A Review of Literature on Economic Instruments Affecting Water and Wastewater Flows

Marc Rouleau
July 18, 1994

A Review of Literature on Economic Instruments Affecting Water and Wastewater Flows & A Review of Documents Used in Toronto’s Main Treatment Plant Environmental Assessment

EXECUTIVE SUMMARY

This study was conducted by the Borealis Energy Research Association, which was retained by Environment Probe to assess four documents used in the Municipality of Metropolitan Toronto Main Treatment Plant Environmental Assessment and to review the available literature on economic instruments such as pricing (and subsequent elasticities), metering and privatization that affect water and wastewater flows.

The following four studies were assessed for traceability and comprehensiveness. Below is a brief summary of our findings:

The R.V. Anderson (RVA) report, Water Conservation Strategy, is not comprehensive. It addresses the issue of water efficiency, but fails to consider several important measures in its analysis of the potential for water conservation in Metro Toronto.

Gore and Storrie’s Implications of Water Efficiency Program for Wastewater Flows is incomplete and limited in scope. While informative, it fails to consider water efficiency’s full potential; instead it limits the concept to measures described by RVA. To understand water efficiency’s full potential, it is essential to explore methods of conservation and neither Gore and Storrie nor Anderson do this.

Gore and Storrie’s study, Alternatives for Reducing Wastewater Flows, which applies the Gore and Storrie water model to the full array of flow-reduction alternatives, was also deemed unsatisfactory. It is unclear how the results of the water efficiency study were incorporated in the overall strategy, and we question the final recommendation to adopt Alternative No. 5.

Gore and Storrie’s Revised Study Design (RSD) was also reviewed. This document incorporates information from the three documents already outlined, and comments related to it were captured in the above reviews. To the extent that the documents on which it relies are neither traceable nor comprehensive, the Revised Study Design is inadequate. No further comments will be made in regard to this document.

Since the above documents were deemed inadequate, this study concludes with recommendations for further research on the extent to which various economic instruments can reduce water and wastewater flows in Metro Toronto.

ECONOMIC INSTRUMENTS AFFECTING WATER EFFICIENCY

The study of current information on economic instruments influencing water and wastewater flows was completed in two stages. First, a general literature review was carried out through consultation of government documents and library materials. Second, an on-line search was conducted using the Waternet database of the American Water and Wastewater Association. We focused on literature that addresses economic influences on conservation, and our results have been separated by subject matter to provide information in all areas that the R.V. Anderson and Gore and Storrie documents analyzed herein deal with. The major factors involved are price and the effects that alternate prices have on demand for water services and flows (the “elasticity” of demand). To understand these effects it is essential to have solid statistical evidence, which is most simply derived from monitoring water and wastewater flows through metering. Finally, an alternative method of system management – economic efficiency through privatization – is reviewed.

PRICE

Prices can effectively guide resource allocation. Quite often, however, the price signals required simply do not exist and therefore do not prompt the discovery of the technology required to achieve an optimum state of conservation. Furthermore, tradeoffs among uses of resources are difficult to make without some signals regarding the scarcity and value of the alternative uses (Adamowicz 1993).

When considering Canadian data on water pricing, Tate (1990) observes that both unit and total water prices are low relative to the prices of other goods and services such as energy that can also be deemed central services in the economy. The relative cheapness of water is illustrated well in Tate’s work, which points out that the consumable liquid priced closest to water – cola – is 1675 times as expensive. Therefore, Tate concludes that Canadian rate-structuring practices are significant in their water use effects and that consumers are receiving the wrong signals about the value of water. Water, he states, is not viewed as a demand that can be changed though pricing practices.

Brooks et al. (1990) note that in the early 1980’s the US Office of Water Research and Technology tested the economics of pricing structures that encourage municipal water conservation for individual cities and the United States as a whole. The benefit-cost ratios over a wide set of circumstances were extremely favourable: nearly 10:1 for the nation (Intasa Inc. for the US Department of the Interior in Brooks et al. 1990).

