Trans Mountain

Trans Mountain Kinder Morgan photo.

Economist pokes holes in SFU study of Trans Mountain economic benefits

Note by Markham: Three years after I wrote this column, I still like it. The political atmosphere in the lower mainland of British Columbia is so poisoned toward the Trans Mountain Expansion project that any criticism is accepted, well, uncritically. Like this hopelessly flawed Simon Fraser University study supposedly debunking Kinder’s Morgan’s economic benefit estimates. I have a tiny bit of experience with impact studies and I knew something was wrong as soon as I read the SFU press release. Enjoy.

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Whose methodology do you believe?  That’s basically the debate between SFU and Kinder Morgan over duelling reports estimating economic benefits and costs of the Trans Mountain pipeline expansion.

Trans Mountain

Doug McArthur, director of the SFU Graduate School of Public Policy.

The SFU School of Public Policy made news Monday by releasing a report critical of the pipeline company’s submission to the National Energy Board. “Kinder Morgan Inflated Pipeline’s Job Numbers
by Factor of 3 while Dramatically Underestimating Spill Costs” blared the headline on SFU’s press release.

In an interview with Beacon News, Doug McArthur, director of the SFU Graduate School of Public Policy, also accused Kinder Morgan of inflating tax revenues to BC governments and not accounting for non-economic costs such as the emission of greenhouse gases and harm to plants and animals.

In the release, McArthur says “Kinder Morgan is not providing accurate and complete data and information about the pipeline, [making] it difficult to see how the NEB can approve this pipeline while fulfilling its obligation to uphold the public interest.”

Incendiary language from an academic. The study, commissioned by the SFU and written by the Goodman Group, Ltd. of Berkeley, Calif., is all of a piece with arguments made against the pipeline project by Greenpeace and a host of environmental groups, not to mention some BC First Nations.

At this point in a column, I would normally cite some of the study’s facts and figures.

I can’t do that this time. After interviewing Michael Burt, director, Industrial Economic Trends for The Conference Board of Canada, which wrote Kinder Morgan’s study, it appears SFU and Goodman Group may be the ones wildly off base in this story. And why cite data and conclusions that appear to be faulty?

Trans Mountain

Michael Burt, director, Industrial Economic Trends for The Conference Board of Canada.

Whose numbers you believe depends on whose methodology you think is most credible.

Let’s start with McArthur and Goodman Group.

The SFU professor says Goodman’s analysis was based on taking “standard industry” multipliers and applying them to Kinder Morgan’s $5 billion budget to build the pipeline and then the costs to operate it.

A multiplier is the total effect of a dollar spent in an economy. For instance, if Kinder Morgan pays $1 million for pipe, then the pipe supplier pays for its all its costs and its employees, who then buy groceries and pay mortgages, and so on and so on, by the time that million is spent, it may have generated $6 million of direct and indirect economic activity.

So, the multiplier is 6:1.

McArthur claims Burt’s multipliers were too high – maybe they were 10:1 when they should have been 5:1, something like that. When Goodman applied the smaller multipliers to the pipeline budget, naturally the benefits would be far less.

As Burt explains, “…what they’ve done is they’ve taken multipliers from, for example the Energy East project [proposed for Eastern Canada] and also the Northern Gateway project, and applied them to the Trans Mountain project to come up with their estimates. And they’ve also made some other adjustments. That’s the main difference in methodology.”

 

Burt points out that there are no “standard multipliers” for any industry, let alone pipelines. Even though both Northern Gateway and Trans Mountain expansion are mostly located in BC, the projects are quite different.

“Parts of the Trans Mountain project have already been built. Which is not the case for Northern Gateway, right? So you have to be very careful doing it that way,” he said.

Burt then goes one step further in his critique: Goodman’s methodology is essentially backwards.

Economists calculating these kinds of studies use a set of tables provided by Statistics Canada and then do their analysis using the project’s budget data. Those conclusions are then used to calculate the multipliers.

In other words, multipliers are the end result of the analysis, not the tool used to do the analysis.

When I asked McArthur why Kinder Morgan had made seemingly huge mistakes in their analysis, this is what he said: “And the only thing I can suggest is that they simply made an error. They’re wrong in what they did.”

I’m not so sure Burt is the one who erred. He struggled through our interview to be polite and the harshest thing he would say about Goodman’s study was, “The way it was done here is, in our opinion, an inappropriate way to conduct an economic impact analysis.”

Now, I am not an economist. But 20 years ago I supervised a team of economists who analyzed the impact of a Saskatchewan utility on the provincial economy. Those economists used input/output tables from StatsCan and the same industry-standard methodology as Burt and his team. The multipliers came at the end of the analysis, not the beginning, as they appear to have been used by Goodman and McArthur.

The Conference Board of Canada team, on the other hand, used industry standard practices, according to Burt.

“We used the best practices in terms of methodology. We’re not the only ones who do economic impact analysis this way. It’s a well established way to do it,” he said.

Arguing about economic impact multipliers may seem like a dry, academic exercise but it really gets to the heart of the BC debate over pipelines: Who has more credibility, pipeline proponents or opponents?

Should British Columbians believe SFU and its American consultants or the American pipeline company and the Conference Board of Canada economists?

Based on my interviews and my experience, I’m siding with Burt: The SFU methodology is just not credible.

Furthermore, McArthur has no idea why Burt is “incorrect” but Burt explained quite clearly why the McArthur/SFU/Goodman analysis is flawed. His argument was pretty compelling.

As always, readers are welcome to their own conclusions. But you can understand why I didn’t bother listing the SFU study numbers. If the methodology is flawed, why waste time with the conclusions?

Note: Brigid Rowan, Senior Energy Economist at The Goodman Group, Ltd and co-author of the SFU report, did not respond to m request for an interview.