Charles Ungerleider, Professor Emeritus, The University of British Columbia
[permission to reproduce granted if
authorship is acknowledged]
Delta
School District finds itself “on the hook” for millions of dollars. To
diminish its carbon footprint, Delta entered into an agreement with FortisBC Alternative
Energy Service for the installation of more environmentally friendly technologies.
The
technologies were expected to reduce emissions by 69% which would be equivalent
to taking 450 cars off the road each year. When it approved the agreement,
the B.C. Utilities Commission expressed concern about the financial risk the
school district was assuming. Years later, FortisBC applied for and was granted
a rate increase by the B.C. Utilities Commission that required the school district
to pay about $1million dollars more each year for energy.
My
hunch (and it is only a hunch) is that the Board neglected to think about the
risks associated with the commitment they made. When you do not think about
risks, you are really self-insuring – saying in effect that we can pay the
price or suffer the consequences if something goes wrong.
It
has too often been my experience that school boards do not think about risks.
Early in the pandemic I wrote a blog about its economic impact on international
student enrollment and school board budgets. In a more recent blog, I wrote
about post-pandemic
budgetary belt-tightening.
It
is prudent to think about risks. When we buy a appliance, the salesperson often
asks, “do you want to buy an enhanced warranty?” They are asking us to consider
protecting ourselves against the cost of repair or replacement if the appliance
malfunctions after the normal warranty period has expired. The protection is
the extended warranty. The manufacturer has protected itself against the risk of
appliance malfunction by excluding from the warranty operator error or misuse
of the appliance. If we decline the extended warranty or the rental car insurance,
we are choosing to self-insure.
Thinking
about what could go wrong sounds pessimistic but is simply being cautious about
protecting oneself. People living in areas that flood in the spring have
sandbags at hand to protect their homes from flooding. Drivers purchase
insurance in the event their cars are damaged or stolen, or they are involved
in an accident in which people have been injured.
Thinking
about what could go wrong needs to be coupled with thinking about the likelihood
of the risk occurring and about the consequences of the occurrence of the risk.
How likely is the anticipated risk? What impact will the anticipated risk have
if it is does occur? Answering these questions is a probability/loss impact
assessment. That is what actuaries who work for insurance companies do for a
living. They ask, “what can go wrong?” and ‘how likely is it that will go
wrong.” Once they determine that, they establish a premium that the insurance
company charges to protect itself from losing money paying off the claims
people make when whatever it was they were protecting themselves from takes
place.
When
Delta chose to install the new energy systems, they must have decided that
those systems would work. I know this because they removed the systems the new
technology replaced rather than keeping them as a parallel backup system. That
calculation is just like the calculation computer users make when the decide to
back-up their files. Among those who protect themselves from loss of
information by backing up their files, there are those who calculated the
impact and cost of having the back-up stolen or destroyed. They back up their
files to the cloud. Back-up systems, extended warranties, automobile insurance,
and running parallel systems are all strategies to mitigate the risk of loss.
Monitoring
risks is another consideration. If I did not take the extended warranty, I had
better begin putting money aside to replace the appliance as it ages because
eventually it will need to be replaced. If I do not, I run the risk of making
an unanticipated large expenditure. The lawyer representing Delta in its
dispute with Fortis said, “The impact on my client's financial position is
going to be very significant… the estimated $1 million in additional costs . .
. is going to have to come out of the
program budget by which the district operates its schools.”
I
said earlier that my hunch was the Delta Board neglected to think about the
risks associated with the commitment they made. I said that because I do not
think that, having evaluated the risks, they would have chosen to self-insure
against them knowing the potential impact on programs and services for
students.
Of
course (and I say this tongue in check) the Delta Board could have attempted to
protect itself against the annual loss of $1million by buying a lot of stock in
Fortis!