Over the last five years, there has been increasing interest in the reform of water and wastewater pricing (Government of Canada 1990). The problems generally identified with rates are that they do not reflect the true costs of supplying the resource and services. Current rate structures include flat rate charges, fixed rates, decreasing block rates and increasing block rates. Problems occur with fixed rates because there is a single charge to consumers regardless of how much they consume. In a flat rate system, there is no incentive to control consumptive habits because water will never cost more; and under decreasing block rates water will in fact cost less as more is consumed. At best, these rates capture revenue based on historic data and reflect average cost pricing.

The theory of Marginal Cost (MC) pricing contrasts current common pricing practices. It is similar to an increasing block rate structure, where increasing units of consumption increase in per unit value and increasing rates therefore are charged for them. Tate (1991) discusses the theory of MC pricing, where prices are set to exactly equal maximum net economic values. According to him, a review of economic theory shows that marginal cost pricing of water would lead to economic efficiency. Economic theory suggests that a system of fixed connection charges plus a volumetric price based on marginal cost (MC) should achieve both economic efficiency and full recovery of cost.

Marginal cost refers to the change in total system costs associated with a change in demand. The purpose of pricing in accordance with marginal costs is to signal consumers the consequences of their decisions and promote efficient choices in consumption. Accounting costs add up to what has occurred in the past. This method of meeting costs does not indicate what costs will be incurred in the present and future as a result of the need to meet more or less demand. There is no signal to a customer of the costs of resource planning and cost consequences of their current and planned future demands. In effect, there is no signal of the system’s incremental or marginal costs (Shaffer and Associates Ltd, 1992). Accounting cost recovery is generally the basis from which rate-making analysis starts and is not the most efficient form of economic instrument in reducing flows.

In Economic Theory for Water Pricing, McNeill (1989) shows that pricing is related to the issue of capacity expansion and that both should be considered simultaneously in water utility planning. He concludes that the optimal allocation will result when price is equated to the marginal willingness to pay for all users: marginal cost. McNeill examines Ramsey pricing, Coase tariffs and multipart tariffs as well as peak load pricing based on long-run marginal cost. This general review of theory provides a clear indication that capacity expansion and price are interrelated.

Tate (1991) points out the difficulties associated with implementing MC pricing in the water industry. These problems include assigning costs of production to establish short-run and long-run marginal cost curves. Another complaint about MC pricing is the theory of second best, described in Shaffer and Associates Ltd (1992), which states that if prices of competing and complementary goods are not set at MC there may be a resulting loss in efficiency by pricing water units at MC.

Although there are some problems associated with the theory of pure MC pricing, Tate (1991) argues that MC pricing will result in a reduction in consumption, which will delay the need for expansion for a water utility.

Good critical reviews of present pricing practices can be found in several papers. Dandy et al. (1984), in Model for Constrained Optimum Water Pricing and Capacity Expansion, conclude that optimum water pricing and capacity expansion policies are likely to achieve increases in economic benefits when compared with average cost (AC) pricing. The authors also provide a very good review of economic theory and its evolution relating to water pricing. Saving Water in a Desert City, (Martin et al. 1984), provides a very good review of the problems associated with past pricing systems. It is critical of the American Water and Wastewater Associations (AWWA) rate manual M1, which has for some time been the generally accepted basis for rate-setting practices at Canadian and American water utilities. Kassem & Tate (1993) offer a brief and critical review of municipal water rates in Canada, arguing that the main criteria in setting water rates appears to be acceptability to local taxpayers, accompanied by varying concerns for cost recovery.

Hirshleifer, De Haven and Milliman, in Water Supply Economics, Technology, and Policy (1960), provide the theoretical foundation for the application of MC pricing. The authors point out the problems associated with AC pricing, including its inability to provide economic efficiency in rates because of its historic bias. AC looks to the past for rate-setting data instead of considering future system requirements and the costs associated with these requirements. The authors use this argument to address the importance of price reform and to distinguish between consumers and consumption habits. The conclusion of this work forms the basis for later arguments regarding the need to disaggregate demand functions into their components. When rates are set based on historic information with no consideration for the differences between consumers, their demands on the system, and the speed at which system capacity is consumed because of different consumption habits, there is no rational connection between pricing and consumers’ demand. The idea can be seen contributing toward the theory of the kinked demand curve and the understanding that elasticity of demand varies among different consumers.

