Gas line extension survey: How this should work

The Problem

Deciding whether to go ahead with a project like the Sage Mesa (or Husula Highlands) gas line extension is difficult under the "opt-in model" because:

  • residents don't know whether they support or oppose the project until they know the project's cost, but
  • the project's cost depends on the number of people who opt-in.

 

So a simple "Are you in or out?" question will not work.

Instead, the RDOS can ask a willingness-to-pay (WTP) question: "What is the maximum amount you are willing to pay for a gas line extension on your street?".  We can then use the WTP information to determine whether the project should go ahead.

An Example

To illustrate, consider the following simple example.  A neighborhood consists of 25 properties and is considering a gas line extension.  Before even discussing how much the line extension might cost, residents should have some idea in their own minds of how much it is worth to them.  For example, they might plug some numbers into Fortis's modeling tool and discover they will save $1800/year by changing from electric baseboard heaters to a natural gas furnace.  Assume they require $1200/year to cover the cost of ductwork, other renovations, and new heating equipment.  That means they should be willing to pay up to $600/year for the gas line extension.  $600/year is thus their maximum WTP for the infrastructure.  Everyone else in the neighborhood will have their own maximum WTP number based on their own particular situation.  For example, some might be perfectly willing to lug firewood for heating, which means they will save less than $1800/year.

A WTP Survey

The trick is to translate these many different WTP estimates into a single go/no-go decision for the neighborhood.  Assume we conduct a WTP survey and receive the following responses (these numbers were randomly generated with an average value of about $400/year):

We can then sort the responses in descending order by WTP, as shown below.  In this example, Household 6 has the maximum WTP for the gas line extension among the 25 households: $654/year.  Sorting the results in this way allows us to say things like: "Thirteen households are willing to pay $400 or more for the project."  Thus, if the actual cost for the extension came in at $400 (or less), the first 13 properties would happily opt-in.

But what is the cost? As noted earlier, cost is a function of the number of households that opt-in. Assume the total cost of the gas line extension is $5990.  We can divide this amount by the number of households that opt-in and add the resulting cost to the last column of the table.  The minimum cost per household is achieved when all 25 households opt-in: $5990/25 = $240/year/household. Note that every household that opts in pays the same cost, regardless of its WTP. (The $240 figure in this example is used because it matches the "100% opt-in" cost provided by Fortis for Sage Mesa; see the original posting on cost here)

The cost decreases as we move from the top row of the table to the bottom.  However, the WTP also decreases (recall it is sorted high to low).  The project is feasible whenever the willingness to pay is greater than the corresponding cost per household.  This range is highlighted above.  For example, the row with 17 participants is feasible since $5990/17 = $352 and at least 17 participants are willing to pay $352.  

The best feasible solution is the one that offers the lowest cost (and, by implication, the largest number of participants).  In this example, the best feasible solution is $272/year/household.  At this price 22 household will opt-in since all 22 are willing to pay $273 or more.  And $5990/22 = $272, so the cost of the project is covered.

Note that the next line down (23 participants at $260/year/household) is not feasible since at least one of the 23 households (Household 14) is only willing to pay a maximum of $248.

Conclusions

The example above hopefully illustrates why the RDOS must ask a willingness-to-pay question, rather than a simple yes/no opt-in/opt-out question. The opt-in level depends on price and price depends on the opt-in level.

The example was constructed to show a situation in which feasible combinations of cost and WTP exist.  However, there is no guarantee that the cost and WTP lines will cross​ when we do this for real in Sage Mesa and Husula Highlands.  If the lines do not cross (if WTP never exceeds cost) then the project is dead.

There is thus a risk associated with misstating your true WTP.  If you low-ball, and everyone else low-balls, you may find that the project does not go forward even though you would have been better off if it had gone forward.  In contrast, if you overstate your WTP, you may end up actually having to pay too much.  The best strategy is to provide us with your best estimate of your WTP.  Coming up with this number is not easy.  It requires some thought and perhaps even some research.  Once again, I refer you to the Fortis comparison tool.  It is very useful for getting a sense of the differences between different heating options.  The $1800/year savings figure I used above is not completely fanciful.  Indeed, is seems to be a pretty reasonable outcome for a baseboard-->gas conversion (model results below).

Fortis baseboard to natural gas conversion analysis

Comments

Question via email:

What happens if some fail to respond to the survey?

I think we would have to count non-responses as a zero willingness-to-pay.  Someone who cannot be bothered to respond to a survey is clearly not interested.  Now it is more complicated if we think people are not responding because they are in (say) Arizona and are not checking their mail.  This is why we now favor a survey a bit later in the spring. We can also offer a web-based alternative for those not at home.  We have done this in the past and received a good response (more or less independent of respondent age, by the way).

Question via email:

Will the offer by the RDOS to finance the line over 10 years remain an option to those that chose a WTP that is below the level necessary to gain an opt in payment, and should they be made aware if it is not a standing offer?

Under the opt-in model, latecomers can always buy-in by paying a latecomer's fee.  As discussed previously, an attempt is made to set a latecomer's fee that is fair to everyone.  However, since the RDOS will have already sold a bond (through the Municipal Finance Authority) to pay Fortis, the RDOS will not be able to finance any latecomer's fees.  Instead, latecomers will have to pay up as a lump sum.  However, if you are a latecomer, your bank will almost certainly be willing to finance this lump sum for you.  Just not at the Municipal Finance Authority interest rate, which is about as low as it gets.

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