerns.  Does the OEB have a legal mandate to regulate corporate governance?  If it does, does it have the expertise to do so?  Surrounding all of this, are the discussions by the OEB with utility executives reflective of the views of utility shareholders, who are ultimately in charge of the governance of the utilities they own?

Or, as one utility board member summed it up to me in November: “Have they gone completely nuts?”

Is There a Problem?

Let’s start with a basic question:  is there a problem with the corporate governance practices of regulated energy companies?  Do they, for example, select, train or supervise their boards of directors poorly, or fail to maintain proper procedures for ethical conduct, conflict of interest, and transparent decision-making?  Do their boards of directors have sufficient independence or, conversely, do they succumb to political influence, or the influence of their unregulated parent companies, in their decisions?  If they do any of these things, does that even matter?

The honest answer is, some utilities have good corporate governance, some not so good.  In this respect, they probably reflect any random cross-section of similar-sized private companies in the province.  Indeed, on average utilities probably do a better job of corporate governance than most private companies.

But, of course, it is not the averages that matter.  Utilities are given a public monopoly (to distribute gas or electricity, typically), and it is important that these utilities be run properly.   They are not like normal private companies, who are judged by the market, sometimes harshly.  The Ontario Energy Board, the regulator, acts as their market.

It was in part to improve utility governance (and also to promote consolidations and privatizations) that, in 1999, the Ontario government of the day decided that all municipal utility commissions would be required to incorporate as private business corporations under the Ontario Business Corporations Act.   Prior to that time, they were essentially arms of their local governments, and their governance practices … what’s the word? … sucked.   Sometimes overly political, sometimes nothing more than sinecures for local political contributors, sometimes just a cash cow for local government, the commissions were not always models of good corporate governance.

Importing the Corporate Law Rules

Moving to the framework of the Ontario Business Corporations Act (OBCA) imported a known and fairly rigorous structure, including not just the fiduciary duty and standard of care that were probably already applicable to the commissioners, but also a level of separation between shareholder and utility.  Further, the OBCA was and is itself based on a strong tradition of regulation of corporations and their practices.  Not only is there a broad basis of statutory rules, but in Ontario and elsewhere the principles in the OBCA have been considered by the courts tens of thousands of times.  While nothing is ever completely certain, in the OBCA we are at least dealing with a set of rules and principles that are well-known and understood.

Corporate law is set up to deal with the relationship between shareholder and company, the relationship between third parties and the company (and through the company, the shareholder), and collaterally the solvency or financial viability of companies.  It is supplemented by separate regulation dealing with taking money from the public as shareholders or debtors (the Ontario Securities Commission, or OSC) and, in special cases, the ability of financial institutions to meet their obligations (the Ontario Superintendent of Financial Institutions, or OSFI).  Corporate governance rules and principles are fundamentally structured to protect shareholders and creditors, i.e. those who provide the capital for the company.

This is not accidental.  To understand why this is true, you have to start by understanding that corporations are just pieces of paper.  Like the emperor’s new clothes, they don’t actually exist.  (Technically, they are “juristic entities”, which means they exist in the legal world, not in the real world.)  Thus, the only way they can operate in the real world is if they are imbued with real world powers, and their duties, responsibilities, liabilities and actions in the real world are set out in a formal code.  People can be held accountable for things.  Pieces of paper, not so much.

So the corporate law makes clear the rules relating to: how corporations make decisions and act on them; the rights and liabilities of the shareholders and creditors vis-à-vis the company and third parties dealing with the company; and so on.

What neither the OBCA, nor any of the corporate governance rules we already have, are intended to do is protect the customers or other stakeholders of companies.  Corporate law goes so far as to require certain levels of financial probity in companies (to protect shareholders and creditors), but has nothing whatsoever to say about how they run their business, or how they treat their customers or employees.  Zero.

In fact, the corporate rules run directly counter to the protection of the customer.  They require directors and, through them, management to act in the best interests of the corporation.  The sole arbiters of whether they are succeeding in that task is the shareholders, who appoint them.  Any resulting protection of the customers or the employees – even though it may actually happen – is serendipitous.  Customers and employees are protected through other areas of the law (consumer protection law, labour law, etc.).

The Role of the Regulator – Mandate

The first and most fundamental question about the role of the OEB in corporate governance is:  “Where is the OEB’s mandate to regulate or control utility corporate governance?”

OEB Staff and their consultants start from the theory that anything to do with the health and well-being of regulated utilities is within the mandate of the OEB.  That is, of course, not the law.

The OEB has three main mandates:  setting just and reasonable rates, licensing many of the participants in the energy sector, and enforcing rules either made by the OEB, or set out in other statutes.

Clearly a mandate to regulate corporate governance cannot be implied within the rate-setting mandate, and the enforcement power is limited to specific rules and requirements.  Unless the OEB establishes a binding Code on corporate governance (which would likely be challenged successfully in the courts), the enforcement power doesn’t help them.

That leaves the licensing power.  In theory, the OEB could require adherence to corporate governance standards as part of licences. If you want a licence, for example to be an electricity distributor, you have to govern yourself this way.

