Love for the land.

For the children and the flowers
Are my sisters and my brothers
Their laughter and their loveliness
Could clear a cloudy day

(John Denver, Rhymes and Reasons)

I spent the Mother’s Day weekend with my mom, although she passed away almost ten years ago.  One way I keep her memory alive is by cooking special breakfasts – crepes this day – sometimes for myself, and particularly when I have the chance to do so for family.  The other is to plant a vegetable garden.

There is no good financial reason for me to grow vegetables.  The time I have spent growing food could have gone towards furthering my career, and the resultant increase in my salary would more than pay for what it would cost me to buy the food I grow.  However, over the nine years I have lived on this property and tried to grow something, I have learned about this land.  I have learned that when the balsam root and saskatoon blossoms are passing their peak, the soil temperature is about right for planting.  I have learned that there is a narrow window of soil moisture during which Glenmore clay can be easily worked.  I have learned that after one season there won’t be much organic material left in the garden and the remaining clay will set up like concrete when baked in the sun.  I have learned that carrots don’t grow well in this clay, and neither do acid loving blue berries.  I have learned many different things, some of which are more of a feeling than a fact I can easily describe.

Source: Three West Security

My ruminations on these matters have been particularly strong since my colleague, Dr. Ross Hickey, suggested that getting rid of the Agricultural Land Reserve (ALR) would help address the high cost of housing here in Kelowna (Let’s Develop the ALR).  There is a beautifully simple logic to his argument.  The price of housing is high because supply isn’t expanding fast enough to keep up with the growth in the demand for housing.  The ALR makes some land unavailable for housing, and some of this land is ideally located and relatively cheap to service.  If land availability is the restriction preventing an increase in the housing stock, then getting rid of the ALR will lead to an increase in the rate at which new housing is build and thereby bring down the price.  If land is simply a physical space which can be used for a variety of purposes – housing, transportation, parks, wild spaces, food production, … – then it follows that each piece of land should be put to that use which generates the greatest value for society.  To the extent that the market does the best job possible of reflecting these values, an unrestricted land market should yield the best pattern of land use.

Source: Vancouver Courier

One place to challenge the effectiveness of a free land market is to consider the variety of services that the land provides which are not captured by that market.  Viewscapes, open spaces, natural habitat, etc. are such services.  These services have value, and in principle if we could measure the value of these services, we could put in place policies, such as taxing particular land use activities and subsidizing others, to adjust the land use pattern that would prevail with a free land market.  Many economists have been arguing for such an approach and seeking to improve methods of valuing these services.  With such measurements, we can calculate the return paid by the land for one purpose, and thereby determine if it should be kept as ‘natural capital’ or developed for other purposes.  However, not everyone buys the idea that putting a price on nature can help save it.

In a recent column George Monboit (“The UK government wants to put a price on nature – but that will destroy it“) strongly rejects the idea of valuing the services of nature.  He argues that determining the value of nature based on the price people are willing to pay for the services nature provides diminishes nature having value in its own right, having ‘intrinsic’ value.  He concludes with

This approach is morally wrong, intellectually vacuous, emotionally alienating and self-defeating.

Those of us who are motivated by love for the living planet should not hesitate to say so. Never underestimate the power of intrinsic values. They inspire every struggle for a better world.

Within economics, intrinsic value, the value a thing has in itself, is recognized for humans.  Economists have many times been asked to calculate the value of investments that change the probability of someone dying, investments such as roadway design and safety regulations.  Initially, the value of life was based on lifetime earnings.  However, it didn’t take long to see the moral issue here, that people who were no longer making a productive contribution have a zero or even negative value.  Currently, economists try to measure what people themselves are paying to reduce their probability of death.  Measuring what people are willing to pay to reduce their own risk exposure is, in effect, asking what their intrinsic value is.  However, this idea has not moved much beyond valuing mortality risk for people.  Can it be extended?

Source: Okanagan College Clean the Creek Campaign

We have learned that the amount of knowledge people have about the environment and their attitudes towards the environment are at best only weakly related to environmental behavior change (Kollmuss and Agyeman, 2002).  Some work is showing that empathy for the environment can motivate change (e.g. Berenguer, 2007 and work described in Greater Good Magazine).  Empathy is the ability to feel what another is feeling, in response to knowing the situation they are in.  Empathy is correlated with compassion, and compassion with making choices for the well being of others.  And this is strongest when there is a relationship.  Monboit’s critique points out that when we value the natural world based on the services it provides us, we undermine the relationship that fosters empathy.  His appeal to “Those of us who are motivated by love for the living planet …” clearly emphasizes the idea of a relationship with that living environment.

Economic efficiency occurs when all resources are put to their most valuable use, and in a dynamic economy, these resources should be as mobile as possible.  Innovation is fostered by enabling those who develop new products that are valued in the market to capture a large share of the profits.  Those who are unable or unwilling to move to the jobs and/or to be innovators are ‘left behind’.  This system discourages attachment to ones local community and environment.  Best to maintain an extensive network that can facilitate moving, if that is required, rather than in building strong local connections that will be of limited value after a move.  Best not to invest too much in a relationship with the local environment, as that investment is lost if one moves.

How, with an economic system that rewards flexibility, mobility and innovation can we create a space for people to have a relationship with the environment that builds empathy and compassion, and thereby motivates people to care for that environment?  Our economic system has done a tremendous job of stimulating technical progress and raising the living standard of many people around the world.  However, this progress has occurred while the environment has been treated primarily as a ‘factor of production’, providing resources and assimilating waste.  How can we recognize the intrinsic value of the living systems we share the planet with in the same way we do for the other humans we share the planet with?  Recognizing (although not necessarily respecting) the intrinsic value of all humans occurred relatively recently in the history of our species.  Through much of that history in many societies slavery was acceptable and women were treated little better than property.  Now, in most societies, all people have basic legal protections.  Do we similarly need to have basic legal protections for the natural world?

Source: Sikhnet

The natural world, be that a species or an ecosystem, cannot express its intrinsic value through market activities the way humans can.  We cannot therefore observe such choices and impute the value that a species or ecosystem is willing to pay to protect its functionality.  Perhaps our moral duty to the natural world is to protect its functionality.  If we have an economic system that makes it difficult for people to develop empathetic, compassionate relationships with the land, maybe the land has to be given rights.  Perhaps policies like the ALR are imperfect ways to provide the land with some rights.  If we lack the empathy and compassion to treat women and members of minority groups with respect, then we are compelled to provide at least some basic respect by the law.  Is it time to give the natural world this same type of protection?

  • Kollmuss, Anja, and Julian Agyeman. “Mind the gap: why do people act environmentally and what are the barriers to pro-environmental behavior?.” Environmental education research 8.3 (2002): 239-260.
  • Berenguer, Jaime. “The effect of empathy in proenvironmental attitudes and behaviors.” Environment and Behavior 39.2 (2007): 269-283.

Wither the Rents?

http://www.westcorp.net/kelowna-downtown-hotel.php

Land and housing issues have been in the news quite a bit lately.  Housing affordability was a major issue in the recent provincial election.  In the February budget, the provincial government extended the speculation tax beyond Vancouver to other hot property markets, including Kelowna and West Kelowna.  The introduction of the tax in Vancouver likely drove investment to other parts of the province, including Kelowna.  Its application to Kelowna has those who benefit from that investment inflow concerned (Kelowna mayor says B.C.’s speculation tax could have ‘dire unintended consequences’).  Here in the Okangan, local government land use decisions have also made the news.  Kelowna city council recently approved a new tower that city staff recommended against (Kelowna city council approves $200 million, 33 story hotel in downtown core).  The community of Peachland amended its official community plan (OCP) to allow a development that exceeded the height restrictions in place at the time (Council gives Peachland development another green light).  The property market is hot, vacancy rates are low, land owners are making lots of money, and those without the means are struggling to find rental accommodation or buy into the housing market.

The economist David Ricardo (1772-1823) is credited with the Law of Rent.  Ricardo observed that the maximum a tenant would pay to rent a parcel of land depended on what they could earn by renting the land, relative to renting another parcel.  It does not depend on what they actually earn by renting the land.  If there are no limits on what an owner or tenant can use their land for, then it will (eventually) be put to that use which results in the highest earnings.  That use will depend on the options available, options that depend on restrictions like zoning, OCPs, environmental requirements, the Agricultural Land Reserve, etc.

http://www.bradnerbarker.com/news/no-alr-exclusions-rally-planned

If the restrictions are permanent, then land will be priced based on what can be earned from permitted uses.  However, if the restrictions are ‘flexible’, then there will be people willing to gamble on the restriction being lifted, and pay based on what they expect to earn.  This is one source of speculation.  ALR exclusions and local governments allowing variances from the OCP and zoning rules help drive speculation.  Another source of speculation is gambling on growth in demand – population and economic growth.  In both cases, as noted by Ricardo, the land owner is the ‘residual claimant’.  When housing markets are competitive, and the markets for those things that go into building houses are competitive, renters, buyers, carpenters, etc. will make a ‘fair return’, while the ‘excess return’ is captured by the land owner.  Booming property markets are primarily a benefit for property owners, and don’t do that much to benefit others.

http://www.mascotmine.com/index.html

The idea within Ricardo’s law of rent has been applied in other economic analyses.   In particular, it has found application within resource economics.  Resource rent is the name given to the profit that a resource owner earns after a fair return is paid against the cost of developing the resource and bringing it to market.  Since the resource owner didn’t create the resource, is it fair that they get to keep the resource rent?  There is broad agreement that they should not keep all of it.  That is why we charge royalties on mineral resources and stumpage on timber resources.  The province collects a share of the profit in excess of a fair return to the resource owner, on behalf of the citizens of the province (e.g. BC Oil and Gas Royalty Handbook).  There is of course always the question of what share the province should collect, with the resource sector typically arguing that if royalties are raised, the sector will shrink.

What is the difference between a natural resource like zinc and land?  Zinc is a finite, nonrenewable resource whose value depends on global markets.  The demand in those markets is based on technologies that use zinc, and has nothing to do with how much zinc there is in the world.  The price does depend on how much there is, and the profits that owners of zinc deposits earn depends on that price.  Land in Kelowna is a finite, nonrenewable resource whose value depends on global markets.  The demand in those markets is based on income levels and preferences for the natural and human created amenities in the area, and has nothing to do with how much land there is in Kelowna.  However, the price does, and the profits that land owners can earn depends on that price.  Like zinc, land owners do not create the value of their location.  They may add value by developing something on the land, but the value of the bare land is a consequence of a larger market.  Should we be collecting royalties on land development in the same way we do on natural resources?

http://idolza.com/

My late father and I would talk about these issues, and several times he told me about how the Netherlands managed land development.  During his time there, land development was largely managed by national and local governments, who expropriated land, serviced it, and then either built on it or sold it for development.  The government, on behalf of the citizenry, captured much of the value of changing land use.  This was very different from the North American approach, where land use changes, largely approvals by local government, create windfall profits for land owners.  However, over the last couple of decades things have changed substantially in the Netherlands.  Court rulings in several nations, based on the European Convention on Human Rights, have challenged expropriation laws as contraventions of the right for individuals to the peaceful enjoyment of their possessions (Groetelaers, 2006).  The Netherlands, and other European nations that had similar land development policies, are sorting out a new balance between private and public involvement in land development.  This rebalancing towards the private market has driven up housing prices and enabled land owners to capture some profits that previously were enjoyed by the larger community.

