Full-cost water pricing

August 4, 2009

The July-August 2009 issue of

Policy Options

calls attention to the importance of water prices that reflect the full costs of service.

Canadian water prices are among the lowest in the developed world. According to Steven Renzetti and Colin Busby, prices are approximately one-third of those charged in Germany, and just one-quarter of those charged in France. Worse, water costs are often unrelated to water use. About one-third of Canadian households do not have water meters.

Both low prices and unmetered use create serious problems. One, of course, is excessive water use. Karen Bakker writes that in 2004, daily average individual water consumption in municipalities with flat or fixed rates was a whopping 467 litres. In contrast, use in municipalities with volume-based fees (made possible by metering) was a far more modest 266 litres. Where water is scarce, excessive use can lead to shortages. Excessive use also strains infrastructure, creating unnecessary demands for new facilities.

Harry Swain points to another problem with low prices: They prevent municipal utilities from becoming “financially competent.” Renzetti and Busby elaborate: “Water prices are set at levels that produce annual revenues that fall short of expenditures. In 2007, for example, aggregate revenues from Canadian water agencies covered only 70 percent of total expenditures.”

Utilities generally rely on grants from senior levels of governments to make up the shortfall. But grants have several adverse consequences. Swain explains that grants distort decision making. Municipal politicians and utility managers delay making necessary capital improvements in the hope that they will get grants. With bursts of what Swain calls “opium” (other people’s money), municipalities tend to over-invest. Perversely, they build more infrastructure than they need, and more than they can afford to operate and maintain.

Renzetti and Busby likewise criticize capital grants from senior levels of government on the grounds that grants may actually exacerbate the problems besetting utilities or, at best, put off the development of sustainable solutions to them. Like Swain, they explain that municipalities, understanding that grants go to those most in need, may “game” the system by delaying needed maintenance and repairs. They also note that grants make possible the expansion of water networks, encouraging the overuse of water.

Utilities, rather than relying on grants, should charge consumers prices that reflect the full costs of water and wastewater services. Swain acknowledges that senior government help may be necessary on a few occasions. But in general, “There is no reason why towns large and small should not pay for their own water services.”

Renzetti and Busby offer a more detailed prescription for water prices: “With water use monitoring capacities [universal metering] in place, the most important near-term strategy is to adopt seasonal water pricing. This could be achieved by setting off-peak prices during winter, when demand is low, and setting peak prices in the summer, when demand is high…. Next, municipalities should improve their costing methods to include all the costs incurred in supplying water.” Those who put more strain on their water system – those who live further from their supply source or use water during peak periods – would pay more. Such pricing would create incentives to conserve, and to find innovative ways to use water more efficiently. And it would ensure that utilities have sufficient funds to provide services that protect public health and the environment.

It appears that the Canadian public would not strongly resist more sustainable water prices. A recent Nanos Research poll of 1001 Canadians found that 45.8 percent of those polled would be very or somewhat willing to pay more for water if doing so improved the supply of clean water for Canadians and the environment. Another 25.7 percent said they would be neither willing nor unwilling to pay more, and 3.9 percent were unsure. Just 24.6 percent said they would be somewhat unwilling or not at all willing to pay more for water.

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