This would run into two problems.

First, presumably if you are requiring licensees to meet certain governance standards, that would have to include not just the regulated utilities, but also licensees that have unregulated energy businesses, such as private generation companies, or energy marketers, and so on.  Not only would they object, but it would be obvious that the licensing power is not intended to include such intrusive control.

Of course, if it is not intended to include that control for unregulated companies, why would it be intended to do so for regulated companies?  The only possible reason would be the mandate to regulate the rates of those companies.  As noted above, that clearly does not mandate control of corporate governance.

Second, and more problematic for the OEB, regulation of utility corporate governance cannot include any real consideration of other stakeholders, such as customers, without running afoul of the existing statutory rules relating to corporate governance.

For example, the fiduciary duty of directors is to the corporation.  That is a statutory requirement.  The OEB can’t change that.  It can express its interpretation that the best interests of the corporation includes the customers, but that has no force or effect.  If the OEB tried to enforce it, they would certainly be exceeding their mandate, and likely be wrong in any case.  The best interests of the corporation is, under the OBCA, enforced by shareholders or by the Director under that act.

Similarly, the shareholders are granted rights under the OBCA to select directors, and there is a rich area of law that they are entitled to exercise those rights in their own self-interest.  The OEB would be on very shaky ground in trying to restrict those rights, for example by requiring that certain nomination and appointment processes be followed.  The OBCA sets out those rules already.

OEB Staff point to court decisions like Toronto Hydro v. OEB, which upheld an order of the OEB that Toronto Hydro not pay dividends for a period of time without the approval of a majority of its independent directors.  This, the high water mark of OEB authority in this area, was still limited to a specific situation in which, acting arguably within its mandate to ensure the financial integrity of the particular utility, and based on evidence that there was an issue, the OEB ordered the utility (not the shareholders or the directors) to act in a certain way.  Even then, it is not at all clear that the decision would have been upheld on appeal.

To be fair, the OEB appears to have accepted the limitations on its mandate in this area.  While OEB Staff refused to disclose, during a public consultation, whether they have a legal opinion on their jurisdiction (I asked), they did make clear that the OEB is planning to provide “guidance” to utilities, without any binding force or other consequences.

(Asked if the upcoming guidelines would have any more effect than they would if they were guidelines from Electricity Distributors Association, a utility trade association, the answer – verbatim – was “not really, except of course that they would be from the OEB”.  To some, that could sound a lot like “wink, wink, nudge, nudge”.)

The Role of the Regulator – Value Added

But legal restrictions on the Board’s mandate in this area may not be the biggest problem.  In all my discussions with utilities and other energy stakeholders, the most common question asked has been:  “How can an organization that can’t get their own corporate governance right ever be relied on to give guidance to others?”

Harsh, but probably fair.

The OEB really has two strikes against it in the corporate governance department.

First, it ignored the express governance requirements of its own statute for several years, leaving the OEB without any effective governance structure for that entire period.

Second, when it re-established part of the statutory governance structure – the management committee – it is still composed of the Chair and the two Vice-Chairs, both of whom rely on the Chair to be re-appointed.  Further, the Chair has been re-constituted, contrary to the statute, as the CEO, thus affirming her role as management rather than governance, but she has no regular reporting process to any management committee or board of directors.

The end result is that the OEB now operates without any independent oversight of either their operations, or their strategies.  They only answer, if to anyone, to the Minister of Energy.  In short, their governance structure is much like the old municipal electric commissions, directly tied into the political structure.

This is particularly problematic because the whole purpose of the OEB is to be independent from government.   The government regularly touts that independence as protecting the public from government influence over the energy sector.  Yet in fact, the OEB has less independent governance than even the most poorly governed regulated utility.

(Contrast the OEB with the Ontario Securities Commission, where the board members constitute a board of directors to which the Chair reports.)

But the complaint that the OEB are not the people to provide governance guidance is not just “the pot calling the kettle black”.  It is also about expertise.

The OEB has some very knowledgeable and talented people, but their training is in economics, accounting, and engineering, areas that provide a foundation for economic regulation.  No-one at the OEB – not one person – can be considered an expert in corporate governance, and they usually don’t even have much knowledge of how utilities are actually governed today.  How many people at the OEB, for example, have even attended a board of directors meeting of a regulated utility?

The OEB recognized this in going out to consulting firms to get assistance.  The first, KPMG, is an accounting/consulting firm, but they were well placed to do a jurisdictional review in the energy sector.  They did that, but they were not asked to continue.

The second, Elenchus, provided a four-person team.  Two are former Vice-Chairs of the OEB, and trained by ICD.D in how to be good directors.  However, both would say that they are not corporate governance experts.  Only one member of the team is a lawyer, and his specialty is mergers and acquisitions.  While M&A lawyers have to know something about corporate governance, it is not their area of expertise.

There are recognized experts in corporate governance in many leading law firms, and elsewhere.  None are part of this consultation process.