While indigenous perspectives do not seem to see any land as unused, the colonizing perspective in North America and elsewhere that western society has expanded into proceeded for a long time by granting vacant land to settlers.  We have largely run out of vacant (stolen?) land to hand out to people without land. Until we start colonizing other worlds, we are going to have to figure out how to manage the development of land in a way that balances the rights of land owners with the fundamental human need for housing, the community need for public amenities, and the needs of the environment (of the land) we all live within.  Do we have that balance right?

Local Issues: More Beaches – Gable Beach Park

Jaimie Kehler, CBC News Posted: Oct 18, 2017

Recently, Gable Beach Park in Lake Country has been in the news (CBC News, Oct 18, 2017).  The District of Lake Country has been negotiating with three land owners who wish to purchase a strip of land that the district owns, a strip of land that extends north along the lake from the park for almost 200 meters.  Some local residents want to see the land remain in public hands, and hope that the district will not follow through to conclude the negotiations with a sale (Lake Country Calendar, Sept 5, 2017).

This strip of waterfront land accounts for a bit more than half of the total public lake shore that Gable Beach Park provides.  At present, this part of the park is undeveloped, used only by people who know it is public land and who walk north from the nearest access road to enjoy it.  If the land remains public, then it would be available to develop a pathway, as well as some picnic tables and/or benches above the high water mark.  Such structures built below the low water mark are more likely to suffer flooding, more likely to cause damage to sensitive habitats, and for both of these reasons far less likely to get the required approvals from the province and the federal Department of Fisheries and Oceans.

There are a number of residences with easy access to the park, who one imagines would enjoy this particular access to the lake.  While selling this land would provide the District of Lake Country with funds that could be applied to other worthwhile projects, such as paying some of the costs of acquiring land for the rail trail (see letter from the district in the Vernon Morning Star, Oct 11, 2017) , it will leave residents who live in the area but do not own waterfront land worse off.  The district has made a commitment to sell surplus lands within the district to pay for the cost of acquiring the rail trail lands.  Given that there do not seem to be enough such surplus lands to sell without including this piece of land, is sticking with this commitment and selling this piece of land truly in the best interest of the people of Lake Country?

Gable Beach Park provides a strip of continuous public waterfront along a part of the lake shore where for a considerable distance to the north and south there are no similarly sized public lake shore lands.  To the east of this piece of land are approximately 100 parcels of land that do not have lakefront, are not within the Agricultural Land Reserve, and are well connected by public roads.  Many of these lots are large.  In future, with appropriate development of local services, one might expect subdivision and development of these lands, with far more people than presently live here being able to enjoy Gable Beach Park.

The District of Lake Country counsel is of course tasked with making the best decision for the people of Lake Country.  Selling this land will provides cash in hand, and allows council to follow through on a commitment that was made.  Some people may be disappointed at the loss of this public lakefront, but none can claim that the district broke a commitment that resulted in a tax increase.

Not selling this piece of land may mean that counsel is unable to fund its share of the rail trail without raising taxes.  If the value of the services provided to the public from publicly owned lands exceeds the value that could be realized by selling those lands, then selling them is a bad decision.  It is a better investment to raise taxes and keep the lands.  However, the value of these services may not be something that shows up on the district’s financial statements in the way that the sale of the lands does.  This of course makes it hard to see the value, and hard to argue against the sale.  However, these services are real and they do have value.  They include:

  • The time local residents save by visiting Gable Beach Park rather than one that is further away.
  • The greater enjoyment of the beach by people using the other beaches when local residents use Gable Beach Park, and therefore do not add to the crowds at these other beaches.
  • Greater physical activity and therefore health for local residents who are more likely to walk to Gable Beach Park than to parks further away.
  • Less money spent on traveling to more distant lake access, and therefore available for local residents to spend on other things.
  • Increased land value for local properties provided by having nearby lake access.
  • Public management that is less likely to damage foreshore habitats than private owners, some of whom follow a ‘better to pay the fine than get permission’ approach to caring for the lakeshore.  While the current land owners may be responsible, once in private hands it can of course be sold.

These benefits are hard to identify, and even harder to trace into impacts on local government revenues.  Some of these may appear as greater spending at local businesses.  Some may appear as higher property tax revenue due to higher property values.  Some may be enjoyed by community members without showing up as an increase in revenues collected by the district.

With plenty of assumptions, we can put a bit of math to this case.  Start by rounding the sale price to $1,000,000.  The Municipal Finance Authority of BC lists rates below 3% that communities may have access to, meaning that financing a loan for $1,000,000, rather than selling the land, would cost less than $30,000 per year.  So, if the owners of those 100 parcels in the area without lake access are, all else equal, willing to pay on average $300 per year per parcel, to keep the land in question in public hands, then it is worth doing so.

Maybe all else isn’t equal.  Maybe these property owners have already paid part of what they value this lake access at in the value of the property they purchased.  The District of Lake Country has a residential property tax rate of about $2.50 per $1,000 (see bylaws).  Based strictly on property tax revenues, if the net change in the total property values for the district, most of which would be in the area near Gable Beach Park, is a loss of more than $12,000,000, then keeping the north part of the park in public hands will on balance not cost the district anything.  This is because the loss in property tax revenue on account of the lower property values larger than the $30,000 annual cost of financing $1,000,000 put towards the rail trail.  With assessed values in the area commonly being above $600,000, the value decrease of the 100 parcels would have to be about 20%.  Economic studies looking at situations like this have seldom found values greater than 5%, and these higher values are for those homes closest to the park or trail being studied.  Therefore, based on property value changes and resultant property tax impacts alone, keeping this strip of land in public hands is unlikely to pay for itself in terms of revenues to the district.  However, there is likely to be some decrease in property values, so that the net benefit of selling that piece of Gable Beach Park is less than the cash received.  If the net change in property value is a loss of about 1.7%, well within the range of those economic studies, then for the people of Lake Country as a whole the sale generates no net benefit.  It just looks like a loss on the district books (thanks Terence for your email).

The District of Lake Country levies development cost charges on subdivisions.  For properties in the Gable Beach Park area, these charges are presently about $14,000 per single family residence (see bylaws).  What will be the impact of selling the north part of the park on development in the area?  It probably won’t stop it, but it may delay it.  For each year delay in the subdivision and development, Lake Country looses more than $400 in interest that could be earned (3%) on the development cost charges, and $1,500 in property tax revenue (if the subdivided parcel ends up worth $600,000).  So, slowing the rate of development in the area has a negative impact on district revenues, as well as delaying the profit realized by property owners in the area, and the wages to construction workers, revenues to materials providers, etc.  This is one more way that the net benefit of selling is less than the cash received.

Counselors for the District of Lake Country have a difficult choice.  Selling the north part of Gable Beach Park provides more than a million dollars cash in hand.  However, this is likely offset somewhat by a slower rate of property value growth and development in the area, and consequently lower property tax revenues and development cost charges for the district.  Further, selling the land reduces the well being of current and future residents in the area who do not own waterfront property, and takes away some profit potential from land owners in the area planning to eventually subdivide and develop their land, as well as Lake Country residents and businesses that benefit from development.  The cash in hand is a known amount and lets counsel stick to a commitment they made.  Selling the land does have costs that should be considered, but how large these costs are is unknown, and therefore defending keeping the land in public hands will be harder to do.

I do not envy the counsel members.

Local Issues: A Bit About Beaches

It is kind of difficult to enjoy our beaches right now, on account of the high lake level. The recent flooding has damaged docks and other investments that have been made by waterfront property owners, and many have spent time, effort and money in order to minimize the damage.

The damage to docks in particular has been recognized as an opportunity by some, including our mayor and a few counselors, to look for stronger enforcement of regulations concerning structures on the foreshore.  With appropriate permitting, waterfront property owners can install docks.  They cannot build other structures on the foreshore.  A properly constructed dock will be built to allow passage, either beginning below the high water mark, or incorporating stairs or some other means for the public to pass the dock.  Many docks are not built this way.  Now that many have to be repaired or rebuilt, it does create an opportunity for inspections to take place and action taken to ensure compliance, so that those who cannot afford to own waterfront property have the opportunity to enjoy the lake that they legally have the right to enjoy.

Should we go further?  Should we acquire waterfront property to convert it from private residences into beach parks?  Is it worth it?  What would it cost?

A number of years ago the city produced an excellent document, the Lake Okanagan Shore Zone Plan (City of Kelowna, 1997), that documented many of the issues surrounding our Kelowna lake shore.  Among these is the fact that riparian property owners have the right to unimpeded access to the water body on which they border. This means that the province – which owns the foreshore – cannot put up a fence or other barrier as a way to limit trespass from those using the foreshore onto private property.  This contrasts with other parks, where the agency in charge often does just this as a means of protecting the rights of adjacent property owners.  However, if these land owners are concerned about trespass onto their property, nothing prevents them from putting up such a fence themselves.

Acquiring lakeshore property to convert it to public parks is expensive.  At the time of the study, it was estimated that it would cost between $3,000 and $5,000 per linear foot of waterfront to acquire property for public parks (p35, City of Kelowna, 1997).  That is twenty years ago, meaning the cost will be higher today.  The graph below shows the changes in the average price of residential properties sold in the Central Okanagan, with and without waterfront (data from the Okanagan Mainline Real Estate Board). I don’t have data specific to Kelowna, so am going to assume that trends for the Central Okanagan are similar to that for Kelowna. From 1997 to the present, residential property prices have more than tripled, while residential waterfront properties have increased in price by almost five times.  This suggests that the cost of acquiring lakeshore property could be as high as $25,000 per linear foot.

Herein lies the dilemma.  Acquiring lakeshore is expensive, which suggests that taxes will have to be increased to pay for it.  The public appetite for tax increases is generally not that large, making it attractive to put off purchasing lakeshore to the future. However, the cost of lakeshore is increasing fast, meaning that the total bill for acquiring lakeshore will be larger in the future.

The total bill for acquiring lakeshore seems to be increasing.  Is the capacity of the city to pay for acquiring lakeshore also increasing?  Our city has grown, incomes have grown, so maybe we are in a better position now to pay to acquire lakeshore.  The figure below plots the same property value numbers as above, and adds the total income earned by all the residents of the central Okanagan.  This is calculated by multiplying British Columbia’s per capita GDP by the population of the central Okanagan.  This is the bottom line on the graph.  The population of the Central Okanagan earns a total income that is almost two and a half times what it earned in 1997.  However, since waterfront property is almost five times as expensive as it was in 1997, each person in Kelowna would likely have to pay twice as much today to acquire extra lakeshore for the public as they would have had to pay 20 years ago.

To an economist, it is nice to see that markets work.  That waterfront prices are increasing relative to properties not on the waterfront is exactly what we would expect from a market.  Prices should go up when scarcity increases.  Since there is only a fixed amount of waterfront, it becomes relatively more scarce as Kelowna grows, and therefore normal competition bids up the price.  While this is true for all properties, the effect is larger for those properties that have something unique, such as being on the lake.  There are two effects of this.  First, people who own waterfront property gain more from the growth of the city than those who own ‘average’ property.  Second, as the value increases, only the more affluent can afford to purchase waterfront residential property, sorting the population into the wealthy who live along the lake, and the rest who cannot.