Current work on pricing in Canada looks at practical modifications to MC pricing in order to apply it to municipal water pricing. Harris (1993) describes these modifications and their application to the Canadian Water and Wastewater Associations (CWWA) new Rate Setting Manual. MC pricing theory is discussed, as is the need for a two-part tariff in order to ensure full-cost recovery. The paper looks at how marginal cost is defined and quantified in terms of economic theory including ways in which to apply these theories to the average water utility. Wastewater aspects form an integral part of the CWWA manual and the same methodology is used to set wastewater rates (Harris 1993). The CWWA manual also provides a computer model (WATRAT) that serves as a spreadsheet to develop retail rates on a simple two-part tariff, featuring a volumetric charge and a fixed charge that varies by meter size. There is an annual and a seasonal optional charge setup (Lawson & Fortin 1993).

McNeill and Tate (1991) state that water use declines by as much as 30 per cent following the installation of water meters and the implementation of volume-based pricing. Their report, Guidelines for Municipal Water Pricing, provides an excellent review of current state-of-the-art pricing practices and their potential to reduce flows. The authors review basic MC pricing then move through two examples on implementing MC pricing.

Loudon (1993) reviews five economic incentives to reduce water and wastewater demands. He concludes that metering is a cornerstone of the use of pricing mechanisms for conservation. He also suggests that sewer surcharges have perhaps the most potential for increasing effective water price.

Sound rate-setting procedures are of limited value if the costing data to which these procedures apply is incomplete, inaccurate or lacking in detail (Fortin and Mitchell 1990). Cash-based accounting systems currently in popular use tend to relax demands on these types of precise data. Explicit use of MC pricing calculations requires precise data. Use of such data in the analysis of waterworks investments in Britain is reported by Herrington (1987). MC analysis was reported in a 1988 rate study for the Seattle Water Department (Economic and Engineering Services Inc., 1989), and Osaka, Japan uses a marginal analysis of investment costs to develop water rates (in Mitchell and Fortin 1990). Fortin and Mitchell concentrate on how Ontario’s municipalities can finance the renewal of aging infrastructure for water supply, collection and treatment.

ELASTICITIES

Price elasticity of demand measures the impact of changing prices on water demand by taking the ratio of the percentage change in the quantity of water demanded to the percentage change in price. Elasticity values greater than minus one indicate that changes in demand are more than proportional to the causative change in price (Tate 1990).

Flack (1981) provides typical elasticity measures for various residential water uses. He suggests elasticities of -0.225 residential (composite); -0.26 domestic (in-house); -0.703 lawn watering; -0.395 average day; and -0.388 maximum day (in Tate 1990).

Brooks et al. (1990) suggest elasticity figures in the range of -0.24 to -0.40 for the residential sector. The authors go on to say that in the early years of attention to energy conservation, similarly low figures for elasticity of demand were reported. However, as more options for conserving energy came to be recognized and as time was allowed for adjustments to higher prices and for technical development, elasticities rose and in some cases exceeded -1.0. This should be considered by Metro in light of the fact that there has still been no major price reform and the rate study recommended by RVA has not yet been carried out.

Hanke (1978) also provides a review of then current studies on price elasticity of demand. Values in this review vary from approximately -1.5 to -0.1. Hanke emphasizes that different groups or classes of water users respond differently to price changes; to predict how price changes will affect average daily demands it is important to use different elasticities for different user groups. This result explains the huge range between Hanke’s upper and lower elasticity estimates.

McNeill and Tate (1993) indicate that the elasticity of demand for domestic water generally falls between the range of -0.1 and -1.0 with the median between -0.2 and -0.3. Of the studies on industrial/commercial elasticities there has been great variability, -0.05 and -1.0, with no clear trend (in Loudon 1993).