The limited expertise of both OEB staff and the consulting team was brought front and centre in the consultations last fall.  The very first recommendation to the OEB from the consultants is that OEB corporate governance guidance be based on the guidance by the OSC (which protects shareholders and debtors), and OSFI (which protects the financial viability of financial institutions).  Presented with the reality that corporate governance principles that protect the customers would have to come from an entirely different perspective, they were nonplussed.  They simply did not understand the concept, even though this perspective issue is central to the duty of any fiduciary, including a director.

Light-Handed Regulation/Micromanagement

The OEB’s goal is a set of governance rules presented as (theoretically) non-binding guidance.   Utilities would be required to report annually and in detail on their compliance with the guidance, and the OEB would then audit their corporate governance reporting to ensure that it was accurate.  Periodically the OEB would send teams in to do a more detailed assessment of the corporate governance practices of individual utilities.  It is not clear who they would send, since clearly it could not be OEB staff.  Perhaps they plan to add to their staff, or perhaps they will simply rely on outside consulting firms.

All of this is, in theory, without any consequences for utilities that do not comply.

Well, not really.

It is carrot and stick.  The stick is that “poorly governed” utilities will be outed publicly by the OEB, the “governance experts”, as if they were made to stand in the stocks in the town square.

The carrot is that, if a utility is judged to be “well governed”, the OEB will embark on a less thorough review of their proposed rates (because, after all, the utility board of directors is looking after that already, right?).

The stick exceeds the Board’s mandate.  The carrot declines the Board’s mandate.

But legal technicalities aside, all good, right?

Again, not really.

The stick is, if you don’t have internal procedures consistent with our rules, we will punish you.  This is not the role of economic regulators.  If the Board were a government department, perhaps it could get away with setting rules on corporate governance (although it would probably be a bad idea).  As an economic regulator, the Board doesn’t deal with the internal workings of the regulated utility.  Its job is to deal with the interaction between the utility and its customers – whether dealing with rates, conservation programs, reliability, customer care, or otherwise.  It is a “market proxy”.

The Board, in its Renewed Regulatory Framework for Electricity, got one thing glaringly right:  outcomes.  Driven by the concept of the market proxy, the job of the economic regulator is to deal with outcomes.

It is not the Board’s job to stipulate how the outcomes are achieved.  That is the role of the utility.  The Board can set targets for rates or reliability, for example.  It cannot and should not stipulate that everyone must have an IVR system, or standardize on Microsoft Word, or use red maple poles.  If a utility can meet its targets without doing those things, that is the end of the matter.  (It is only when goals are not being achieved that things like “best practices” are even relevant to the regulator.)

The regulated energy sector has a term for a regulator encroaching on the role of the utility:  “micromanagement”.  The basic theory is that utility personnel are in the business of running a utility.  They have both more expertise and better information than the regulator, and so with rare exceptions will run the utility better than any regulator could.  “Tell us what results you want us to achieve”, the utilities say, “and assuming those results are reasonable, we’ll figure out how to get there.  Just leave us to do it.”

Thus, the stick in this exercise is an overreaching by the regulator, crossing a well-understood line – micromanagement – that is there for a good reason, and has stood the test of time.

The carrot, on the other hand, is “light-handed regulation”.  This apparently common-sense theory is that, like a doctor dealing with a healthy patient, the regulator doesn’t have to look as closely at a utility that is clearly better than its peers.

Customers generally don’t like light-handed regulation, because it seems like the regulator is not really meeting its full responsibilities with respect to some utilities.  How do you know the utility’s rates are OK if you don’t take a thorough look?

In fairness, the answer is that the level of investigation can be driven in part by external measures of success.  The critical element is that you set the intensity of your review not on the basis of operational factors, but on the basis of results.

A regulator has outcomes that it can assess using objective tools.  If rates are low, reliability and customer interaction are good, cost benchmarking is favourable, and asset condition is strong, this is probably not a utility that needs a CT Scan and an MRI.

The OEB’s scorecard approach is already moving in this direction.  “If you’re achieving objectively proven good results for your customers, we the regulator have met our goals, and we’re not going to try to fix what isn’t broken.”  While the scorecard system still needs work, there’s nothing wrong with the concept.

The concept of light-handed regulation goes off the rails, though, when it is tied to operational tests, rather than results.  Good results are what matters, and a utility achieving good results does not need the same level of diagnostics as one with issues.  That would be true, by the way, whether the utility has an independent and stellar board of directors, or whether they are effectively run through the local municipal offices (bad, very bad).  Results are results.

Thus, if the implicit promise of complying with the Board’s governance guidelines is light-handed regulation, that is essentially the Board refusing to do its job.  A utility with good governance and high rates needs regulatory attention, and not doing so is a regulatory failure (whether through laziness or stupidity or anything else, it doesn’t really matter).  A utility with lousy governance that delivers for its customers doesn’t need a full-scale regulatory onslaught.  Jumping on them is not only unfair, but a waste.

Who Are They Talking To?

Part of the problem here may be that the OEB is talking to utility management, and consultants, and themselves, and even sometimes (well, a little bit) to customer groups, but not to the owners of the utilities.

Corporate governance belongs, in a very real sense, to the owners of corporations.  Step one in any review process would have to be to go to the owners of utilities and talk to them.