Is having so much of the lakeshore in private hands truly in the public interest, or is acquiring lakeshore for the public something worth investing in?  The data suggests that the longer we wait, the more expensive it is going to get.

A few researchers have come up with estimates of the value of a visit to the beach.  Chen (2013) used the travel behavior of Michigan residents to estimate the value of the beaches on Lake Michigan.  Since people won’t make the trip unless the value they gain from visiting the beach exceeds the cost, the cost of the trip gives a minimum value for the experience.  Chen found that the value was between $32 and $39 per person in 2011 dollars.  For the Italian resort town of Lido di Dante, Brandolini estimates a value of 26 to 27 Euro per day visit.  Lew and Larson (2008) use the value of people’s time to estimate what a beach visit is worth for San Diego county, finding values in the range of $21 to $23 per day.  Penn et al (2016) use a survey approach, where people are asked to choose between different beach configurations. Locals put a greater value on beaches that were less crowded, while tourists would pay more to ensure high water quality.  Or, for Kelowna, in the middle of the summer when the beaches are crowded, many locals may just stay home.

Looking at these results, a beach visit in Kelowna could reasonably be worth between $40 and $50, with the value of a visit for all beach visitors increasing if new beach reduces congestion on existing beaches.  New beach may also result in more visits if the congestion and other beach characteristics encourage people who are presently staying home that it is now worth going to Kelowna beaches.

So, if we can get an extra 50 feet of beach for $1,000,000, is it worth spending the money?  The city of Kelowna looks for a return on investment of at least 1.5% over inflation (Council Policy Manual), which means somewhere between 3 and 4%, or higher.  This means that the extra 50 feet of beach would have to attract between 600 and 1000 people per year to all Kelowna beaches, or if the beach season is three months long, approximately 100 days, then it would have to attract on average 6 to 10 people per day.  Seems like a pretty easy hurdle to meet.

Are we willing to pay for this?  Are we willing to have the city borrow money to invest in more public beach, as we residents of Kelowna will be paying down that debt through our taxes?  Are we willing to allow pockets of high density and/or resort development near the lake if in exchange the waterfront property is purchased for public use?  Can we convince Victoria and Ottawa that public waterfront is important cultural infrastructure that they should help pay for?  I think these are conversations we need to have.  The longer we put it off, the more expensive it is likely to get, and therefore we end up with a city where most of the greatest asset we have – the lake – is walled off behind luxury properties that only the wealthiest among us can afford to live in.

  • Chen, M. Valuation of Public Great Lakes Beaches in Michigan. 2013. Thesis (Ph.D.) – Michigan State University.
  • Brandolini, S. Recreational Demand Functions for Different Categories of Beach Visitor. Tourism Economics. 15, 2, 339-365, June 2009.
  • Lew, DK and Larson, DM. Valuing a Beach Day with a Repeated Nested Logit Model of Participation, Site Choice, and Stochastic Time Value. Marine Resource Economics. 23, 3, 233-252, 2008.
  • Penn, J; et al. Values for Recreational Beach Quality in Oahu, Hawaii. Marine Resource Economics. 31, 1, 47-62, 2016.

Local Issues: Five or One – Governance

Governing is hard.  Governance can be thought of as the way in which the will of the people is made effective through the decisions of government (UN).  Politics can be defined as “the activities of the government, members of law-making organizations, or people who try to influence the way a country [or other entity] is governed (cambridge).”  Politics is an inevitable part of governance whenever decisions can impact people differently, and this is almost always the case.  The challenge of good governance is figuring out how to effectively ensure that the will of the people is made effective in the face of political realities.

Winston Churchill is credited with saying

Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time.… (Langworth, 2008).

We rely on a democratic process to grant decision making authority over government decisions.  Those who gain the right to exercise that authority do so through a political process, offering the voters something of a plan for what they hope to accomplish while in government.  Since there are typically only a few candidates or parties on offer, these plans seldom perfectly match the preferences of any voters.  The winning candidates platform therefore is more like the least undesirable option than something the community wants implemented as is.  Candidates who appreciate the dilemma this creates will not emphasize ‘doing what they promised’, but rather focus on understanding what is the will of the people on both an issue by issue basis and in the overall direction for the community.  In the case of our city, our elected members deserve credit for choosing drinking water as a priority after a consultation process, rather than as I incorrectly asserted was an election issue.

For Kelowna, we periodically go through a guided community consultation process to update our official community plan.  From the city website, the “… Official Community Plan (OCP) provides a policy framework for Council by addressing issues such as housing, transportation, infrastructure, parks, economic development and the natural and social environment.”  A significant amount of council’s time is spent dealing with development proposals that are not consistent with the OCP, with the proponent asking council to provide them an exception.  We believe that this right to appeal is an important part of our democracy, and the public part of council meetings are a place we provide for the community to comment on these appeals.  Unfortunately, this part of the process is inclined to be biased against the broad interests of the community.

Where council is considering a decision, such as approving a land use change, those who have the most at stake will put in the most effort to influence the decision in their favour.  Consider as an example building a boardwalk from City Park to Gyro Beach at the high water mark along Okanagan Lake.  There are a bit under 100 parcels with lakefront that would see a boardwalk between their back yard and the lake, should such a proposal go ahead. These residents would have their privacy reduced, and would argue that their security was also impacted, and that these effects would manifest as a reduction in their property values.  There is at best mixed evidence for such property value reductions, as properties near pathways are often found to command higher prices (Hobden et al, 2004).  There are presently three waterfront properties listed for sale, at an average asking price of a little over $3 million, along this part of the waterfront.  If we imagine that these properties would loose 1% in value as a result of this pathway, then the average home owner along the lakefront would be worse off by $30,000 should a pathway go in.  It is therefore not surprising that these land owners would be very active in their efforts to stop such a proposal, attending public meetings, lobbying council members, etc.  Taking those approximately 100 properties together, they would collectively loose about $3,000,000 in property value if the boardwalk goes in.

On the other side are those who would enjoy the pathway.  Imagine that the average Kelowna resident would use this pathway twice per year, and do so instead of going to a movie, meaning that their time on the boardwalk is worth around $30 per year.  With about 120,000 residents in Kelowna, that works out to the pathway generating a benefit of $3,600,000 per year to Kelowna residents. Notice that with these hypothetical numbers, the value to Kelowna residents of this boardwalk per year is greater than the total value lost to the property owners.  Investing $3,000,000 to generate an annual benefit of $3,600,000 is a pretty good investment. However, for the average Kelowna resident, is that $30 benefit enough to get them to keep up to date on what is going on in the city, attend public meetings and council meetings, etc.?  For many it won’t be.  Therefore, a public process around a decision like this will invariably give extra weight to those most affected, and there is a pretty good chance that the option which is best for the community is not the one that will be chosen.

My experience of most people who work for the city or have put themselves forward for office is that they genuinely want to do what is best for the city.  Most are also not naive about the pressures I have described.  However, they are human, and the political pressures, the pressures to make decisions quickly, the limited resources to carefully study the impacts of proposals, the limited resources for enforcement to ensure compliance, etc., means that decisions made by the city will not always be consistent with what is best for the people of the city.  I have the utmost respect for the efforts of both city staff and our elected members, but effort is not the same thing as outcome, and I think when we make changes, such as reorganizing the way that water is managed in this city, we need to consider what the best decision process will be going forward.  It isn’t obvious to me that putting all decisions about water under the control of city council is ultimately the way to make the best decisions about water.

There are two issues that stand out in the debate, protecting the health of Mission Creek and protecting the interests of agriculture.  At present, the irrigation districts play a large role in both of these areas.  Mission creek and its tributaries are important water sources, and therefore need to be protected, and the irrigation districts are only responsible for a single service, water, with agriculture being a key user group.  The city has clearly stated that it will protect Mission Creek and the interests of agriculture (castanet).  I think we need to consider what governance arrangements are best to protect these interests.

Cities do not typically deliver irrigation water, and irrigation districts do not typically deliver potable water to households.  In Alberta, only recognized irrigators have the right to vote as members of the irrigation district (Irrigation Districts Act). This ensures that decisions made prioritize irrigation needs.  Arrangements are similar elsewhere.  Rights to irrigation water are held either by the irrigators themselves with the district as an entity providing a service (delivering water) or held by the district, with control of the district vested with the irrigators.  Should something similar be set up for irrigators in the Mission Creek watershed?  I.e., should the rights to irrigation water be vested with the individual irrigators, and then the city be contractually obligated to deliver those irrigators water in volume and seniority consistent with those licence rights?  Or should a single irrigation district, the Kelowna Irrigation District, be created that holds all the agricultural licences and is responsible for delivering irrigation water?  That entity could then enter into a contractual agreement that in the event of a drought, water is supplied to the city in exchange for a payment to the district.  Such contracts exist between irrigation districts and municipal water utilities in California (Tomkins et al).  Something like this would give security to agricultural water users in a way that would not be as easily subject to the pressures faced by the city.

Protecting Mission Creek is a divided responsibility.  The city is subject to provincial and federal laws, and to the expressed wishes of the citizens of the city.  Resources for monitoring and enforcement in the upper watershed are limited.  In the lower watershed, were most of us live, there are some great things being done.  One example is the Mission Creek Restoration Initiative.  The Mission Creek Greenway is one of the gems of our city.  However, are we investing as much in protecting an enhancing Mission Creek as we should, or are those same forces that would make it challenging to move forward with a waterfront boardwalk also making it difficult to achieve that level of investment in the creek consistent with what is best for all the citizens of Kelowna.  Are there ways to restructure the governance of the watershed so that the protection and enhancement of the creek is further prioritized?

One interesting approach to this is being tried in New Zealand, where a river has been given the rights of a person (Smith, 2016).  Two trustees, one from the local iwi indigenous community, are tasked with speaking on behalf of the best interest of the Whanganui river.  In effect, the river, and thereby the watershed, has rights.  Such an arrangement may give voice to those nonhuman entities that cannot vote in municipal elections.  Would something similar be a way to ensure that the interests of Mission Creek are protected?

Should we develop a Water Sustainability Plan for the Kelowna area, something that is possible under the relatively new Water Sustainability Act?  Such a plan could address the unique needs of this watershed, including protecting a share of the water for agriculture and for the environment, and be given the force of law.  City decisions that impact on Mission Creek would then be subject to the watershed sustainability plan.

We seem to be moving forward with significant changes to the way that water is governed here in the Kelowna area.  I am happy that there are discussions of the relative merits and risks going on, and even as I have many questions, I do not see the city – staff or elected representatives – trying to do anything other than what is best for the people of the city.  However, there are pressures that make it challenging to achieve what is best.  I think given the significance of the change we are contemplating, we should take the time to come up with a way of governing our watershed that has the best chance of protecting the interests of all who are connected to that water.

  • Langworth, Richard. Churchill by himself: The definitive collection of quotations. PublicAffairs, 2011.
  • Hobden, David W., Gary E. Laughton, and Katherine E. Morgan. “Green space borders—a tangible benefit? Evidence from four neighbourhoods in Surrey, British Columbia, 1980–2001.” Land Use Policy 21.2 (2004): 129-138.
  • Tomkins, C. D., Weber, T. A., Freyberg, D. L., Sweeney, J. L., & Thompson, B. H. (2008). Managing Water Supply Uncertainty: Option Contracts and Short-Term Water Transfers in California. Policy Brief, Woods Institute for the Environment, Stanford University.
  • Smith, James L. “I, River?: New materialism, riparian non‐human agency and the scale of democratic reform.” Asia Pacific Viewpoint (2016).