Brooks and Peters conclude that there is a need for models to break municipal demand down into its residential, commercial, and industrial components (1988).

Given that certain end uses of water are more sensitive than others, demand curves formed on the basis of aggregate consumption values and elasticity should exhibit kinks that separate zones of low value for uses with high elasticity of demand from zones of high value with low elasticities of demand. We should be studying price elasticities very carefully – not so much to predict future consumption, but to identify the forces that can primarily make water use more elastic (Brooks et al. 1990).

Renzetti & Tate (1994 unpublished) remark that water utilities view the demand for water output, and thus wastewater output, as an exogenously-determined need. It is a requirement to be met, not an economically-driven demand. The decision to reduce any type of output or to expand an existing supply network requires weighing the costs of supply and the benefits from consumption. If this assessment is not carried out, then water utilities can easily expand past the capacity dictated by efficiency. In addition, they forgo the opportunity of learning customers’ valuation of their output. The authors argue that government policy has led to inefficiently low water prices which have become embedded in consumers’ water habits, and that increasing water rates will induce reduction in consumption. They use examples from recent water audits conducted on federal government facilities in response to rising water prices to show the yield in net benefits; this yield is said to approximate a ratio of benefits to costs of 21: 1.

METERING

In the municipal sector, Brooks et al. (1990) note that the installation of meters without any price increase has caused permanent reductions in water use of 10 to 40 per cent. Per capita use of water fell by 23 per cent when the Durham region of Ontario installed meters and added a surcharge for sewers, which was previously included as a portion of customers’ property tax bill. The bulk of this reduction was noted to have occurred during the first two years of the program (Loudon in Brooks et al. 1990). This is an important fact in light of Metro’s incomplete metering.

Fortin (1985) discusses metering success in other jurisdictions. He notes that in Boulder, Colorado, six years after metering was introduced, outdoor/sprinkling and domestic use were, respectively, 51 and 65 per cent of their pre-metered levels. He also notes that the impact of meters on water use was slightly greater after six years than after the first year of metering.

Tate (1990) concludes that metering alone could reduce municipal water use by 15-20 per cent. As noted above, McNeill and Tate (1991) state that water use declines by as much as 30 per cent following the installation of water meters and the implementation of volume-based pricing.

Tate (1990) cites several cases in which reductions followed metering: Kingston, Ont. 25%; Brockville, Ont. 15%, Ottawa, Ont. 27%; and Calgary, Alta. 31%. In all areas of the world, writes Tate, implementation of metering combined with volume-based charging resulted in significant reductions in the amount of water used. Examples were: Gothenberg, Sweden 33%; Philadelphia, USA 45%; Moss City, Norway 41%; and Copenhagen, Denmark 20%. Tate concludes that metering generally has a benefit-cost ratio greater than one, indicating economic advantages for full metering (Tate 1990).

The costs of metering include purchase and installation of meters, the cost of maintenance, meter reading and possibly higher billing expenses. What is often ignored under such analysis is the value of foregone water consumption under a zero-based or flat-rate pricing scheme. The revenue lost because of imprecise measurement should be partially attributed to the value of metering investment; this is embodied in the notion of water’s intrinsic value, which was not reviewed in this study.

Edmonton, which meters all residential users, consumes half as much water as Calgary, which is only partially metered (Mitchell 1984 in Brooks et al. 1990). Brooks et al. (1990) note that cost effectiveness is important for economic efficiency in conservation; citing studies on cost effectiveness of water metre installation, the authors note a 1986 report from New York State, which says meters will be cost effective under $650 per meter (New York State Senate Research Service Task Force on Critical Problems in Brooks et al 1990).

Brooks and Peters (1988) report on several case studies where meters were found to be cost effective. Grima (1972) reported a 1.1 benefit-cost ratio for the Borough of Etobicoke for a simulated metering decision. Associated Water Services Ltd (1980) conducted a benefit-cost study of metering for Alberta Environment, which resulted in a positive Net Present Value (NPV) indicating the metering decision was economically efficient (in Tate 1991).