What?  They haven’t talked to the municipalities and other owners of utilities? Apparently not.  (Or at least, if they have, they haven’t told anyone about it).

They have talked to utility management, particularly CEOs, but the OEB doesn’t appear to realize that CEOs and their shareholders have different perspectives on issues like this.

I talked to one CEO, for example, who told me quite frankly that while he can’t publicly support the OEB’s corporate governance initiative, privately he sort of likes it.  If the OEB does what it plans, he expects that he will have more influence over the selection, orientation and training of board members, the people to whom he reports.  His municipal owners will have less influence, because this will be seen to be a regulatory requirement.  It will expand the CEO’s freedom to manage as he sees fit, and reduce the extent to which his board questions what he’s doing.  His job is made easier due to decreased accountability to the shareholders.

It is likely that if you talk directly to a municipality that owns a utility, they will have a different view.  (And as for Enbridge Inc., for example, the publicly traded owners of Enbridge Gas Distribution and now Union Gas, they will certainly have a very different view.)

If the OEB wants to help the owners of utilities improve the governance of those utilities, the right thing to do is ask those owners how the Board can help.  The answer might well be positive.  Municipalities and others may value the input of the Board, consultants and customers, particularly if it is constructive and respectful of their rights.

On the other hand, the answer might be some polite, or less polite, variation on “Thanks for bringing this to our attention.  We’ll take it from here.”

What appears to have happened, instead, is that the OEB is simply moving forward as if the utility owners have no say in this.  It is unclear why that would make any sense.

Conclusion

The Ontario Energy Board’s foray into regulating corporate governance is likely a mistake on multiple levels.

That is not to say that they can’t do some good in this area, just because as the regulator they have an ability to get peoples’ attention.  However, until they recognize that the owners – whose issue it is – need to be at the centre of it, there is little likelihood they can be helpful.

Even in partnership with the utility owners, it is at least questionable whether the OEB should be spending its time barking at this particular squirrel.  The OEB has a lot of important things to do that are within its mandate, some of which are not getting sufficient attention due to finite resources.  Whatever value the OEB could add to the corporate governance issue, it may well be able to add more value in an area for which it actually has both legal responsibility and technical expertise.

– Jay Shepherd, January 7, 2017

 

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How Bad Can It Be, Really?

[This is my fourth attempt at an article on the Trumpian ascendancy.  I usually set an article aside for a day or two, then come back to it and see if it’s silly, prosaic or boring before publishing it.  The first three “Trump” articles, seven thousand apparently pithy words, didn’t survive the sober second thought test.  If you’re reading this, this one did.  Of course, I could have followed the lead of The Donald: all of that stuff could have been shared over the last four weeks, in 140 character 3 AM bursts.  But no.]

Let’s start with some basics.  I believe in democracy, perhaps somewhat naively.  I believe that the genius of the democratic model is that the “public” – many disparate people, some of them stupid and venal, some of them naïve, some of them apathetic – can collectively make wise decisions.  Democracy is the epitome of the aphorism “Some of us are not as smart as all of us.”

Events like the latest American election put this belief to the test, and like many – particularly in Canada – I’m shaking my head at the result.  However, I still believe in democracy, and as strongly as I disagree with this election result, the people have spoken, and they are right.  (No.  No buts.  They are right.  That’s how democracy works.)

The Election is Over

Of course, there is an issue – or maybe more than one – about what the people actually said when they spoke.  Did they say Trump or Clinton?

Many people argue that, with a lead of more than two and half million votes, Clinton was the peoples’ choice, and should be President.  That, they say, is real democracy at work.

There is a part of me that wants to agree, but I know in my heart that I can’t.  The election took place according to certain rules.  Those rules – and in particular the electoral college system – may be archaic.  They may no longer reflect the growing urbanization of America.  However, they are the rules.  I hate to agree with Trump, but he’s right.  Even Clinton probably agrees.

(Imagine.  “The double fault is a stupid rule.  That’s not real tennis.  Tennis is hitting the ball back and forth across the net.  If there were no double fault rule, I would have won.”)

So maybe the current electoral college structure now has a bias against urban voters, which implies an anti-minority bias.  Maybe it should be fixed.  (Or maybe not.  Is it really right that the President of the United States should be selected by the voters in a handful of states?)  Either way, that would be for next time.  Right now it is the way this election was contested, and thus decided.

There have been, and are still, demonstrators in the streets of many US cities.  While their chant is “Not my President”, in fact what they are protesting is how Donald Trump won.  They are protesting xenophobia, and sexism, and victory by mudslinging.

I heard someone say that Trump won by cheating.  Instead of playing the election by the Marquess of Queensberry rules, talking about the issues, he turned it into a cage-fight, where the normal rules don’t apply.  I understand the sentiment, but it’s wrong.  The analogy is not to cheating.  He didn’t take performance-enhancing drugs.  He didn’t rig the voting machines. (Well…I’ll get to that.)

