November 4, 2009
Presentation to Mayors and Chief Administrative Officers of Alberta municipalities at an EPCOR-sponsored function held in conjunction with the Alberta Urban Municipalities Association Conference
A perfect storm is blowing towards Alberta’s water providers. Tonight I’ll talk about that storm and propose some strategies to help you weather it.
What are the clouds gathering on the horizon? I believe that Alberta’s municipalities face three serious challenges: Many have poorly performing water systems. All are working in a new regulatory environment. And many face growing water shortages.
Let’s start with the problem of performance. Five years ago, the province completed an assessment of its water systems. It looked at water sources, treatment facilities and performance, and system monitoring and operations. It found widespread problems. On a scale of one to five, with five being the worst, 192 facilities got grades of five. The assessment revealed inadequacies in the design and capacity of many facilities. It also revealed serious shortcomings in operations and management. It found inadequately trained operators, and problems with monitoring.
Progress has been made since then. But at the same time, standards have gotten tougher. In its latest annual report, Alberta Environment admits that 13 percent of the province’s regulated drinking water facilities still do not meet current design standards. Perhaps 70 or 80 facilities require upgrading. Alberta Environment also reports that last year, 22 facilities failed to comply with operational requirements, and 36 had water quality problems.
Alberta Environment posts more current water quality information on its web site. Unfortunately, the data is missing for many systems. About 18 percent of them aren’t reporting electronically. That raises questions about the quality of the water. I found safety problems at 17 facilities. Who knows how many others have been having unreported problems?
Another problem is that, for many facilities, only bacteriological results are posted. Consumers aren’t getting critical information about chemical water quality test results, such as those for lead, trihalomethanes, or nitrates. You can expect these reporting requirements to get stricter in the coming years.
Indeed, a lot will be changing in the next few years. 2006 saw the introduction of new design and operation standards. Alberta Environment expects all systems to be upgraded to meet these new standards by April 2012.
It’s not just the standards that are changing. Your water utilities are working in an entirely new regulatory environment. The Water Act is just a decade old. The Water for Life strategy is only six years old, and was revised just last year. It was only three years ago that the province stopped issuing new water licences for withdrawals from the Bow, Oldman, and South Saskatchwan rivers.
More changes are to come. The province wants to see better integration of water and land management. It wants to pursue watershed planning, and planning for cumulative effects management. In the coming decade, municipalities will be working under new and untested rules.
You’re also going to see tougher wastewater standards. Environment Canada has been working with provincial environment ministers to put together federal regulations on sewage pollution. The Canadian Council of Ministers of the Environment has approved the new Canada-wide strategy, and federal Environment Minister Jim Prentice has promised to implement it. He’ll be publishing new regulations under the Fisheries Act in December. It sounds like the feds are taking a tough line on this issue. Both Jim Prentice and John Baird have vowed to make it a priority.
Just as it’s getting harder to treat water and wastewater, it’s also getting harder to get water in the first place. Water, as you all know, is already scarce in several regions of the province. Many warn of increased scarcity in the coming years. Several things are at play here.
First, we’re looking at a changing climate. I don’t know if the changes are natural or man made. But I do know that the climate is always changing, that you’re already experiencing some adverse effects, and that many predict that things are going to get worse.
Kathy Jacobs, the director of the Arizona Water Institute, calls water "the delivery mechanism for the impacts of climate change." In other words, people are likely to experience changes in climate through changes in water.
It’s impossible to predict – let alone quantify – what those changes will be. So much relies on unreliable computer models. The common wisdom is that you can expect more extreme weather events, such as storms or droughts. Here in Alberta, shrinking glaciers and smaller snowpacks may mean earlier runoff, and less of it. Summer flows may be lower. You may also see increased evaporation, changes in water quality, and changes in water temperatures.
Many regions can’t afford to lose any water. Some watersheds are already stressed. In September, Alberta Environment reported on mountain runoff for the year. The Bow and North Saskatchewan River basins are experiencing the second and third lowest volumes in 91 years of record keeping.
Three weeks ago, the World Wildlife Fund released a report on Canada’s rivers. It called the South Saskatchewan River "Canada’s most threatened river in terms of environmental flows." Too much water is being allocated, it charged, and not enough is being left in stream to meet ecosystem needs.
As you grapple with current and future water shortages, your water demands are likely to increase. StatsCan expects Alberta’s population to grow by 24 percent over the next 25 years. That’s an extra 800,000 residents who will need water services.
It’s not just municipal populations that will grow. So will your thirsty natural resource sectors. The National Round Table on the Environment and the Economy recently commissioned a review of economic forecasts and water use information for agriculture, mining, forestry, and energy. Overall, the sectors are expected to grow by between 51 and 62 percent by 2030. Unless they change their ways, their water use will grow as well.