PRIVATIZATION

Although specific information relating to flow reductions from privatization was beyond the scope of this study, it is an area that should be considered as a method of avoiding or financing any major capital investment in water and wastewater infrastructure. Privatization meets the criteria of an economic instrument because competition breeds efficiency. And if it is agreed that pricing reform has been effective in reducing water flows which in turn reduce waste flows, then the private sector has the potential to more readily reduce flows than the public sector.

Haarmeyer (1994) discusses the success of privatization in France and Britain, suggesting this method as a way to capture private-sector resources and incentives to improve water supply systems. Private water companies in these countries are considered leaders in technological innovation and are aggressively competing to design, build, operate, and own water and wastewater treatment facilities.

As Jeffery (1994) concludes, despite the fears that existed at the time of privatization in Britain, the process is improving standards and increasingly involving customers in understanding and commenting on the links between quality levels of service and costs. These results should be compared with the fundamental goal of water efficiency which is to provide consumers with sufficient full-cost consumption information about their water and wastewater flows so that they can make informed consumption decisions.

Westerhoff (1986) concludes that an increasing number of American municipal agencies are seriously considering the privatization of their water and wastewater treatment facilities. And construction of the first major privatized wastewater reclamation facility at Chandler, Arizona demonstrates that the process can work. Indeed, there are now many areas in the US that have documented cost savings from privatization: New Orleans, Louisiana, saves 40 per cent of previous costs on the operation of the city’s 100 mgd and 10 mgd wastewater plants; Houston, Texas saves 35 per cent on the operation of its 80 mgd Southeast Water Purification Plant; and Indianapolis, Indiana, saves 40 per cent annually on its two advanced wastewater treatment facilities (combined capacity of 245 mgd) (Haarmeyer 1994).

Hanke (1983) and Hanke and Fortin (1985) believe that private-sector firms can operate more efficiently than public-sector firms. As Tate (1990) explains, Hanke’s contention that the private sector can perform traditional public-sector functions at less cost is based upon the ability of the former to levy charges and to establish incentives based upon the true costs of supplying water services. Wade Miller Associates, in a study for the US National Council on Public Works Improvement (1987) concluded that a private investor is able to provide the same service at an estimated 10-20 per cent lower cost due to reduced construction cost and timing efficiencies, operational advantages and tax benefits. Similarly, Doctor (1986) stated that privatization generally led to a 10-30 per cent cost saving to the municipality (all in Tate 1990).

THE R.V. ANDERSON REPORT

Metropolitan Toronto contracted R.V. Anderson to produce a report on a Water Conservation Strategy and the city adopted the study’s preferred scenario in September 1991. It recommended that the plumbing code be improved to require water-efficient fixtures and advocated voluntary reductions of water use through water-saving devices, as well as the adoption of a pricing policy for water that embodies full user-pay concepts. Since this report was used in support of Gore and Storrie’s EA component studies, it was examined for accuracy, traceability and comprehensiveness.

METERING

To its credit, the Anderson report recommends that the City of Toronto implement full metering. Until that happens, it is impossible to accurately project water consumption and the most effective economic instrument for reducing water and wastewater flows – efficient pricing – cannot be introduced in Toronto. However, the RVA report does not draw upon comparative data from other jurisdictions to enhance its findings. Moreover, it neglects the potential for metering waste flows, an issue that is gaining attention in the field. Consequently, this report leaves many questions unanswered: What are the costs associated with such a metering program? Could such a program be effective in delaying system expansion? Water audits appear to be producing significant savings; how much are these audits liable to reduce flows throughout Metro? It is important to find the answers to these questions and incorporate them into any cost allocation and planning decisions associated with the current EA.

WATER RATES

The RVA report does not adequately explain and analyze water rates, rate structures and the data requirements necessary to provide accurate cost-benefit decisions on the economic efficiency of alternate rate schemes.