Local Issues: Five or One – Mea Culpa, Me Paenitet

“Mea culpa, me paenitet”, which is Latin for “my fault, I am sorry”.  In my previous post I asserted that the amalgamation of the water utilities was put forward as an issue during the last municipal election, as a strategic political move designed to gain votes.  I received a reply from the city pointing out that I was wrong.  I am grateful for having this error pointed out, and do not want my error to distract from what I believe are some serious questions that should be addressed before the proposal suggested by the value planning exercise is implemented.  I was wrong, and I apologize.

I did spend some time looking into the events that did transpire.  Here is something of a timeline.

2006 – Provincial policy statement on improvement districts
Improvement districts are a legacy of the early development of the province. Their services are best delivered by municipalities or regional districts, and the province favours the dissolution of improvement districts and the assumption of their services by municipalities or regional districts. To that end, it will continue to provide more favourable financial opportunities only to municipalities and regional districts.  This has been the evolving direction of provincial policy since regional districts were first created decades earlier.

2010-01-12 – Minister’s letter (referenced in KIWSP)
In response to lobbying from the four utilities other than the city, the minister issues a letter setting out conditions under which they would be flexible with respect to funding in relation to the need for amalgamation.  These were:

  • Best-Lowest Cost solutions,
  • Achievement of Public Health Outcomes,
  • Agricultural Interests Maintained.

2010-09-15 – Memorandum of understanding between five utilities (referenced in KIWSP)
The five utilities sign a memorandum of understanding that sets out the terms agreed to in order to move forward and develop a plan consistent with the requirements of the ministry.

2012-09-21 – Kelowna integrated water supply plan
Plan developed under terms of agreement set out in memorandum of understanding delivered.

2012-10-25 – SEKID ratepayers reject borrowing for system upgrades
The voters in the South East Kelowna Irrigation District (SEKID) rejected a proposal to borrow money so that system upgrades could be made to meet Interior Health requirements. The board chair states that “… the community is in favour of the project but is not willing to move forward without government funding assistance.” SEKID is therefore unable to comply with Interior Health requirements on their operating permit.

2012-12-09 – Memorandum of understanding to develop implementation plan
The five utilities sign a memorandum of understanding under which they will develop an implementation plan for the KIWSP.  Under the MOU, the parties agree to allocate scare provincial grant money to the highest priority projects.  Given that such money was not available to the irrigation districts directly, all such money would have to pass through the city.  This was clearly described to city council when their approval was sought for the city to sign on to the MOU (Report to Council, 2012-11-08).

2013-03-13 – Kelowna integrated water supply plan – implementation plan
All five water utilities sign onto an implementation plan for the previously developed integration plan.  The implementation plan is approved by the province, and would be used to prioritize capital expenditures and financing of those expenditures across the five utilities (see also RWW).

2015-04 – SEKID water quality improvement program
SEKID develops a plan to bring their system into compliance with Interior Health requirements without borrowing money.  Without grant funding, which would have had to come through the city, SEKID voters would face a significant rate increase.  At the conclusion of this project, the SEKID system would not need major capital upgrades for some time.  SEKID is the last of the three irrigation districts to move forward with implementing plans to upgrade their water to provincial standards without receiving funding support from the province through the city.

2015-04-12 – Kelowna citizen survey
Results of a survey of Kelowna residents conducted by Ipsos Ried are released.  The results are based on 301 telephone interviews, with a reported accuracy of plus or minus 5.7%, nineteen times out of twenty.  The top priority identified by the respondents when they are asked to compare a list of priorities is drinking water, which was the chosen priority six percent more often than the next most frequent winner, encouraging a diversity of housing at different price points.  The survey did not ask about the preferred organization for the delivery of services like water.

2015-09 – Kelowna council priorities
Based at least partly on the results of the citizen survey, city council singles out drinking water as its top priority.  Then begins messaging to the effect that Kelowna provides high quality, dependable water to those it serves and that same quality should be available to all throughout the city.  To implement this priority, its first action will be to conduct a value planning exercise to review the 2012 integration plan.

2015-09 – Amalgamation not the goal
Speaking about the council priorities, Mayor Basran states that ““The city doesn’t want to take over water boards, This is about providing good quality drinking water.”

2016-02-08 – Amalgamation and city control is the goal
As part of the state of the city address Mayor Basran delivered to the chamber of commerce, he made it clear that council believes that the delivery of all water services in the city should be under the control of city council.  He argues that citizens would not stand for five different fire departments with five different fire chiefs, all funded differently, and that therefore they will see the logic in having only one water provider for the city of Kelowna.  New stories tend to reflect perspective that irrigation districts are protecting their turf in the face of what would be best for the city as a whole.   In reference to the provincial policy to not fund improvement districts and to aim for their long run dissolution, the mayor is quoted as saying ““So, we’re just doing what it appears the province wants us to do.”

2016-05-11 – Letter to SEKID voters
The city sends a letter directly to those served by SEKID arguing in favor of amalgamation of the water utilities.  In the letter the city states that the aquifer SEKID proposes to use to supply water for its system upgrades cannot actually supply the water, thereby undermining SEKIDs credibility as an organization that can effectively meet the water supply needs of those it serves.  Through the value planning exercise conducted later, SEKIDs assessment of the groundwater supply it was proposing to use was vindicated.

2016-11-14 – Value planning statement of principles
The province announces that the five utilities have agreed to a statement of principles related to the undertaking of a value planning review of the 2012 plan.  The value planning workshop, the essential element of the process, took place between the 9th and 13th of January, 2017.  The workshop is an opportunity for outside experts together with local experts and key stakeholders to brainstorm new approaches to address the issues that the 2012 plan was developed to address.  The process is guided by terms of reference that describe what is to be considered and what is not to be considered.  In this case, the process considered only technical solutions that could occur if such a plan could be developed without having to honor the service areas of each water provider separately.  Issues of asset ownership, governance, water licences, etc. were not to be considered.  Black Mountain Irrigation District, Rutland Waterworks District and Glenmore Ellison Irrigation District opted not to participate.

2017-02-28 – Value planning final report released
The report of the consultants is made public.  It suggests that the integrated solution that was developed would save approximately $100 million in capital costs, relative to the 2012 plan.  This is about three quarters of the costs of the 2012 plan.  Effective use of this infrastructure requires relying on Mission Creek to supply about three quarters of the water supply for Kelowna residents.  If this can be achieved, then pumping cost from lake sources can be reduced.  If the water quality from Mission Creek continues to be sufficient to satisfy health standards, then filtration costs can be deferred until such time as Mission Creek water quality changes or health regulations change.  The plan identifies an interesting solution which, if it can be implemented as planned, would save both capital and operations costs in the delivery of water to Kelowna residents.  The plan was conceived as if all five utilities were partners, even though three of the five did not participate.

As someone who has been listening to the conversations about water in our city and valley for a decade now, it is quite apparent that like everywhere else, politics and water are intimately connected.  I was wrong in my recollection of how the politics has manifest itself, and am grateful to city staff for calling me out and giving me the impetus to put together this timeline.  I regret any confusion this has caused both to people associated with the city and anyone else who has read my posts.

I hope that my error does not distract from what I think are the important questions, questions which people much better qualified than I should answer.  These questions include:

  1. How much water can Mission Creek reliably supply, in the face of climate change, and with respect to environmental flow needs?  We have expertise in the valley that can contribute to modeling the likely climate change impacts on Mission Creek, and understanding how that will affect agriculture and environmental needs.
  2. How will an integrated Kelowna water utility be governed?  The city wants all water governance to be accountable to city council.  However, there are other models.  Los Angeles county has more than 200 water utilities, not necessarily corresponding with municipal boundaries (UCLA).  Metro Vancouver manages the north shore sources and provides treated water to the municipalities who are responsible for final distribution to households.  Fire services (alluded to by the mayor when arguing for cities taking over the utilities) are also separate by municipalities, with procedures in place to support each other when needed.
  3. How will agricultural interests be protected?  What does this mean?  Will agriculture be guaranteed priority access to that volume of water specified in the current agricultural licences – i.e. like an agricultural water reserve?  Will they be guaranteed the same security as they have now?  Cities typically do not manage irrigation water.  Rather, irrigation districts manage irrigation water, and may enter into agreements with cities to supply bulk water, and to be part of a drought plan should cities nearby be unable to meet needs during a drought.
  4. What can go wrong?  If the assumptions behind the plan are wrong, what does that do to the cost savings?  Climate change impacts, resolutions of water rights for indigenous peoples, …  How sensitive is this plan, in terms of cost savings, to everything working out right?  The value planning report does not offer any such sensitivity analysis.

The city is hoping for a significant amount of provincial money to support the initial phase of this project.  Getting that money amounts to recovering for Kelowna tax money that we as residents of Kelowna pay to Ottawa and Victoria.  I am certainly in favor of our city getting a just share of those tax dollars for projects that ensure we are not suffering relative to other Canadians and British Columbians.  I do hope that if the province does commit to supporting us in addressing water issues in Kelowna, that it does not tie our hands so tightly to this specific proposal that we cannot do the research required to ensure it is the right plan.

Local Issues: Five or One – Politics

Politics Trumps Everything

As an economist, I teach my students how to use economic models to represent the workings of the economy.  Given assumptions that some people do question, those models let us identify the best way to organize activities in the economy.  It still amazes me, and hopefully sometimes amazes my students, that such often simple models can provide powerful insights into how the economy works.  However, I also repeatedly remind my students that no matter how sound the logic, no matter how many economists agree, politics trumps everything.

I was recently interviewed by CBC radio, and was hoping to explore some of the questions I have about the value planning solution to our water system challenges. However, the conversation focused almost exclusively on why three of our city water utilities are not participating, what it would take to get them to participate, and what could be done if they refuse.  The tenor of the questioning was that the outcome of the value planning exercise is the right plan, and the barrier to its implementation is the irrigation districts.  I think there are some serious issues that need to be resolved before it is even clear whether or not this is the right plan, and below are the notes I prepared for the interview.  However, politics trumps everything, and my reflections after the interview turn to that.

In 2012 the Kelowna Joint Water Committee completed a plan to integrate the five major water systems in Kelowna.  All five utilities were part of the plan, and the provincial government was in support.  Then some of our local city politicians saw a political opportunity.  Canadians are passionate about water, and a politician rallying against the variations in water quality across the city would easily get attention and likely get support.  For someone looking to win an election, this was a shrewd move.  However, it also amounted to sacrificing for political gain people and organizations that have a long history in this community.  The tenor of the conversation since the election, and certainly the undertone of the interview questions, was that the water utilities who are not participating are selfishly protecting their turf in the face of what is obviously the right way to go.

The four utilities other than the city deliver a single service, water.  They are managed under the direction of a board of trustees elected from among those they serve.  Their job is to look out for the interest of those they serve.  If we believe in democracy, then we should respect the autonomy of these organizations, whether or not we like their choices.  Democracy is not about low cost service delivery, and democracy has not failed if the voters decide to undertake something other than the cheapest option.

