Guiding and Controlling Ontario’s Future Water and Wastewater Service

Thomas Adams
April 17, 2001

Borealis Research Association
Submission to the Walkerton Inquiry on behalf of Energy Probe Research Foundation
April 2001; Revised June 2001

Table of Contents
Chapter 1: Introduction
Chapter 2: Applying the Principles of User Pay and Full Cost Pricing to Water
Chapter 3: Independent Economic Regulation of Water Utilities
    Natural Monopolies And Public Utilities in Water Services
    Applying Ontario’s Successful Experience With Economic Regulation of Natural Gas to Water
    Case Study on Public Regulation as a Superior Social Control Alternative to Public Ownership:
            Ontario’s Natural Gas Industry Vs. Ontario Hydro
    Case Study on Accountability: OEB Treatment of an Enbridge Deferred Tax Issue Prior to Bill 35
    Principles to Guide Public Regulation of Water Utilities
    Choice of Regulatory Instruments
    How Might a Future Ontario Water Board Work?
    Changes to The OEB’s Mandate in 1998
Chapter 4: Strengthening Environmental Law Enforcement
    Ontario’s Environmental Law Enforcement Rollercoaster
    Enforcement Case Studies: Kingston, Hamilton, and Deloro
    Improving the Effectiveness of Government Environmental Enforcement
Chapter 5: Conclusions
Chapter 1: Introduction
The purpose of this paper is to assist the Walkerton Inquiry in making recommendations to prevent reoccurrence of the tragedy that occurred in Walkerton in May 2000, and in finding permanent, effective solutions to the problem of unsafe drinking water and unsound waste water management practices in Ontario.
On the surface, it might be argued that the Walkerton events were caused by a failure of government — inappropriate actions or failure to act by municipal employees, the municipality, and the Ontario Ministry of Environment (MOE). While it is tempting to suggest that the alternative to bad government is good government, this paper takes a different approach. It does not recommend greater government effort be committed to water issues but instead recommends structural remedies to some of the generic causes of bad performance by government. These structural changes are directed at making the delivery of water services safer, more efficient, more self-correcting, and financially sustainable.
This paper recommends that water services in Ontario be redesigned around the principle of user pay and overseen by an independent economic regulator of water utilities. It also recommends strengthening the province’s ability to prosecute violations of pollution laws by structurally reforming environmental policing. These subjects are discussed in the context of potable water and waste water utility privatization, while recognizing that the recommended solutions would also have some usefulness in the absence of privatization.
Privatization, if introduced thoughtfully, can improve both economic regulation and environmental enforcement, producing financial, environmental, and public-health benefits. Privatization can eliminate the conflicts of interest inherent when one element of the state functions as the economic regulator of another, or when one element of the state is charged with enforcing environmental laws and another element is the polluter. While economic regulation can be applied to publicly-owned entities, privatization can strengthen regulation by ensuring that regulators have the capacity to impose financial penalties on shareholders and thereby help make utilities accountable.
To maximize efficiency and generate the funds necessary to support much-needed upgrades, rates for water service should be based on the principles of full cost pricing and “user pay.” If subsidies are deemed necessary to ensure social equity, disadvantaged individuals should be subsidized with direct payments, independent of their level of consumption, rather than resource prices below cost.
While some level of competition is possible around the fringes of the water distribution business, the most efficient market structure of piped delivery service for water or sewage is a single seller for a contiguous service territory – a local monopoly. With single sellers of piped water and sewage services, consumer interests in price and quality of service cannot be adequately protected by competitive market forces. Liability law, though supportive of quality of service interests, appears not to be a complete answer to the problem of ensuring clean drinking water and acceptable sewage effluent.
If privatization is introduced, some form of economic regulation is required to prevent classic monopoly abuses like overcharging and undue discrimination. This paper provides a comparative analysis of both natural gas and electricity regulation during the period from the late 1960’s until 1998. This paper argues that the structures and principles that guided economic regulation of natural gas distribution during this period provide a model that has proven successful in Ontario and one well suited for water service. Based on what deserves to be considered a “golden age” of natural gas utility regulation, this paper proposes the creation of the Ontario Water Board, a province-wide economic regulator to oversee our water utilities. Ontario’s history with utility regulation demonstrates that effective regulation must be arm’s length from government, transparent to the public, disinterested, legally bound to observe due process, and subject to judicial review.
This paper argues that, in order to protect sources of drinking water, pollution crimes should be subject to enforcement in the form of policing and prosecution, as our environmental laws intend. It provides a summary of several recent cases demonstrating the environmental benefits of investigations and prosecutions. The case studies outlined here all are privately initiated investigations and prosecutions that evolved into various forms of joint public/private prosecutions. Ontario’s declining success with prosecutions since 1991 suggests that environmental law enforcement in Ontario is not organized in a way that maximizes the effectiveness of police operations. This paper recommends establishing the Ontario Environmental Protection Agency (OEPA) to undertake environmental policing under the Ministry of the Solicitor General.
Many recent detailed examinations of the MOE, notably the paper commissioned from Nicholas D’Ombrain and the January 2001 report of the Executive Resource Group to the provincial government, have promoted internal policy reforms within the MOE as the primary route to solving Ontario’s environmental problems, particularly those related to water. In contrast, this paper promotes structural reforms to the institutions responsible for aspects of the province’s water supply. In considering the design principles to guide the development of optimal regulatory and enforcement structures focussed on water services, a theme this paper returns to several times is the necessity for the particular functions that together constitute the water system to be separated into discrete institutional structures, each with distinct mandates and defined accountability mechanisms.

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