The better sports analogy – at least for hockey fans – is the neutral zone trap.  Perfectly legal for a long time, the neutral zone trap was a way of winning hockey games by disrupting opponents in the middle of the hockey rink (the neutral zone).  It was used for years by weak teams to prevent offensively stronger teams from getting their plays started.  For that reason, and because it makes for boring hockey (the fans hated it), it was banned a few years ago.  Until then, it was a very successful approach that was well within the rules.

Donald Trump played within the rules, but he didn’t play the election game the way many people would like.  He is weak on policy, so he used his own neutral zone trap, disrupting any talk of issues with enough name-calling and finger-pointing to make a five-year-old proud.  He used demagoguery instead of reason to appeal to voters.  He lied, and exaggerated, and obfuscated reality.

Like the Catholic Archdiocese of New York, you might not want to invite him to dinner.  But he won, fair and square.

The third part of the “Who really won?” issue is the rigged election question.  There are recounts going on, but they will almost certainly confirm rather than change the result.  Still, like many I have a nagging feeling that there is something fishy going on here.

I know that there are statisticians and analysts saying that there is numerical evidence of something untoward, but that’s not really the genesis of my doubts.  My doubts come from the personality of Donald Trump.

When Trump first said, during the campaign, that the election was rigged, my immediate thought was “He’s going to rig the election.”  That’s not because I mis-heard.  It’s because he has shown, over and over, a tendency to project his own bad characteristics and bad actions onto others, a defensive reflex that you often see in bullies.  If he is corrupt – and he almost certainly is – then he calls Clinton “Corrupt Hillary”.  If he is lying to get elected, he calls Ted Cruz “Lyin’ Ted”.  If you go through his campaign, you see one example after another where he accuses his opponent of a flaw or impropriety that is, in reality, his own obvious failing.

(Remember “No puppet!  No puppet!  You’re the puppet!”?)

So, when Trump said the election was going to be rigged against him, I read that as an indication that he or the GOP was going to cheat to help Trump win.  It’s brilliant, when you think of it.  Get everyone on the other side swearing that American elections are sacrosanct, and they will be prevented from investigating your own cheating later.

There is still a part of me that wonders whether the fix was in, given both the polls and my sense of the campaign.  However, the election is over, and so far there is no hard evidence of cheating.  Some people, like a dog with a bone, will continue to investigate it for years, and maybe they will eventually find something.  Until someone does find something, though, the election is over.  Subject to the million to one recount shot, a new President has been chosen, and it is time to move on.

Now What?

Once you accept that the new President will be Donald Trump, there are lots of subjects that come up.

He is undoubtedly the President who, in all of US history, is the most likely to fail to make it to the end of his first term: being assassinated (by one of America’s many well-armed nutbars), impeached (by a Congress that, while Republican, doesn’t really like him), or deposed (by generals or his Vice-President, stopping him from firing nuclear weapons in a fit of pique).

His cabinet is starting to emerge as something like a Sergeant Pepper’s Lonely Hearts Club Band parody, but at the bottom of that swamp he promised to drain.

He isn’t even President yet, but through his weak impulse control he is already drawing the US into significant geopolitical black holes, and with India and China no less.

Trump is nothing if not entertaining.  You almost wonder if his election was engineered by the news media to ensure good ratings for the next few years.  (Although if I have to listen to Kayleigh McEnany defending Trump much longer, CNN may have to give way to HGTV in my house.)

Despite all of these juicy subjects, I want to look instead at Vladimir Putin.  What is his game in a Trump reality?  How will the Strongman of Leningrad deal with the Rich Kid of Queens, and where does Putin hope to end up when it all plays out?

This, it seems to me, is the most interesting part of the whole thing, in terms of speculative outcomes.  It could be incremental business as usual.  Or, it could be a very, very big deal.  It depends largely on whether Putin has the cojones he advertises.

There seem to be four possible Putin-Trump futures.

Brothers in Arms

First, and most obvious, they could be just two peas in a pod.  Both bullies with serious insecurity issues, and both relentlessly narcissistic, Trump and Putin could be legitimate best buds because they are so much alike.

Now, two narcissists can’t be friends as you and I might understand the term.  Friendship requires some level of selflessness and sharing, and clearly neither of those is going to happen here.  On the other hand, they may intuitively understand (and fear) each other, and thus have a wary truce, dividing up geopolitical interests and influence in a cautious but collectively selfish way.  If you’ve ever seen two bullies in a schoolyard, each with their own entourage and territory, but never facing off against each other, you may be able to picture this Trump-Putin world.

I don’t think this is going to happen, because Putin is obviously smarter and tougher than Trump.  This future lacks a certain balance.  Still, it has to be on the list.  It is not crazy as a possible outcome.  And, of course, it may be the least damaging outcome for everyone, all things considered.

Global Chess Match

Second, the future could be more like the past, an incremental chess match in which Russia and America match wits to expand, consolidate, or erode their respective spheres of influence in the world.

Putin, despite having once been named a chess grandmaster, is not a player of that game.  Yes, there is the famous story that he played Garry Kasparov (and lost in 11 moves), but in real life he doesn’t have the patience for it.  And Trump is not really the chess type.  (Although I for one would pay to see him play chess:  “Whaddya mean the king can’t ride the horsey.  He’s the fuckin’ king.  He can do whatever he likes.”)