Tate (1990) concludes that water is significantly under priced. To effectively generate statistically-significant information one requires data on elasticities of demand. Unfortunately, the RVA report calculates elasticities based on historic data, which does not produce a true indication of elasticities. There are several possible methods for pricing water. One method – MC pricing – is increasingly referred to in the literature, but RVA does not consider it as a pricing or conservation measure. And although the author recommends Metro complete a review of rate making structures, this study has not been undertaken. The assumption that rates should increase is not a sufficient explanation for how rates should increase and where rates should increase. For these reasons, the RVA report is insufficiently comprehensive to be attributed full weight in an EA document considering alternate methods to reduce flows.

RVA suggests that if “the water and sewer rate increases that are proposed for the next four years (1992-1995) were to be combined and assessed over one year, the resultant increase in the rate would be 57.7 per cent. With an estimated elasticity of demand of -0.4, this would result in a 23% reduction in use” (p. 3-14). This projection does not include the fixture retrofitting of 25% of homes that is included in the adopted conservation scenario D. Scenario D does not indicate the maximum amount of water flow reduction that can be expected over the projected time horizon; it merely indicates a possible reduction. Gore and Storrie have assumed that RVA’s scenario D creates an upper boundary from which to judge alternate measures for water efficiency. This is not a comprehensive position to take since rate studies have not been concluded.

Furthermore, RVA notes that the intrinsic value of water is not incorporated in cost of services measures, as is done in other natural resource industries such as oil and gas. But since water is a scarce resource, it should by definition be attached scarcity value, and RVA has failed to adequately discuss this important value factor.

ELASTICITIES

The RVA report assumes a price elasticity of demand of -0.7 for high volume uses (HVU), -0.2 for indoor residential uses, and -0.4 outdoor residential uses (p. 4-6). But there is a great deal of literature on elasticity of demand for water, which calls Anderson’s values into question. Without discussion of pricing effects and analysis of the effects of historically low water pricing on consumer preferences, it is hard to judge elasticity figures accurately. And since there is not yet full metering in the Metro area, consumers are unlikely to be able to indicate their true price elasticity of demand for water services. A specific study of elasticity of demand in Metro is required.

Brooks et al. (1990) suggested the necessity of looking at components of elasticity and how they can be altered. The RVA report spends insufficient time disaggregating demand, pointing to areas where demand can be most efficiently altered, and exploring areas where elasticity of demand and its components can most easily be altered.

The RVA report also cannot be considered comprehensive in light of information now available to the Canadian water utility industry. An example of information unavailable at the time Anderson published its findings is the joint study between the Rawson Academy of Aquatic Science and the Canadian Water and Wastewater Association (CWWA) entitled “Municipal Water and Wastewater Rate Manual”. This is important because the RVA study is meant to be the source of current information on the potential for water efficiency in this EA.

IMPLICATIONS OF WATER EFFICIENCY PROGRAM FOR WASTEWATER FLOWS

Gore and Storrie write, “other countries such as the United States have already implemented water efficiency policies and practices, which has been motivated to a large extent by the scarcity of water supply. Once an essential resource becomes scarce, then ways are found to reduce and eliminate waste and maximize efficiency of use”. This definition implies that scarcity value is of significant importance to the water supply service; yet the study includes neither analysis of the intrinsic value nor suggested valuation methods. It should be noted that expansionary plans cannot be deemed comprehensive without full consideration of pricing schemes.

This study asserts that a possible downside to conservation is lost revenues (p. 1-2), but it is not clear this need be true. Indeed, conservation may reduce costs more than revenues, and conservation resulting from higher prices could conceivably increase revenues. Furthermore, there are ways to shield Metro from revenue reductions while enhancing conservation. For example, privatization in Britain and France has resulted in increased efficiency while removing almost all public costs associated with water utilities (Jeffery 1994). Economic efficiency should not be considered a method that would cause lost revenues. It is economic inefficiencies in the current system that have historically caused water to be underpriced and revenues to be low.