I think it is useful to think about how things would unfold if the city were trying to absorb four private, for profit water utilities instead of four improvement districts.  Before anything was done, there would be a negotiation on the financial terms whereby the city would acquire the assets of the private utilities.  If one of the utilities refused, then the city could seek to expropriate the assets of the private utility.  However, this would trigger a process to determine what fair compensation for those assets would be, and that compensation is usually more than fair market value.  The reason for that being a recognition that if these assets were only worth fair market value to the owner, the owner would be offering them for sale.  Like a private utility, the improvement districts own assets.  Those assets were purchased and maintained using funds collected from the ratepayers, and those assets are set up to provide valuable services to those ratepayers into the future.  The current situation essentially amounts to the city saying ‘give us control of your assets, and trust us that we will treat your ratepayers fairly when we get around to figuring out what that will look like.’  I suspect that if the city approached the utilities to negotiate a deal to acquire the assets and fairly take care of the staff and fairly compensate the ratepayers, solutions could be found.

The fair treatment of staff, and of the trustees and ratepayers of the utilities is an important issue.  As a mid-sized, rapidly growing city, there are compelling arguments about how the overall evolution of the city can be better accomplished if the city is responsible for all important services.  This is independent of whether the results of the value planning exercise are in fact the right plan.  However, this great city that our mayor likes to champion got here through the hard work of many people, and the irrigation districts were central to that.  The process that has unfolded since the last city election has not recognized the dedication and hard work of the people who work for and serve the water utilities.  This began with the repudiation of all the efforts that went into the 2012 integration plan, and then multiplied when the city opted to use its financial leverage to secure its goals, rather than working with the utilities to try and smooth out the divisions created through the election.  I hope we can get back to a more cooperative approach.

Politics trumps everything, and politics never stops.  Going forward, the city is hoping to secure almost $45 million in provincial grant money, in order to implement the first phase of the project described in the value planning exercise.  I don’t know how tied this grant is to the specific plan.  If it is, then we may be politically locking ourselves into a plan that might not in fact be the best plan.  If we spend $45 million to take water from Mission Creek and deliver it to residences in the South East Kelowna Irrigation District (SEKID) and the South Okanagan Mission Irrigation District (SOMID), that money is gone.  We don’t get it back if it turns out that Mission Creek cannot supply the water we need it to.  How tied is this money to the results of the value planning exercise?

If we build this, and then find out it was not as good an idea as we originally thought, will we walk away and start again, or will we insist in continuing with the plan.  It is hard for any of us to accept that we made a big mistake.  It will be very hard for a politician to say he or she made a $45 million dollar mistake.  We could end up spending a lot more money for storage to secure fish flows, to negotiate an arrangement with the West Bank First Nation, and may have to back out of the commitment to supply agricultural water consistent with the present water licences.  By spending $45 million now, will we end up going down a more costly path to avoid admitting that a mistake was made?  To my students, I say sunk costs are sunk, and why they were spend in the first place does not matter.  However, politics trumps everything, and admitting expensive mistakes does not have good political optics.  I hope that the conditions on the money we get from the provincial government have the space for us to complete the careful research and planning that is needed, and to follow a different plan if that research does not support what we currently think is the best idea.

My notes prepared for the interview:

  • What the plan is:
    • An exploration of what water supply in Kelowna could look like if it was managed as a single utility, and how much it might cost to implement such a single system, relative to 2012 plan.
      • fundamentally, it envisions one water utility, rather than five major utilities and a collection of minor ones.
  • What they found:
    • Using Mission Creek for a large part of Kelowna’s water supply could be more cost effective than the 2012 integration plan developed by the five main utilities.
      • use gravity for delivery, cost effective compared to pumping.
      • use high quality source water, avoid/defer cost of filtration.
      • balance with lake, have two high quality sources that can switch between, increases security.
  • What the plan isn’t (not in the mandate of the study):
    • A detailed engineering study that sets out the specifics of how to implement plan.
      • cost estimate is based on numbers in 2012 study, not new work specific to proposal.
    • A detailed assessment of the capacity of Mission Creek to supply about 75% of Kelowna’s water.
      • no modeling of the watershed and impacts of climate change.
    • A detailed exploration of the water licencing and regulatory requirements to implement the plan
      • environmental flow needs
      • commitments to agriculture
    • A detailed plan to ensure that all water users are better off being part of one water utility than they are now as part of separate utilities.
      • plan recognizes that ratepayers have payed for assets and acknowledges that equity would require some compensation to ratepayers of the utilities for the value assets that are taken over by the city and the value of the services that those assets will provide to the city.
      • there has been no agreement about this matter before this planning exercise, which may be part of reason that three utilities didn’t participate.
    • A clear plan to ensure that there is sufficient water for agriculture now and into the future.
      • plan recognized importance, has some suggestions about how it could be done in terms of infrastructure, but doesn’t do much else
    • A plan for the governance of the new water utility and the transition from five utilities to one utility.
      • describes it as an important thing that should be done.
  • What the immediate action item is:
    • Spend about $68 million to supply water from Mission Creek to SEKID and an east-west main to deliver Mission Creek water to the city.
      • this is as an alternative to spending about $23 million for wells and system separation to achieve water quality improvements in SEKID.
  • Longer term items:
    • Different alignment of pipes, location of pumping stations, etc. than in 2012 integration plan.
      • to enable switching between Mission Creek and Okanagan lake as main sources.
    • Increased storage in Mission Creek, to provide capacity in line with supply objectives for Mission creek.
  • To implement plan, need:
    • All water utilities on side.
    • Certainty that Mission Creek can be used as set out in the plan
      • actual water that is and will be available
      • regulatory issues – environmental flow needs, etc.
      • licence issues – large share of licenced water on Mission Creek is supposed to be protected for agriculture
      • ability to build storage, given some of Mission Creek watershed is inside provincial parks.
  • My key question:
    • Should we spend $45 million more on an infrastructure project when we don’t know if the larger plan can be implemented.
      • can’t get that $45 million back if we can’t implement the plan.
      • will this infrastructure be worthwhile even if rest of plan cannot be implemented?
    • Why the panic now?
      • federal and provincial granting programs come and go, miss this one, can get the next one.
      • implementation of plan is contingent on future granting opportunities
  • The grand story.
    • province wants to get rid of improvement districts
      • desires that dissolution of improvement districts and integration with cities or regional districts be voluntary
      • reason, an inconvenience to local government land use planning and coordinated service delivery
      • local government cannot be ‘single desk’ for approving development if there is another local government responsible for some services.
    • province refuses to provide improvement districts with access to funds that are available to cities and regional districts
      • ‘forces’ improvement districts to ‘voluntarily’ join cities or regional districts when they face costs which are ‘too high’.
      • RWW, BMID, GEID not in financial situation where service quaility currently requires large investments
      • SEKID is.
      • City could have followed 2012 plan, which would have meant merger of utilities within city would be many years or decades in future.
      • City opted to leave SEKID hanging, without access to funds, until they agreed to participate in planning for merger into single utility.
    • desire of province / city to get rid of improvement districts about overall land use planning and service delivery, not specifically about drinking water quality or saving money on water delivery costs.

Some other points:

  • Water Sustainability Act with respect to agricultural licences:

    26(5) Despite subsection (1) (g), a decision maker may not (a) authorize a change in water use purpose for dedicated agricultural water except to another qualifying agricultural use,

  • Mission creek is ‘fully recorded’ and has licences totaling just over 35,250 ML per year.
    • almost 20,000 ML is agricultural water licenced to BMID – if WSA followed, not available for waterworks
    • if transfer waterworks from GEID and SEKID to mission creek, and ag water from mission creek to GEID and SEKID, get almost 5,000 ML more waterworks water on Mission creek.
    • need about 20,000 ML of licence capacity to meet 75% of current non-agricultural demand for system.
    • total waterworks licences, with transfer from GEID and SEKID are about 10,000 ML.
      • there is not enough licence space for proposed 75% supply from Mission Creek, if ag licences are to be respected, as set out in WSA.
      • province could reassess and issue new licences, but that does not change hydrology and increases risk that there will be supply challenges in dry years. New licences would have lowest priority date.
      • plan proposes new storage, which may enable new licences. However, cheapest (and highest quality) storage expansion is inside provincial park.
      • Net result, may have to pump more from lake than set out in plan, and therefore would not realize all of suggested cost saving.
  • Without BMID, GEID and RWW on side, when can plan actually be implemented?
  • If Mission creek cannot be used as set out in plan, is it still worth using Mission Creek water for SEKID instead of wells?
    • Wells are cheaper.
    • Can’t get money back for more expensive Mission Creek use if it turns out Mission Creek cannot be used the way set out in plan.
  • Instead of spending money on integrating system now, should we be considering a Water Sustainability Plan for the Mission Creek and nearby watersheds that enter Okanagan Lake in Kelowna?
    • bring all stakeholders together, set out objectives, and then develop integration plan consistent with overall community objectives for entire watershed?
    • Water sustainability plans have provisions for an agricultural water reserve, which may provide extra security for agriculture into the future

 

Local Issues: Five or One – Value Planning

In November 2016 it was announced that the five main water providers in Kelowna had agreed

… on a statement of principles and terms of reference for a value planning process that will allow for an independent third-party to review all relevant documents and information that would inform the development of a new, integrated water system for the region over time (news.gov.bc.ca).

A consultant was hired, stakeholders and experts recruited, and a value planning workshop was held January 9-13.  The value planning exercise started from the 2012 Kelowna Joint Water Committee integration plan, and looked for ways that water services could be enhanced and/or costs reduced.  The report on the value planning exercise was released on the 27th of February.

The analysis recognizes one of the things that I pointed out in an earlier posting, that the cost of delivering water around Kelowna might offset the advantages of centralized treatment.  They identified a solution that takes advantage of the scale economies of centralized treatment, and the opportunities to avoid some treatment costs if high quality source water is used, while using gravity to move water some of the time.  That solution is to use Mission Creek as much as possible.  Mission Creek water is, for much of the year, of sufficient quality to require minimal treatment (i.e. no costly filtration), and when Mission Creek water is not of that quality, the plan sees the lake intakes being used.  Therefore, by integrating the system and taking advantage of these two sources – Mission Creek and Okanagan Lake – the cost of pumping water can be kept down, and the cost of treatment kept down as well.

The first phase of the project will be to build infrastructure to bring Mission Creek water to the residential areas presently supplied by South East Kelowna Irrigation District (SEKID), avoiding installing the wells that were originally seen as a solution to water quality issues faced by SEKID.  It is acknowledge that this will be more costly than the wells, but in the long run as Mission Creek becomes an important source for the entire city, would be an appropriate investment.

Good job to the value planning consultant for identifying this option.  However, on my first reading of the report, I am left with some questions.  Here are a few of them and my thoughts.

1) The Missing Water Providers

The value planning exercise includes only SEKID and the city.  The remaining three opted out, even after agreeing to the original guiding principles mentioned in the press release.  Something happened to the goodwill that was in place in 2012, when all were working together.  How will the lack of full involvement by all the water providers impact on the ability to implement the plan.  Part of the proposed plan sees using Black Mountain Irrigation District (BMID) infrastructure to manage withdrawals from Mission Creek (Alternative 4, page 3-27).  How can this be implemented if BMID is not involved?  Will additional infrastructure need to be built to operate things in the mean time until BMID is brought on side?  How much will that cost?  Or, without BMID, might it be cheaper to avoid using Mission Creek for now and install the wells originally envisioned to deal with water issues in SEKID?