That having been said, both will, by choice or by necessity, be playing chess on the global stage.  Putin (trained as a lawyer, no surprise) is 64, and has been the de facto leader of Russia since August 1999, when he was not quite 47.  He probably thinks he has another ten years or so, and he has certainly shown that he knows how to play the long game (remember the Medvedev interregnum?).  No-one believes that Putin will walk away smiling at the end of his current term in 2020, but at this point he must be thinking legacy.

His strategy during the Trump years could be to invite mistakes by Trump, then capitalize on them in small ways.  Not enough for a confrontation, but enough to expand Russian influence and get back to a situation of two global superpowers, rather than just one.

This is the safest route for Putin.  If he’s careful, he won’t wake up the other powers in America (the Senate, for example), and will be able to parlay a series of small wins into a longer term success.  He has the advantage that Trump doesn’t really listen to others, and – as we have already seen with his ham-handed approaches to Taiwan and China, and then Pakistan and India – will stumble into mistakes simply because of his lack of understanding.  That behaviour is not going to get better any time soon.  Each of these gaffes, and the many more to come, will be an opportunity for Russia to gain some ground.

In this scenario, Putin retires having brought Russia back to its former glory.  More than that he doesn’t need.

This is clearly the likeliest future for Trump and Putin.

Russian Dominance Through Rope-A-Dope

Third, both of the first two options assume that Putin is not going to chase the brass ring:  Russian dominance.

Fareed Zakaria noted recently, in case it wasn’t obvious, that America is currently the dominant power in the world:  “We have less than five percent of the world’s population”, he said, “but the other ninety-five percent look to the US to be the leaders.”  It is not out of the question that Putin sees in a Trump Presidency an opportunity to replace the US as the one dominant global superpower.  “Why not us?”, Putin would say.

Could this happen?  Most certainly it could.

Look at the centrepiece of the Trump “ideology”, if there is such a thing.  He restated it the other day:  “There is no global citizenship.  There is no global flag.  We are citizens of the United States of America, and the only flag we pledge allegiance to is the American flag.”  This, along with his attacks on trade agreements and offshoring of jobs, presages an era of protectionism in the United States.  America dominates the rest of the world through its economy.  Close the borders, and that dominance is undermined.

Further, America is still seen by many in the world as the place where the streets are (figuratively speaking) paved with gold.  Even those who will never be able to move to the US think of it as the place to which they aspire.  If America decides it no longer wants immigrants, the “American dream” may, for many around the world, simply become a thing of the past.

Clearly at some point in the future America will no longer be the dominant power.  (See below.)  There are only really four current candidates to replace America in that position – countries with size, and resources, and aspirations.  Those are the BRIC countries:  Brazil, Russia, India and China.  Brazil is not quite there yet, and it has more limited resources.  India will not be a serious candidate for dominance until they solve their population problem, which is not any time soon.  That leaves China and Russia.  Russia has more physical resources, but a small population and a language issue.  China has more people, but more limited resources, and its own issues with xenophobia.  Both have significant markets close by.  Both have growing business and educational sectors.

In this scenario, Putin pushes Trump to make mistakes, particularly mistakes that hurt China.  It is, in effect, geopolitical “rope-a-dope”, in which Putin, a judo expert, allows or encourages Trump to flail about, while Putin takes advantage of Trump’s lack of discipline.  In the best future (for Putin), Trump ends up in a confrontation with China.  Meanwhile, Putin plays the adult in the room with the Middle East, Europe, and South America, i.e. tough, but the only one with his head on straight.  If he really wants to become dominant, he also opens up Russia to immigration to solve his under-population problem, and expands his reach through “acquisition” of the Baltic States and Finland.

Do I think this is going to happen?  That is really a two part question.  Do I think Putin will try this?  I think it is a reasonable possibility.  Never underestimate the patriotic fervour of Russians, or the personal ambition of Vladimir Putin.  On the other hand, do I think Putin can succeed at this strategy?  Not really likely.  That would be to underestimate the ability of America, and its diverse political institutions, to re-orient a White House that has veered off course.  The US will one day decline.  That is inevitable.  However, it will not go easily.

The Fall of the American Empire

Fourth, and even more extreme, Putin could seek to push America over the cliff.

Now, before you scoff, start by accepting some obvious truths.  America is an empire, and all empires ultimately fail.  The world has become smaller, which means that the evolution of world power is moving faster.  US dominance has been driven in large part by its own economic growth (fed mainly by immigration and trade), but growth cannot continue forever.  I could go on.

Perhaps more important, most empires fail because of internal conflicts, and America has the early signs of a similar future.

Someone said to me this morning, in all seriousness, that there is going to be a race war in America.  While unlikely, is that completely out of the question?  Not at all.  The USA struggles to handle a racial divide that has almost destroyed the country more than once.  This election brought that divide back up to the surface (we are seeing it already in the aftermath).  In fact, the election also highlighted a significant urban-rural chasm that is only partly based on race and ethnicity.