Gore and Storrie note that adoption and implementation of a water efficiency strategy by Metro must be considered as a requirement for the potential reductions in sewage flows to be realized (p. 2-1). Since a major source of reduction in sewage flows can only occur through water efficiency, it is not responsible to also argue that flow reductions can only be estimated based the findings of the RVA report, especially if it is concluded that the Anderson study’s estimates of water efficiency initiatives are incomplete.

The authors also state that a computer-aided literature search on the key words “water conservation” and “sewage flow” was carried out to determine if any information was available. It would be helpful to know what database was searched. Using several other key words, our own literature search provided additional information on economic instruments affecting water flows. The fact that Gore and Storrie did not pursue other references to water efficiency because they felt that RVA addressed them completely suggests that their work cannot be considered as conclusive evidence of the effects of reducing water flows on the flow of wastewater.

The report states that records of industrial, commercial and institutional water and wastewater use are mixed and cannot be separated in each municipality unless individual large users’ billing is examined, which Gore and Storrie conclude is beyond the scope of their study. If the information was not available from previous work, then it should have be gathered. Its absence illustrates that the potential of water efficiency has not been fully explored as an alternative.

Table 3.1 of this study looks at results from the RVA report, which calculated total Metro water consumption to be 514,569,042 m3 for 1990. Data on 1993 figures has been available for some time and should be used to assess the current success of water conservation. The Ontario Water Environment Association (OWEA) survey of municipal sewage systems in Ontario lists 1993 water generation for Metro at 490,586,836 m3, a reduction of approximately 4.8 percent in three years. It might be important to consider updating RVA’s results in light of this movement.

A further assumption that should be questioned is Gore and Storrie’s use of 6 per cent as a legitimate estimate of water loss for the City of Toronto (p. 3-3). The city is not metered and is more likely to have deficiencies in detecting leaks than other municipalities. Its leak detection program found a total of 515 leaks over the period of 1990 to 1992 (Memo, Department of Works and the Environment, Feb. 10, 1993). Further, Brooks and Peters (1988) report that the experience in the U.S. with leakage in water systems is in the range of 12 to 40 per cent. Municipal water leakage estimates from the Canada Water Yearbook are 13 per cent (in Brooks and Peters 1988). Using 6 per cent does not seem reasonable in light of this information.

Gore and Storrie’s literature review provides evidence that wastewater flows can be reduced through water efficiency programs, but the study is rather limited. For example, it notes that the Regional Municipality of Waterloo achieved a 13 per cent reduction in indoor water use, but does not highlight that Waterloo rejected a plan to implement full-cost pricing for the region. It has been documented that price reform will induce water efficiency (Loudon 1993). Thus, RVA’s conclusion that scenario D will at minimum achieve a 14 per cent reduction in water use can be seen as a low estimate.

It would be useful, as a point of reference in understanding the reduction of wastewater flows through water efficiency, if the results from the New York city study provided data on the amount of water flow reduction attributed to the 8-10 per cent wastewater flow reduction (Table 5.1 p. 5-4).

While the study notes that reducing water flows will not reduce solids loading to the MTP, it does not address increases in efficiency at the MTP due to increased solid concentration. This change, in affecting treatment costs, may impact rates and rate structures and should be considered in an EA document (Tate, personal communication, June, 1994).

Gore and Storrie conclude by remarking that a detailed study of large consumers and their water use practices was beyond the scope of their study. Since these are the precise customers that will be driving future demands on future systems, it is not comprehensive to conclude that such information is beyond the scope of water efficiency program.

Finally, there is no mention of the potential impact on water flow reductions and efficiency through privatization of the current system. Nor is there any mention of the legal reform that may allow for further efficiency measures in both water and wastewater flows. Metro is limited in the actions it may take to limit water and wastewater flows, but simple legal reform may offer significant freedom to introduce economic efficiency. These areas for potential efficiency improvements should be addressed when discussing the potential flow reductions from an efficiency program.

ALTERNATIVES FOR REDUCING WASTEWATER FLOWS

This study was reviewed on the basis of the evidence it used from Implications of Water Efficiency Program for Wastewater Flows and the RVA report and in light of current literature on economic instruments, comprehensiveness and traceability.