2) Mission Creek

Mission Creek is a ‘Fully Recorded’ water source, which means that the province will not issue new licences on the creek.  This is because the reliable supply on the creek is not seen as sufficient to supply extra licences.  The city has three relatively small irrigation licences on the creek.  BMID has by far the largest licence volume on the creek, and they are not part of the plan.  The city would need to have new waterworks licences on Mission Creek to be able to withdraw water from the creek, and as presently classified, the province will not issue new licences.  The value planning exercise did not address these issues.  It was not part of the mandate.  From the report:

The VP Study was to specifically focus on the technical solution without regard to
system Governance. Further, the technical solutions were not limited based on any
ownership or rights to existing systems (page 1-3).

This means that there are important legal and governance issues that need to be resolved before this plan can be implemented.  Or, there may be legal and governance issues that mean this plan cannot be implemented.

3) Climate Change

Climate change is widely recognized as the single greatest unknown for future water supply planning. Potential impacts include, increased growing seasons in the shoulder months, precipitation falling more as rain rather than snow in the uplands, increased irrigation requirements (both domestic and agriculture), increase in extreme events (both drought and flooding), and possible reductions in mean streamflow (page 3-41).

The projections for the Okanagan are for an earlier freshet, a longer low flow period, and a lengthened season when plants need water.  There are kokanee that spawn in Mission Creek during that low flow period, and they need water.  It would seem that before moving forward with construction that anticipates relying on Mission Creek, it would be important to develop some forecasts of how much water Mission Creek can reliably supply into the future.  There has been some work done related to this issue by people at the Pacific Agricultural Research Center and by the Okanagan Basin Water Board.  Such work was not mentioned in the report.  What information is available for Mission Creek needs to be consulted, and the risk that Mission Creek cannot be relied upon needs to be fully quantified.  If the risk is large, then the projected cost savings are a gamble, rather than a sure thing.  Since the up front costs of starting down this path are high, if the dice do not fall in our favor, we will have spent money that we cannot recover.

4) Agriculture

Protecting the interests of agriculture was recognized as an important part of the value planning exercise, and the suggestion of separating agricultural supply from domestic supply makes sense.  How will this be governed?  The present governance has some challenges, and there is potential to improve things.  Based on information in the 2012 integration plan, the three irrigation districts presently supply more water to domestic customers than their licence volume permits.  They have agricultural and domestic licences, and while their supplied water is below the sum total of their licence volume, the amount going to domestic uses exceeds that licenced for domestic purposes.  This presents a challenge for agricultural water users, as water is ‘seeping’ out of agriculture into domestic water uses.  If agricultural water licences are vested in a body that is independent of the city, managing a separate delivery system and/or contracting with/to the city for the types of resilience issues mentioned in the report, then the result may be good for agriculture.  However, if this amounts to a capture of almost all the water rights in the Kelowna area by the city, then agricultural users are likely to be a lower priority to the city.  Agriculture is an important use of the land and a valuable contributor to the quality of life here in Kelowna.  However, it is a relatively small economic contributor, relative to those activities related to the continued growth of the city (construction, real estate, etc., see this post).  Integrating the water providers in the city makes it easier for development, as all major infrastructure decisions related to development are made by one local government.  This is a benefit for some that is independent of doing anything to address water quality issues.  However, that comes at the cost of removing a structure which gives agriculture a larger voice relative to the other interests trying to get the ear of local government.

5) Governance

A theme that runs through the points I raise above is governance.  Negotiations between nations, between business partners, and between domestic partners take time, and are successful when all parties feel that they are better off by being part of the deal than not.  Deals that are rushed often do not work.  This process was entered into and the timeline set by the opportunity to access infrastructure money available from the federal and provincial governments.  The sense was that if things were not done quickly, then that money would be gone.  This likely contributed to the reason that three water providers backed out.  Their situation was such that there was no urgency to address water issues in their system immediately.  SEKID had the most significant water issues to deal with, and therefore felt unable to wait for an arrangement that was acceptable to all the water utilities.  The result is a plan that cannot be implemented until the other parties do come on board, and if those other parties move forward with works that are inconsistent with the plan, the projected cost savings may not be realized.  Likewise if it takes a long time to bring everyone together, then the cost savings of the proposed plan will not materialize for some time, and therefore the benefit of spending more now, rather than using the wells originally planned, becomes smaller.

The plan speaks to the issue of dealing equitably with the disposal and rationalization of the assets held by each water provider.  This is important.  Those served by the different water providers have paid, through their rates, for those assets.  If the utilities are merged and assets disposed of, then it would seem fair that those who paid for the assets be compensated.  Perhaps these issues should have been agreed to up front, rather than as an afterthought.  It is good that the value planning report talks to them, but perhaps the negotiation between the water providers should have started with the governance issues.  I.e., perhaps we should have figured out how we are all going to work together before talking about what we are actually going to do together.

In sum, the value planning exercise has identified a potentially cost effective way that an integrated Kelowna water system could be organized.  This is a valuable outcome from the process.  However, there remain a number of outstanding issues, some of which include: the capacity of Mission Creek to actually supply the water anticipated in the plan, in the face of a changing climate and environmental needs; the requirements for bringing the three providers that were not part of the plan back on side so that the plan can actually be implemented; identification of a practical way to ensure that agricultural water users are able to manage water for their purposes; and a plan to fairly deal with the merger of these multiple independent entities together.  Hopefully we have not being rushed to the chapel for a shotgun wedding before really figuring out the practicalities of living together.

Local Issues: Five or One? – Reprise

This is a long one!

article-2141825-1300EE74000005DC-328_634x286An economist and her friend are walking down the street when the friend sees a twenty dollar bill on the sidewalk.  “Look,” he says, “it’s a twenty dollar bill”.  “Nonsense,” says the economist. “If that was a twenty dollar bill, someone would have picked it up by now.”

Education and experience have both taught me to be very suspicious when anyone suggests that there is a lot of money to be had for little effort.  Thus, when it was suggested that amalgamating the water utilities in Kelowna together would generate large savings, I found it hard to believe.  My questions and speculative answers were all ways that to me suggested the savings would be far less than advertised, and that something of value might be lost in the quest to achieve these savings. There are typically good reasons why those savings, that twenty dollar bill, have not already been picked up.

saving-clipart-saving-money-clipartmoney-clipartpng-ivaf1v3rRecently, Alan Newcombe
Divisional Director, Infrastructure with the City of Kelowna provided a great response to my previous blog post on the “Five or One” question.  You can read it by scrolling to the end of my previous post. The overarching argument seems to be that from the perspective of those speaking on behalf of the city, the best governance model for the city includes all services such as water being under the authority of the city. The assertion is made that among the benefits of bringing all water supply under the control of the city will be substantial cost savings. The governance question is a big question that is about far more than the cost of service delivery, and in my opinion decisions about governance should not revolve strictly around the cost question. Having said that, I do think there is merit in examining critically some of the claims about the cost savings that can be had.

A point by point discussion of which cost savings are likely to be realized and which not will, I believe, prolong the argument and divert attention from the governance issue.  I put forward a number of questions in my previous post and suggested that in response to those questions, which were areas where one might expect cost savings, that I didn’t think the actual savings would be that large.  How large the savings will be depends on how amalgamation is accomplished, and unfortunately whatever choice we make, we will never know whether we actually saved money relative to the other option.  33034-doctor-who-tardis-in-spaceEven the time traveling T.A.R.D.I.S. of Dr. Who would not be enough, as we would need a parallel universe where the only thing different is that in one universe the system was amalgamated and in the other it was not. To date, we have neither perfected time travel nor travel between multiple dimensions, in spite of its common theme in science fiction.  Since we cannot know what the costs will be with and without amalgamation, our best indication of the effects of an amalgamation would be to carefully examine the costs of different sized utilities.  Such examinations have been done.

In a recent doctoral thesis, Hugh Boyd Wenban-Smith (2009) carefully separates the cost structure of a set of water utilities in the UK and in the USA between treatment and distribution.  He finds the result that many others have found for treatment, namely that there are significant economies of scale.  Larger water utilities have lower costs per unit of water treated. However, whether there is an overall cost advantage to larger utilities comes down to the form of the community and the resultant distribution costs.  Communities that are densely built have distribution costs that decrease with community size as well as decreasing treatment costs. However, for sprawling communities and communities that are made up of settlements spread across the landscape, distribution costs are increasing in community size.  Kelowna has a combination of sprawling, low density development together with dispersed settlement pockets (Gallagher’s Canyon, Sunset Ranch, …).  This means that if amalgamation is accomplished by replacing the existing collection of water systems with one water system that covers the entire city fed by centralized water treatment, the cost of that system is likely to be higher than what we have now.

Kelowna’s population is spread over a large area and a large elevation range.  Analysis of a collection of water utilities that are mostly in areas with little variation in elevation may not capture all the issues important for Kelowna.  Two recent papers, one looking at German water utilities (Zschille and Walter, 2010) and a second studying Swiss water utilities (Faust and Baranzini, 2014) are somewhat more representative of our geographic situation.  Both find that increasing the elevation range over which water must be moved increases the cost of the utility. In other words, in Kelowna, the large elevation range will increase the adverse cost impact of an amalgamated utility, if that utility is going to centralize treatment using the lake as a source.

The importance of urban form in the cost of providing services like water cannot be overemphasized.  It has long been recognized that sprawling low density development is costly to service.  Sprawling low density development that spreads high up our hillsides is even more costly. Redoubling efforts to encourage infill development and increasing density within the existing built areas of the city will increase the cost effectiveness of water supply and of other urban infrastructure.  The city’s efforts in this area should be applauded.

Faust and Baranzini (2014) also find that areas with more extremes in weather (especially periods of drought) tend to have higher water utility costs.  This isn’t surprising, as in such areas the water utilities will need to maintain capacity for these extreme times.  Kelowna is rightly proud of the fact that for a decade it has accommodated population growth without increasing total water demand.  Higher density, successful efforts to reduce outdoor water use, metering and pricing by volume, etc. have meant that expensive capacity expansion could be delayed.  However, the irrigation districts were built to supply water for irrigation, and being able to meet the needs of irrigators during times of drought was the reason these systems were built to the capacity they have.  While there is certainly scope for ongoing improvements in efficiency on the farm, farmers livelihoods will continue to depend on supplying their crops with enough water.

Finally, work by Destandau and Garcia (2014) looks at quality of service as a dimension of water supply activities.  In essence, water utilities are not just providing water, but they are providing services as well. Increasing the size of water utilities is generally accompanied by a reduction in the quality of service.  Put another way, if the water utilities in Kelowna are absorbed by the city, and if the city is committed to maintaining the same quality of service that people presently enjoy, the cost savings from amalgamation will be smaller (or the cost of amalgamation larger).  The staff that appear redundant from a strict accounting perspective are in fact providing a service that the people served value.

