Volume #26 - 269.|
RELATIONS WITH THE UNITED STATES
Memorandum to Cabinet Committee|
on Columbia River Problems
April 27th, 1959|
On 29 January 1959 the governments of Canada and the United States sent identical letters to the two sections of the IJC requesting that the Commission "report specially to governments at an early date its recommendations concerning the principles to be applied in determining
"(a) the benefits which will result from the co-operative use of storage of waters and electrical inter-connection in the Columbia River System, and
"(b) the apportionment between the two countries of such benefits, more particularly in regard to electrical generation and flood control."
Since that time the Commission has held three meetings to discuss this question. At the first meeting held in New York the Chairman of the Canadian Section presented a broad framework of ideas which could be used as the basis for the specific replies to the two governments. The U.S. Section undertook to draft specific principles and at the next meeting in Chicago the U.S. Section submitted a paper amplifying the problems involved. Later, in Washington the U.S. Section submitted a paper commenting on the Canadian proposal made in New York.
Both these papers were inconclusive and inadequate as a basis for recommending principles to the two governments.Discussions within the Commission and informally with representa-tives of various U.S. agencies have made it clear that the conflicting interests in the water resource field in the United States make it difficult for the U.S. Section to formulate principles which would be acceptable to all interests in the United States.
It appears that, while the Bonneville Power Administration, Federal Power Commission, and the State Department in the United States would be receptive to the sort of principles that have been in the minds of Canadian officials, the views of the U.S. Army Corps of Engineers have prevailed in the Committee advising the U.S. Section, IJC. Accordingly, it is suggested that more rapid progress could be made if the Canadian Section of the IJC again took the initiative by proposing specific principles for the determination and apportionment of downstream benefits. This course of action requires however a clear indication of the general propositions which are acceptable to the Government of British Columbia, the owner of the resource, and the Government of Canada.
It is the purpose of this paper to spell out in some detail the basic issues involved and to suggest principles which might be put forward by the Canadian Section for discussion in the IJC. It cannot be expected that either the British Columbia Government or the Government of Canada will make firm commitments at this stage, before recommendations have been received from the IJC as a whole. However the Canadian Section IJC will be in a stronger position in the discussions if there has been agreement in Canada on the general principles.
The technical studies on the provincial, federal and international level have now been carried forward to the point where it is possible to formulate principles for the determination and apportionment of downstream benefits.These studies indicate that flood control and power make up the major portion of the downstream benefits and are far greater in total than the cost of providing the benefits. Consequently an equitable division of benefits will result in net gains in each country which are much greater than those that could be obtained by any other alternatives within the Columbia Basin.
The cooperative use of Canadian storage would result in the production of additional power in the United States at a cost which is far below the cost of power from alternative sources in that country. An equitable sharing of this power between the two countries would provide low cost power to the BC markets and very low cost power to the U.S. markets.Measurement of Downstream Power Benefits
The U.S. Section of the IJC has agreed that the power benefits attributable to upstream storage should be measured in terms of the increase in firm power due to an increase in dependable capability during critical periods and proposed that, in addition, consideration should be given to the increase in usable energy made possible by the upstream storage.It is therefore recommended that:
(a) The downstream firm power benefits should be measured by calculating the increase in firm power capability of the US system due to the estimated effect of storage regulation in Canada during the critical stream flow period. (The question of what constitutes the critical stream flow period would be subject to joint determination by United States and Canadian engineers before any final agreement is made.)
(b) This valuation of downstream firm power benefits should be made initially on the basis of the agreed amount* of generating capacity, at existing sites in the United States. Subsequent evaluations should be made of additional downstream benefits created by the addition of new generating capacity in the United States.
(* It is assumed that the initial evaluation described in (b) above would reflect an increase in the U.S. installations sufficient to make maximum use of Canadian storage.)
(c) In assessing the contribution of storage projects, each project, when added, should be credited with the additional downstream firm power benefits which it creates and the benefits, as measured under (b), should remain constant for the term of the agreement.
(d) In addition any increase in usable energy generated at the downstream plants and attributable to the storage projects should be determined at the end of each year.
Division of Downstream Power Benefits
There are strong indications that an equal division of downstream power benefits would be generally acceptable to both the U.S. and Canada.* However the equal division could apply to gross or net benefits. Within these two broad categories different methods can be used to make the calculations.
(* At present, while it is relatively easy to divide firm power benefits, insufficient information is available to recommend a principle for the division of usable energy.)
The division of gross power benefits could mean that the power benefits described above would be divided equally at the generators. Under this method each country would bear storage and generating costs incurred in its own country and each would receive one half of the additional power produced in the downstream plants. For example a High Arrow Lakes project would produce an additional 1,000,000 KW of firm power in the downstream plants. Assuming a capital cost of $70 million and annual costs in Canada of 4.2 million and costs of transmission $2.5 million and transmission losses of 4%; Canada would receive 480,000 KW at a cost of $4.2 million + $2.5 million or $6.7 million or $14 per KW. A more equitable division of the economic benefits between the two countries would be achieved if the United States pays the cost of transmitting Canada's share to the boundary. The cost to Canada would then be 4.2 million/480,000 or $9 per KW.