One of the reports greatest failings concerns its assumptions regarding “achievable” and “ultimate” conservation scenarios. Gore and Storrie are misleading in their supposition that scenario D from the RVA report is the boundary to conservation through water efficiency. For this position to be accurate, it must be established that RVA’s study was complete, exhaustive and accurate; it was not. Scenario D does not establish the upper and lower bounds for “water efficiency” as an alternative to the undertaking; it only establishes suggested results. This is not comprehensive.

The use of figures from Implications of Water Efficiency Program for Wastewater Flows are very difficult to trace. In the model applied to Alternatives for Reducing Waste Flows, 1990 flows are said to be 777 ML/d, while in the Water Efficiency Program study average dry weather flows are said to total 736 ML/d (Table 3.4, p.3-6). Of the 736 ML/d, 30 per cent is attributed to extraneous flow, and it is unclear why these results are different. Flow components are not clearly broken down between these two studies; it is difficult to see how the results of one study have been incorporated into the other. This question of traceability should be resolved in the future.

Finally, it is difficult to understand why Gore and Storrie recommend Alternative No. 5 in planning to meet future wastewater treatment needs in the MTP service area. This incorporates high population growth but low water efficiency goals. It is not economically efficient to target minimum conservation goals. For this reason, we suggest that at the minimum Alternative No. 6 be recommended.

CONCLUSION

Clearly, there is sufficient literature available to consider the potential for improving water efficiency by reforming water and wastewater rates in Metro Toronto. MC pricing is cited as the most efficient pricing mechanism to reduce water flows, which in turn will reduce wastewater flows.

The literature demonstrates that price elasticity of demand varies substantially across user groups, economic conditions, time of year and several other key factors. It is likely that elasticity of demand for water and wastewater services will change over time much like it has in other industries. Thus it is important to carry out a specific study of Metro’s elasticity of demand and study ways in which this elasticity can be affected. Indeed, without a clear understanding of elasticities, it will be impossible to implement efficient pricing mechanisms to reduce water and wastewater flows.

The literature also indicates that full metering (metering for all customers, including sub-metering in cases such as apartment buildings) has many benefits; the potential to delay system expansion may be among them. The City of Toronto, the last major area in Metro to make the move to full metering, has not yet completed its program, and flow data cannot be effectively conveyed to consumers until this program is complete. Metering waste flows was not extensively covered in this literature, but should be considered as a further method for reducing flows to the system.

As Fortin and Mitchell (1990) argue, institutional change would be neither innovative nor revolutionary in the context of arrangements that already exist elsewhere in the world. The most aggressive way of moving utility operations in the direction of increased efficiency and full cost recovery involves privatization.

Since the four documents reviewed by this study were found wanting in the areas mentioned above and Borealis was not contracted to conduct original work, we conclude that an in-depth analysis of the use of economic instruments to reduce water and wastewater flows in Metro Toronto is required and recommend research in the following areas:

The intrinsic value of scarce water resources – both when withdrawn and when remaining in the lake to assimilate waste – should be examined, as should the degree to which the cost of water and wastewater treatment would rise if the resource’s full value were taken into account and the impacts of these price increases on water use in Metro.

The extent to which MC pricing can reduce water and wastewater flows in Metro should be further examined.

Metro Toronto’s elasticity of demand and ways in which it can be affected should be studied.

The viability of metering the quantity and quality of waste flows should be considered, as should pricing reforms for wastewater rates.

A full rate study for Metro should be completed to provide comprehensive planning information, which could then be used in conjunction with the treatment plant EA.

Privatization should be examined as both an alternative to the undertaking and as an alternative method of carrying out the undertaking.

REFERENCES

Adamowicz, Wikto T. “Water Conservation: An Economic Perspective.” In Every Drop Counts, Conference Proceedings, Canada’s First National Conference and Trade Show on Water Conservation, Winnipeg, Manitoba, February 4-6, 1993. Edited by Dan Shrubsole and Don Tate, Canadian Water Resources Association, 1994.

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