Overall then, the evidence from other jurisdictions is that whether or not a single large water utility will have lower costs than our current system of five relatively large utilities (and 27 tiny ones, more on that later) is uncertain.  We have some of the factors that tend to increase costs for a larger entity, namely dispersed settlement pockets, sprawl, and large elevation ranges.  Water drawn from the lake can presently be treated at lower cost than that collected from the uplands, thanks to an ongoing filtration deferral that the city has.  However, water collected from the uplands can be moved by gravity, rather than needing to be pumped. There are also costs associated with amalgamation, and those who have renovated a home know it often isn’t clear whether the cost of the renovation will ever be paid back in terms of a higher home value or savings on things like heating costs.  You do the renovation because you expect to be happier in the home after the renovation than the one you currently live in.  In the end then, I am still left skeptical about the cost savings that bringing water supply services under the control of the city will bring.  Or to put it another way, I don’t think the financial argument is the winning argument to justify amalgamation.

From my perspective, the ‘citizens’ of our city are far more than just rate payers, and even if there were a clear financial advantage to amalgamation, that would on its own not be justification.  There are other values that factor in, and the question is how do we balance these values and arrive at the best choice.  In situations like this, there is no right answer. Solving such ‘wicked problems’ really involves finding solutions that balance the conflicting values in such a way that everyone is willing to ‘give it a try’.  What doesn’t work is when one party decides its values, its vision, is the right one and attempts to force it on all the others.  A willingness to listen, to truly appreciate the perspectives of the others, and to take the time necessary to bring everyone on board, are critical to finding solutions to such problems.

Mr. Newcomb makes reference to the provincial policy on improvement districts.  The policy is to have the improvement districts all eventually absorbed into municipalities or regional districts, except in those rare cases where there is no alternative.  It is pointed out that some improvement districts, particularly the smaller ones, are challenged to provide the effective governance that is felt appropriate for an entity providing a public service. The assertion is that the public is best served by having only one level of local government which is responsible for land use planning and the services that are needed to support the various land uses.  This assertion reflects a particular perspective on the purpose of local government and the best governance model to achieve that purpose.  Whether or not this view on governance is ‘right’, the eventual dissolution of improvement districts is government policy.

Some excerpts from the government policy document highlight important aspects of the provincial perspective.  First, as part of a list of governance issues, the document states:

relationships between improvement districts and regional districts: It is inevitable that there is potential for conflict when land use planning and servicing responsibilities are vested in different jurisdictions in rural areas;

The overall objective of the ministry is stated as:

The ministry expects that improvement districts will, over time, be converted to municipal or regional district jurisdiction and at some point in time all improvement districts will be under municipal or regional district jurisdiction. However, it is recognized that improvement districts will have an important role to play in providing local services to rural areas for some time and the process of change will largely be voluntary.

and in reference to changes to Bill 14 (Local Government Statutes Amendment Act, 2000):

At the same time, Bill 14 advances a number of changes to regional district legislation which will indirectly contribute to the vision and the objectives. These are:
  • strengthening provisions for regional districts to establish elected local community commissions to manage local services;
  • enhancing flexibility for regional districts to establish management committees and commissions to oversee local services including those provided by former improvement districts; and
  • requiring regional districts to consider whether consultation is required with improvement districts in preparing and amending official community plans.

So while the provincial policy does eventually see the assumption of the responsibilities of improvement districts by regional districts or municipalities, this is not something that the province intends to force, and the legislation enables the creation of entities to manage the delivery of local services.  It would seem that from the provinces perspective, acquisition of the irrigation districts by the city is not the only solution.

There are likely a number of governance related issues that need to be sorted out before the water utilities serving Kelowna can be effectively absorbed into either the city or regional district.  That the five main water utilities were talking about these issues when they developed the integration plan is certainly a good start. This conversation needs to continue with all the parties committed to working together, and being open to a solution emerging from those discussions.

The irrigation districts, to varying degrees, supply a substantial share, if not a majority, of their water to irrigators. To the extent that the interests of the city and that of the irrigation community do not align, there is the potential for conflict. From a governance perspective, one key question is whether the interests of the irrigation community will be fairly accommodated within one Kelowna water utility. I have pointed out elsewhere (Kelowna’s Agriculture Plan)  that agriculture makes up a very small share of the local economy. However, it uses a large share of the water.  The largest driver of Kelowna’s economy is immigration, and the construction and other activities (i.e. real estate, legal services, etc.) that need to take place to accommodate that immigration. A tremendous amount of wealth has been created for those in Kelowna who have land and been able to provide it for development.  When there is a boom in housing demand, such as has been occurring recently, there is much potential wealth to be generated for land owners who can develop their land. As Mark Twain said “buy land, they aren’t making any more of it”.

Kelowna’s city council is keenly aware that when immigration slows and construction slows, the city economy suffers far more than the impact of changes in apple prices or the occurrence of a late spring frost. Beyond land owners, many residents of Kelowna are employed in industries that rely on this continuing growth, and they suffer when growth slows. These are voters and residents, and council rightly should be attune to their situation. Counselors are in a challenging position, trying to make decisions that strike the right balance among the varied values that Kelowna residents care about, while facing constant pressure from various interests seeking to promote their own needs.  There are more than 100,000 residents who drink water in Kelowna, while a few thousands are substantially impacted by what happens in agriculture. Agriculture accounts for perhaps half or more of all the water that is used. In such a situation, it may make sense for the agricultural community to have some level of control or ownership over their access to water, lest their interests be lost among the many conflicting demands on city government.  Alan’s comments include seeing the need for “A plan that protects agriculture …”  I’m glad that the city recognizes this. However, there is a fundamental difference between the city having the responsibility to protect the interests of agriculture and agriculture having the power and tools to protect its own interests.

The bottom line is that the agricultural community needs to have some level of real power when it comes to decisions about water, decisions that can affect their livelihoods.  That is a critical governance challenge, and I do not think it should be constrained by an imposed deadline for amalgamation.  An imposed deadline with the end result being that the city assumes responsibility for all water means that the city does not have to meaningfully engage with the affected parties on the needs of agriculture or on any other issue.  They can just wait until the deadline arrives, and then have things their way.

The agricultural community has long taken issue with having to pay the cost of treating water to potable quality when the majority of that water is used for irrigation.  The differential rates between residential and agricultural users reflect this, but this difference in rates is also something of an uneasy peace where people avoid talking about the issue.  Is there a way to reshape the governance of water in Kelowna such that irrigation and residential supply are separated?

There are few jurisdictions outside of British Columbia where irrigation districts are as active in the supply of domestic water as they are here.  I am no expert on the history of this, but at the very least the residential development that the irrigation districts ended up supplying were approved by some other level of government, the level that had authority over zoning (city, regional district or province as the case may be).  In most other jurisdictions, the equivalent of our irrigation districts supply only irrigation water, and they may be bulk water suppliers to other utilities that take responsibility for supplying drinking water.  Is there anything we can learn from this?

Could we separate responsibility for irrigation and drinking water supply. The city could take on all responsibility for supplying potable water to all residents of Kelowna.  The irrigation districts would then only be responsible for supplying irrigation water that is treated to a level that meets the needs of agriculture.  All non-agricultural residents throughout the city would then pay one water bill to the city, and the city would be responsible for figuring out how to best supply potable water to those residents, where ever they are in the city, and how to fairly charge residents, based on where they are and the cost of delivering potable water to them.  Agricultural residents would pay two bills, one to the city for their drinking water, and a second to their irrigation district for their irrigation water.

Such an arrangement would leave the city free to determine the best way to supply potable water to all Kelowna residents, and relieve the irrigation districts of the responsibility of figuring out how to supply potable water through a system that is primarily designed to supply irrigation water.  For some neighbourhoods, the best solution may be for the city to twin lines and connect to the current city system.  In other places the city may opt to pay for twinning lines and installing a small treatment plant, supplying it from a well or purchasing the water from an irrigation district. For some residences, it may be most cost effective for the city to install point of entry treatment systems that treat the water for one house alone. Figuring out how to pay for these system upgrades would then fall to the city, taking the issue away from the irrigation districts and the challenges they have had raising money.  I don’t know if such an option has been seriously considered, and I would not be surprised if there are things about this suggestion I have not recognized.

Finally, there is the question of drinking water quality among the 27 other very small utilities within the boundaries of Kelowna.  The public debate doesn’t seem to have touched on these much.  For these small utilities, many of which can be connected to the city system or one of the larger irrigation districts for relatively minimal cost, amalgamation makes sense. In my opinion, the other governance issues loom less large here, and the threats to people’s health are likely larger. There is of course the question of who will pay, but so long as there is good faith negotiation on the part of all involved, such things can be resolved.

I do not see any reason to rush forward with amalgamation.  There are some serious governance issues that need to be sorted out, particularly ensuring that the agricultural community has a real say (i.e. has real power) about how water is managed.  I think we are facing conflicting visions about what a city should be and do.  The economics of service delivery are not conclusive, and even if they were, there are other values, some related to the final outcome and others to the process of getting there, that are also involved. I do not see any obviously right answer, beyond moving forward with those investments in the system that make sense, whatever the future relationship is between the water providers. Solving dilemmas such as this requires communication, a willingness to listen and appreciate others perspectives, and patience. The best solutions are not found in a hurry.

References

Destandau, François and Serge Garcia (2014). Service quality, scale economies and ownership: an econometric analysis of water supply costs. Journal of Regulatory Economics 46(2): 152-182

Faust, Anne-Kathrin and Andrea Baranzini (2014). The economic performance of Swiss drinking water utilities.  Journal of Production Analysis 41:383-397.

Wenban-Smith, Hugh B. (2009) Economies of scale, distribution costs and density effects in urban water supply: a spatial analysis of the role of infrastructure in urban agglomeration. PhD thesis, The London School of Economics and Political Science (LSE).

Zschille, Michael and Matthias Walter (2010). Cost Efficiency and Economies of Scale and Density in German Water Distribution. German Institute for Economic Research (DIW), Berlin, Germany.

 

Local Issues: Five or One?

Should the city of Kelowna take over the other four water providers before any major upgrades take place?  While not quite top of the news anymore, my sense is that it is far from settled.  In what follows is some background, and some thoughts from the outside.

https://www.kjwc.org/

https://www.kjwc.org/

Kelowna presently has five major water providers and a collection of small ones. The five main ones are the Glenmore Ellison Improvement District (GEID), Black Mountain Irrigation District (BMID), South East Kelowna Irrigation District (SEKID), Rutland Waterworks (RWW), and the City of Kelowna.  The first versions of the systems that would develop into those operated by the three irrigation districts began when land development companies recognized that they could sell parcels of land with irrigation for much more than that which was not irrigated.  The systems they built took advantage of the local topography to move water from upland reservoirs to the dry lands without easy access to nearby creeks.  Relying on gravity, the cost of moving water was small. The principle challenge was building enough storage and delivery capacity to meet the needs for irrigation during the summer months.  After the land was subdivided and sold, the systems were often neglected by their original builders, and were eventually reorganized into a level of local government.

http://www.kelownabc.com/kelowna/

http://www.kelownabc.com/kelowna/

The Rutland and Kelowna systems were built to supply water to urban residents. Being distant from the lake, Rutland’s system used groundwater, while Kelowna turned to the lake.  Unlike the irrigation systems, both Rutland and Kelowna must pump their water, making water delivery more costly. This at least partly explains why both of these utilities moved to metering and charging by volume. As these systems are dependent on pumping, they are vulnerable to equipment breakdown and power interruptions, and must have measures in place (generators, fuel storage, redundant pumps) to ensure that they can handle such events. Those supplied by RWW and Kelowna do tend to have fewer complaints about water quality issues, a consequence of the fact that upland reservoirs are more likely to be affected by biological activity, and the stream channels that deliver the water to the system intakes are more vulnerable to weather events that can cause turbidity.