If the net downstream power benefits are to be divided equally the incremental costs of storage and generating facilities would be recovered from the power values and the remaining power benefits divided equally.
For example, in the case of the High Arrow Lakes project discussed above the 1,000,000 KW of firm power might have a value of around $40* per KW or a total annual value of $40 million. From this amount Canada would be entitled to an amount of power equivalent to $4.2 million and the U.S. $1.8 million (The annual cost of additional generating facilities required as estimated by Canadian Government engineers). The remaining $34 mil-lion would be divided equally between the two countries i.e. power equivalent to $17 million would go to each country in addition to its basic entitlement. In this case Canada would get the equivalent in power of $21.2 million and the U.S. $18.8 million. These amounts can be translated into power equivalents by dividing by $40, the value assumed for the above calculation. Under this arrangement Canada would get 530,000 KW and the United States 470,000 KW. Canada would then receive 530,000 KW at the generators at a cost of $8 per KW.
(* A figure of $41.58 is used in "Multiple-Purpose River Development" by J.V. Krutilla and D. Eckstein, as the value of prime power output in the Columbia Basin. This in turn is based on Federal Power Commission studies. It should be noted that if a figure lower than $40 per KWH is used as the value of this power for the purpose of this calculation then Canada's share of power increases. On the other hand if any part of Canada's share is sold in the U.S. market it would be expected that the same price would apply.)
When transmission costs and losses from point of generation to the boundary are included the cost would be about $13 per KW. (For 510,000 KW at the Boundary).
If the cost of transmitting Canada's share to the Boundary is included in the netting calculation then Canada would receive 480,000 KW at the border at a cost of about $9. per KW.
In the case of the higher cost Mica project the benefits to Canada of the netting process are much greater (See Appendix A attached).
If the net benefit division method is adopted as the basis for the Canadian position it would have the following advantages:
(a) it would have distinct economic advantages to Canada, and the higher the cost of a project the greater the relative advantage.
(b) it is a more defensible principle in terms of traditional economic thought. Benefits are in fact the value remaining after costs have been deducted. Net benefits are therefore the only real benefits.
(c) it conforms with standard practice in inter-utility arrangements for similar problems.The equal division of gross benefits has the following advantages:
(a) it avoids the need for international cost accounting,
(b) it simplifies the administrative problems, particularly with the multitude of agencies that are involved in the development of the Columbia Basin,
(c) it avoids interference by each country in the internal affairs of the other.
FLOOD CONTROL BENEFITS
The value of the damages prevented by flood control storage or the least cost alternative of providing equivalent protection measures the worth of the flood control service.
The effectiveness and value of Canadian storage should be based on the contribution towards obtaining the flood control storage needed to control the 1894 flood to 800,000 cfs. at the Dalles - a minimum objective proposed by the U.S. Corps of Engineers. According to statements made by U.S. members of the IJC less than 8 million acre feet of additional storage will be needed to meet this objective. From an economic point of view High Arrow Lakes and Mica Creek are the two most attractive storage projects in the entire basin and would achieve this minimum flood control objective.Canada should require that the annual contribution of Canadian storage projects to flood control be evaluated on the same basis as if these projects were in the United States and that such evaluation should remain constant for the period of the agreement.
This would mean that the annual flood control benefits i.e. the calculated value of damages prevented from High Arrow Lakes and Mica storage would be over $10 million, provided that these are the next two storage projects constructed. Division of Flood Control Benefit
On the assumption that alternative U.S. projects have a benefit-cost ratio of 1.5 to 1 it might be reasonable to suggest that the payment to Canada for flood control storage should be two thirds of the measured value of the flood control benefits, or alternatively the Canadian Section might suggest a token payment of $1 per acre foot for effective flood control storage.
Method of Payment
The flood control payment as determined above should be in fixed annual cash payments for the term of the agreement or a lump sum equivalent. The lump sum payment has the following advantages:
(a) it is preferred by the U.S. Section, IJC,
(b) annual payments would have to be voted annually by Congress. A lump sum payment would avoid the chance of recurring debates in Congress,
(c) it would safeguard the payment against the possible effect of inflation on the value of the dollar,
(d) it would make available a large sum of money for investment in works early on in the development of the Canadian section of the Basin.
The fixed annual cash payment would:
(a) avoid objections that might arise in the United States to a lump sum payment for flood control that is larger than the total cost of the High Arrow Lakes storage project.
This paper has been directed to the current discussion on principles for the determination and apportionment of downstream benefits. Underlying this issue is the broad question of the selection of the actual projects to be constructed in both countries and operated as part of the co-operative development.
The International Columbia River Engineering Board Report indicates the possibilities for overall system development. However power load requirements must be met by adding projects one at a time in order to minimize unused capacity. To maximize benefits it is desira-ble to develop projects in the order of their economic attractiveness. Therefore it is of funda-mental importance that both countries accept in principle the proposition that storage projects will be constructed in the order in which they yield the greatest net benefits to the two countries.
(* Under the net benefit method Canada might agree to take not more than 50 percent of the benefits in power i.e. 500,000 kw in each of the above examples. The balance of Canada's share would be marketed in the U.S.)