More than that, though, the election put a spotlight on a large segment of the US public that is dissatisfied, and looking for someone to blame.  In a heavily armed country, this personalization of economic dissatisfaction into good people and bad people is very dangerous, on both sides, yet it is in fact how Donald Trump got elected.

The interesting thing is that, for this risk to be realized, it doesn’t really matter whether Donald Trump does all the things he said he would do.

If he does, the US will become isolated from the rest of the world, the economy will stagnate, the wealthy will appear to be protecting/enriching themselves, minorities will feel threatened (and justified in defending themselves), and middle America will still be suffering.  Trump will be a one-term President, but at a cost, and with a serious risk of conflict along the way.

If he doesn’t follow through on his promises, on the other hand, his working class base will once more feel betrayed.  Their need to “drain the swamp” could become acute, leading to even more extreme winners in the mid-term elections, and again the risk of conflict.

Sooner or later, someone has to actually provide real, sustainable solutions to the systemic problems of middle America.  It certainly isn’t going to be Trump, either way.  Without solutions, the polarization in American society isn’t going to get better by itself.

From Putin’s point of view, the question is whether he can, with the right kind of nudge, get the US over the precipice.  Is America sufficiently vulnerable right now that supporting dissidents (on both sides), attacking America’s internet security, seeding external threats from radical jihadists, and challenging the US internationally, can push a tense political and social conflict across the line to become a true civil conflict.  That’s what Putin has to assess.

Once more, do I think this will happen?  Not really, but it is no more crazy than the “best buds” scenario.  Putin is perfectly capable of seeing this as an opportunity to sink the US, and equally capable of going for it.  Trump and his advisors are certainly capable of screwing up, domestically and internationally, in egregious enough ways that the cliff will be tantalizingly near.  And, the USA may in any case be closer today to actual internal conflict than it has been since the Sixties.   The table has certainly been set.

Conclusion

Amidst the angst (or, in some cases, exuberance) of the Trump victory, and now his pitiful victory lap, we are not always focusing on how others around the world will respond to a Trump Presidency.

For some countries, and their leaders, Trump in the White House will simply be a problem to be managed.  For others, however, it will be an opportunity to be exploited.

Those are the countries, and leaders, that pose the real threat.

 – Jay Shepherd, December 3, 2016

Posted in International Affairs, Politics | Tagged , , , , | 2 Comments

Teachers

As a society, we don’t value teachers enough.

To my mind, a society should value work – in the sense of the rewards society delivers to people who do that work – based on two factors.  First, how important is the function to society?  Second, how hard is it to do?  If you value teaching based on those factors, teachers should be much higher up on the list.

Obviously teaching is a critically important role in our society.  We hand them our children, for crying out loud.  We ask teachers to guide our children to learn the things they need to know to be happy and functioning adults.  We ask them to take a key role in supervising their socialization and growth.  And, in a broader sense we rely on the teaching profession to prepare a new generation to be useful and productive, one of the fundamental drivers of every economy throughout history.

Compare teaching to law, for example.  Sure, it is important that we have lawyers.  (Otherwise, I’d have had to become a professional golfer, and who knows how that would have turned out.)

We pay lawyers a lot of money.  I know lawyers who make more than a million dollars a year, and I think the average after ten years is something like a couple of hundred thousand.  Certainly, every lawyer I know makes more money than any teacher I know, and with more upside.

Sure, lawyers often don’t have a pension or other benefits like teachers, but some do.  And, they make three times what a teacher makes, so it pretty well doesn’t matter.

Yes, yes, their job is important in at least some respects.  If we didn’t have lawyers, where would our politicians come from?  We’d have to elect real people.  More seriously, our systems of dispute resolution and commercial dealings and human rights all rely heavily on the specialized skills of lawyers. Be as cynical as you like.  They are still important for society’s efficient operation.  Modern societies have to have complex rules in order to function properly.  Someone has to understand those rules.

But does anyone really think that lawyers are more important to society than teachers?  Surely not.  At the end of the day, most lawyers deal primarily with money.  Teachers are responsible for our children.  OK, some lawyers (typically the ones paid the least, by the way) protect our rights, or protect the environment, etc., but ALL teachers are front and centre directing the lives of our kids.

I will agree that the job done by doctors is at least as important as the job done by teachers (and they are paid much more, I note).  Setting doctors aside, there is a long list of professional and other roles that are rewarded more highly in our society than teaching.  Rarely would we say that those roles have a higher intrinsic importance than teaching.  Accountants?  Architects?  Engineers? Actuaries?  I could go on.  All important.  But more than teachers?  Really?

If we can agree that teaching our children is a role in society that we should value highly for its intrinsic importance, we still have to ask the second question:  How hard is it, anyway?

To answer this properly, you have to ask not just how hard is it to teach, but how hard is it to teach well.  People who argue that teachers should be happy with what they get tend to focus on the mediocre teachers, not the stars.  I look at it from the other way around.  First look at how hard it is to be a great teacher.  Once you have set the value – in societal terms – of the great teachers, then you can look at how to value those who are less exceptional.  (Or, maybe the job is so important that you figure out how to ensure that more people who choose teaching end up being really great at it.)