RWW, GEID, BMID and SEKID are a level of local government, and fall under the provincial Local Government Act.  Their activities are overseen by an elected board of trustees that establishes bylaws regulating the operations of the utility.  For the city, by contrast, water is one of a number of services, with city politicians ultimately responsible. Unlike the other four water providers, the city’s elected officials are responsible for overseeing all the services the city provides.

KJWC_logoThe managers of all these water utilities are planning infrastructure upgrades and expansions to deal with their respective challenges.  They recognize that there is scope to support each other, and cooperate through the Kelowna Joint Water Committee.  In recent years, the provincial government has decided it would like to see the many, mostly small, independent water utilities around the province absorbed into other levels of local government – cities, towns, or regional districts.  The five utilities mutually agreed to tighten their cooperation, and in doing so were able to arrange for continued access to funding, using the city as the conduit.  This cooperation took the form of a detailed integration plan, the 2012 Kelowna Integrated Water Supply Plan, which describes the situation of each water provider, the technical needs and costs of installing physical integration between the utilities and upgrading water treatment, and explores governance reform that would reflect the emerging integrated water system.

Since the last local election, city council has come to question the wisdom of the integration plan, and stated that it aims to take over all the water utilities.  It suggests that this would reduce costs to all those served, and bring responsibility for all water services in Kelowna under the oversight of city council.  The affected parties do not all agree that this is the best solution.  In reflecting on this, I am left with a number of question which I think are important to answer if the best solution is to be found.  Given that I am not a technical expert, I would be happy to be corrected.

"I can't change the laws of physics" Scotty from the original Star Trek television series.

“I can’t change the laws of physics” Scotty from the original Star Trek television series.

Will amalgamation save on the cost of physical infrastructure? To paraphrase chief engineer Scotty from the original Star Trek television series, amalgamation cannot change the laws of physics.  In my non-technical understanding, the physical infrastructure consists of the pipes, pumps, treatment plants and reservoirs needed to deliver water to the residences and businesses of Kelowna. Amalgamation won’t make water any lighter nor change the distances and elevations over which it has to be moved.  It won’t change the quality of the water in the ground, lakes, or reservoirs.  It won’t change the climate.  Therefore, it won’t change the form of the most effective way to integrate the systems.

Does having five water providers prevent us from following the most effective approach to integrating the systems? Moving water is cheap when nature has lifted it for us and we can let gravity do the work.  However, the water we collect above the city is more vulnerable to quality challenges in particular than that in the lake or under the ground. A simple take on the problem of choosing the best way to integrate the systems is finding that mixture of treatment plants, pipes, pumps and reservoirs which will deliver water to the residents and businesses in Kelowna reliably and of adequate quality at the lowest cost.  There is a lot of evidence that the cost of delivering a liter of treated drinking water is lower for larger systems, all else equal. In Kelowna, all else is not equal. To minimize treatment costs, we could reconfigure the system so that all of Kelowna’s water is drawn from the lake, with treatment in a small number of large and low cost plants, and then distributed throughout the city.  This would likely reduce our treatment costs. However, there are a lot of people in Kelowna who live quite far from the lake, and quite far above the lake.  Moving to such a system would mean saving on treatment cost, but spending more on pumping costs.  It would probably also require a more expensive integration of the systems than necessary to manage the water quality and quantity challenges from the DrawingBoardmultiple sources we have.  There may be some neighbourhoods around the edges where it would make sense to switch from one provider to another.  However, for the bulk of Kelowna residents, my guess is that the system in place right now is probably not far from the lowest cost system, and given that it is in place and largely working, replacing it with something ‘fresh of the drawing board’ would be an expensive way of getting something that is only slightly better than what we’ve got. Therefore, it would seem that any difficulties in cooperation between the water providers are not preventing us from realizing large savings on the physical infrastructure we need to deliver water in Kelowna.

Will an integrated system have lower operations and maintenance costs?  Since the water delivery infrastructure won’t be much different with or without amalgamation, neither will operations costs directly related to this infrastructure – electricity, chemicals, etc.  Each utility has capital assets – vehicles, heavy equipment, tools, etc. that are used to carry out operations and maintenance activities. One could imagine reducing duplication. However, whether and how large these savings are depends on how much of this capital isn’t being fully utilized as things are presently structured. Are vehicles and equipment sitting around unused more in Kelowna than in a comparable community with one water utility?  Unless there is significant waste under the current system, there won’t be much in the way of operations and maintenance savings.

Will staffing cost be reduced by amalgamation?  With five water utilities, there are five offices with office staff, five billing systems, five sets of water related bylaws and regulations, etc.  It is easy to imagine that administrative costs can be reduced through amalgamation.  If these systems were identical, with similar sources, similar populations served, similar challenges, then there are likely benefits from amalgamation.  However, the city presently draws its water primarily from Okanagan lake, has little to do with managing upland surface reservoirs, and has few agricultural customers.  The irrigation districts have many agricultural customers, rely to varying degrees on upland storage, and face different water quality and quantity risks.  To effectively deal with these new responsibilities, the city will have to add staff.  I would expect that many of the technical staff presently working for the independent utilities would need to be retained by the city. These people have the experience and intimate knowledge of their water systems, knowledge and experience that it would cost money, time, and inevitable costly learning errors to replace. What staffing cost savings there would be would likely come from eliminating some clerical staff and closing down some offices.  It isn’t immediately obvious to me that there would be much more, particularly if management of one utility requires an additional level of paid managers to oversee things.

Will there be savings from harmonizing rules and regulations? Presently, the different water utilities have different pricing policies, different development cost charges, and various different rules and penalties for violating them.  Might there be some administrative simplicity from harmonizing the bylaws and regulations?  Remember that amalgamation doesn’t change the laws of physics.  The bylaws and regulations are unique to each system because each system is unique. Harmonization of these rules could actually create more problems if the rules being followed don’t reflect the reality of the physical system.  Red tape sometimes has a purpose.  If simplifying regulations means, for example, accelerating development approvals, we may end up approving development that cannot be properly serviced.  Costly unplanned system upgrades may be needed, and many other water users may also see their water affected.  Promising to cut red tape is politically popular.  However, doing so may in the end only benefit those who the tape was holding up, and accomplish that by creating more problems for the larger community.

One challenge is that because the city does not control water services to all within its boundaries, it cannot proceed with planning activities completely in-house.  Zoning changes to enable development, etc., that city council would like to approve will be contingent on the ability of the appropriate water utility to supply that new development. City staff are accountable to city council, but non-Kelowna water utility staff are not.  This introduces a wild card into the conversations between council, city staff and developers, a wild card that may introduce an inconvenient risk of transparency.

One apparent simplification might be applying the same water rate across the entire city. This is apparent rather than real because the cost of delivering water is not the same across the entire city. Most people believe that everyone should be able to satisfy their basic needs for water (consumption, food preparation, sanitation, hygiene, etc.) at little or no cost.  Basic fairness would suggest that people who impose extra demands on the system on account of where they choose to live or the amount of water they choose to use, all else equal, should pay more.  Harmonizing prices when those prices don’t reflect the true costs that water users impose on the system encourages waste.  Presently, the differences in prices across the water providers reflect their different costs.  Kelowna, RWW, and now GEID, which all pump much of their water to those served have adopted volume based pricing, reflecting that pumping costs is directly related to the amount of water delivered.  That BMID and SEKID do not charge residential customers by volume makes sense for these utilities, as a much smaller share of the water they supply needs to be pumped.

Will politics be less of a barrier to effective water management with an amalgamated water system? Water services in the city of Kelowna are one of a number of services that the city provides. The remaining four water providers are independent levels of local government with their own elected board of trustees, whose job it is to oversee the management of the utility.  Elections need to be run, meetings held, etc., all of which has costs both in terms of time and money.  There is certainly a risk that some of those involved enjoy the politics and are loath to give up their power.  The common criticism of petty politicians protecting their little kingdoms.  Bringing things together under one body would eliminate these costs.  Some places where politics may prevent effective decisions might therefore be done away with.  However, it is also possible that this more complicated politics actually produces better decisions.

To make good decisions, it is incumbent on the involved politicians, be they trustees of a water utility or city council, to become informed about the issues related to a decision.  Are city council politicians, with many different responsibilities, more or less likely to find the time to fully inform themselves about the water issues of those they represent than trustees of a water utility?  The impressions I have is that city council relies heavily on staff to do most of the heavy lifting, where water utility trustees are more likely to explore the issues themselves. This is reinforced by the fact that city council is elected based on a platform of issues, whereas water utility trustees are elected for water issues alone.  A city counselor is unlikely to win or loose their position based exclusively on water issues. As a result, I would expect the political accountability for water issues in Kelowna to be less if the water utilities are amalgamated than as they are currently structured.

KelownaAgAgriculture adds a level of complexity to this situation.  Irrigators use a large share of the delivered water in Kelowna, for example in the neighbourhood of three quarters of the water SEKID delivers.  However, there are relatively few farmers in Kelowna, and agriculture makes up a relatively small share of the city economy.  Water utility trustees, even if not farmers, are probably more likely to pay attention to farmers’ concerns than city council.  Water utility trustees are not responsible for zoning decisions, sports and recreation, roads and transportation, etc.  They are responsible only for overseeing their water utility, more likely to pay attention to water issues, and therefore more likely to listen to farmers.

Are there alternatives to five or one?  I do not see an obvious reason why the decision is five or one.  The political reality is that independent water utilities do not have access to support from senior government that cities and regional districts do.  One physical reality is that the three irrigation districts are serving users who are in the regional district but outside the boundaries of the city of Kelowna.  Would it make more sense for the irrigation districts to become part of the regional district?  The district is responsible for some small water systems.  Is there anything that would prevent semi-independent water utilities to exist as part of the regional district?  For example, could BMID continue to have a board of elected trustees and operate as an independent utility, but be legally part of the regional district?  Where service requirements are clear and outside of choice – e.g. water quality standards – it is often most effective to set up an arms length entity to deliver the service. There isn’t much scope for politicians to make important choices, and their involvement can actually interfere with the effective delivery of the service.  The  2012 Kelowna Integrated Water Supply Plan does include a discussion of governance of the future integrated water system.  I am left with the impression that there is still much which needs to be explored before we know the best way to govern that future system.  The decision may not be about five or one.

What should we do? In sum, there are probably some small cost savings that could come from amalgamation of Kelowna’s water utilities.  Since amalgamation won’t change the laws of physics, most of what the five utilities presently do will still have to be done if there is only one utility.  A well structured and well run amalgamated water utility could do as good a job as the present five utilities do, for what is likely a similar cost.  The political aspects of water delivery in Kelowna would be simplified, but that almost surely comes with substantially reduced accountability.  There is a risk that this loss of accountability may actually increase costs for the community as a whole, should important physical realities of water delivery be ignored in favor of development.  The key question then is whether the potential for a small cost savings is worth the almost certain loss in political accountability and the risks that come with that.

In the short term, an integration plan exists and the utilities are only waiting for funding to move forward.  Many of the steps in integrating the system will be the same, whatever the final governance looks like.  It would seem to make sense to move forward with these steps when we can.  I don’t see any obvious gain from putting such things off in order to adopt a governance model which doesn’t seem to offer any significant advantages.