If you look at the really great teachers, you see that they have qualities that most of us don’t.

They can’t just understand their subject or subjects.  Lots of people understand math.  (Yes, really.)  That’s not enough.  You have to understand it both at an operational level – how it works – and at a conceptual level – the underlying structure and logic.  Once you have that second level of understanding, you can communicate that understanding to others.  A good mathematician is not necessarily a good math teacher.

That leads to a second quality, the ability to communicate.  The average person finds it difficult to stand up before a room full of people even once in a while, for example to give a presentation.  Teachers spend all day, every day, in front of a crowd (and not always a receptive crowd).  They have to capture the imagination of a group of young people who have many natural distractions, and they have to communicate ideas and concepts that are not always intuitive for kids.  For younger kids, they face short attention spans.  For older kids, they face conflicting priorities and cynicism.

Teachers can only be great if they have natural empathy.  Connection is critical, but not everyone can do that.  Even those who can will usually have difficulty connecting with many different types of people, and in an environment where there are a lot of people seeking to connect with you at the same time.  This is made more difficult by the fact that you are seeking to connect with people who are not your peers, and whose lives do not have a great deal in common with yours.  A thirty-five year old teacher has to connect with a seven year old student, understand what that student is feeling, and reach his or her soul.  Every parent knows how hard that can be, and parents are dealing with young people they know really well.

The best teachers are motivational.  Part of that, to be sure, is empathy, and another part is communication skills.  Those traits are still probably not enough.  The very best teachers also believe in the potential of their students.  They are inherently optimistic about life, and about people.

All of these mostly natural skills have to exist side by side within a personality that is willing to work hard, and able to put up with society’s limitations on both the resources available to them, and the freedom they are given to do the job as well as they can.  Yes, teachers sometimes get some of the summer off.  They also often work fifty hours a week during the school year.  And, when they go into the classroom, they drag the shackles of bureaucracy and restrictions along with them.   Most of those restrictions are necessary, to be sure, but they are still a straitjacket that makes it more difficult to be empathetic, motivational, and exciting for the students.

OK, not all teachers are the paragons I’m describing.  But some are, and we would be happy if more reached that level.  And maybe the fact that some are not as good at it as we would like is a chicken and egg issue.  Maybe if we valued teachers more, we would get more good ones.

So why am I going on and on about the value of teachers?  Well, part of it is that this subject originally came up in September, the time of year that teachers are suddenly more top of mind for parents. In that time period I certainly heard lots of talk from parents of younger kids (mine are adults) about whether their kids got the best teachers, or the ones they wanted, or the ones most in demand, etc.

But what actually set me off was that someone casually mentioned the name Dorothy Prosser.  Dorothy Prosser was the epitome of what a teacher can be.

How many of us have felt the profound influence – whether positive or negative –  of a teacher?

Certainly Dorothy Prosser, my high school English teacher, had a hand on the dial, helping to map the trajectory of my career and my life.

When I hit high school, I was already a reader, and I already liked to write stories.  High school, and being a teenager, presented a blizzard of new challenges and influences, any of which could have  pushed me in one direction, or the other (and sometimes did).  That included dozens of teachers, some good, some bad.

But Dorothy Prosser was special because, to her, each of her students was an individual.  Some needed remedial assistance.  Some needed to cope with their insecurities.  Some needed to be encouraged to spread their wings.  And some, like me, needed to learn how to see what was possible.

“You can write a short story?” she told me.  “Good, now write a poem, a sonnet.  Write a play.  Write a piece of non-fiction that will teach me something, and keep me interested at the same time.”  Her constant theme – test your capabilities, see what you can do – pushed me to challenge myself.  It was never whether my writing was better than the next student.  It was always whether my writing was the best I could do.

The paradigm she presented led me to be a lawyer, a career in which my written work is likely my strong suit. And now, later in life, I’m once again becoming a writer.  Along the way, I’ve been lucky enough to have many positive influences – my wonderful parents, my great kids, friends who tell it like it is – but one teacher, way back when, still touches my life every day.

Do you have a teacher like that, one who, even today, you can say had an enduring influence over your life?  Many people do.  Proof positive of the critical value we get from those who excel at teaching.

Society is not going to change the monetary value we place on the job of teachers any time soon.  We have this view that teachers are a kind of specialized category of public servants, and should be slotted into a rewards category comparable to other public servants.  Valuing their work more, at least in any tangible way, is about raising taxes, not about providing the best for our kids.

That’s wrong, certainly, but it is what it is, and it’s not going to change.

What we can do, as individuals, is remind ourselves of the dedication and contribution that teachers give to all of us, and particularly to our children.  If we’re not going to pay them what they’re worth, at least we can give them the respect they deserve.

Yes, I know this was a bit of a rant, and for those of you have heard it before, over the years, I apologize for the repetition.  Our attitude towards teachers sucks.  That pisses me off.  Simple as that.

Jay Shepherd, November 25, 2016

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