Some of these sectors are your primary competition for water. Agriculture already consumes the lion’s share of water in the province. Some see agricultural production growing to meet increases in global demand for food, booze, and biofuels. What will that do to the sector’s water demands?
And what about the energy sector? The National Energy Board expects Alberta’s oil production to grow by 71 percent by 2020. The Conference Board expects oil sands production to grow by that much by 2013. Of course, climate change policies make such growth more uncertain. But to the extent that the oil sector does grow, it may well will mean more demand for water.
Meanwhile, we’re beginning to understand that ecosystems themselves need a lot of water. The province promises to focus more on maintaining aquatic ecosystems. It may start reserving more water for environmental flows.
And so, in the coming decades, water users – including municipalities – can count on more competition for less water. If you’re trying to grow, and need access to more water, you may find it rather hard to come by.
So that’s the storm that’s brewing in this province. Many of your water systems perform poorly. Many face growing water shortages. And all are operating in an ever more challenging regulatory environment. You can meet these challenges. But to do so, many of you will need more money, capacity, and smarts. And you’ll need to hold your water providers more accountable for their performance.
Let’s start with the money. I want to discuss both the need for capital investment and the need for pricing reforms. Estimates of the required investments vary wildly. The authors of the 2004 Waterworks Assessment proposed investments of $880 million over 10 years – and almost $1.2 billion over 25 years. That’s just for water systems. Six years earlier, the Canadian Water and Wastewater Association warned that you would need to invest far more than this. It estimated that water systems in the province would need almost $2.4 billion over 15 years – and that wastewater would need another $4 billion.
Some of you will doubtless be looking to upper levels of government for help in meeting your capital needs. There is some public money out there. The Building Canada Infrastructure Plan promises $33 billion over seven years. Canada’s Economic Action Plan promises another $12 billion for infrastructure over two years. But you know that there will never be enough grant money to meet all your needs.
What’s more, grants are actually bad for water and wastewater systems. There are several problems with them. First, they encourage delays in investment. Municipalities put off making essential improvements, hoping that free money will some day flow in to pay for them. Second, when and if the grant money does come, it encourages overbuilding. Grants have given us many facilities that are unnecessarily large, and unnecessarily expensive to operate.
The third problem with grants is that they allow municipalities to under-price water. Cheap water deprives consumers of the incentives they need to conserve. It encourages wasteful consumption. That’s serious where water is scarce. But even where water is plentiful, it’s a problem, since excess demand requires unnecessary capacity.
What’s the alternative to grants? Private investment. Private capital has several advantages. First of all, it’s available. There’s a lot of money out there, and a lot of interest in putting it into water utilities. According to the editor of Renew Canada, "this is a sector that’s about to explode onto the marketplace." Why? Water utilities offer steady, predictable, reliable revenue streams. That’s very attractive to investors.
And why is private capital attractive to municipalities? There are several reasons. It frees up public funds for other purposes. It can transfer financial risks to the private sector. And it tends to be used efficiently – it comes with its own due diligence. So municipalities will get more for less.
We don’t yet have a lot of experience with private investment in water utilities in Canada. But the experience we do have is promising. Out East, Veolia, a multinational water company, designed, financed, built, and now operates Moncton’s water filtration plant. Moncton had to go the private route, because no public funds were available.
It ended up being an excellent choice. The total capital cost of the plant was $23 million – almost $10 million less than the city had planned to spend. Those savings came in part from a 40 percent reduction in the size of the building, which was made possible by the choice of a particular kind of filtration. The city was also able to offload construction risks. Veolia agreed to design and build the plant within 500 days, to be responsible for cost overruns, and to forego payment until the plant was fully commissioned.
Of course, there is a catch with private capital: It will have to be recovered. That means that water rates will have to be sufficient. And right now, in most communities, they aren’t. That’s one reason we need pricing reforms.
Water rates all across Canada are notoriously low – they’re some of the lowest in the developed world. They’re not sufficient to cover operating expenses, let alone investments in better systems. I don’t know what the figures are for Alberta. But across Canada, water revenues earned in 2007 represented just 70 percent of recorded expenditures.
This has to change. Consumers have to start paying the full costs of their water use. Water rates should cover all of the costs of acquisition, treatment, storage, and distribution. Rates should vary with the availability of the water, and with the distance the water must be pumped. Rates should also reflect financial costs – they should include a return on capital.
Academics and policy wonks have been singing the praises of full-cost pricing for decades. This support has broadened considerably. Earlier this year, a poll by Compas suggested strong support in the business community. Environmentalists are also lining up in support of full-cost pricing.
Even consumers are saying that they support higher prices. Nanos Research polled Canadians on the issue this spring. It asked, "How willing would you be to pay more for water if it improved the supply of clean water for Canadians and the environment?" Forty-nine percent of the respondents from the West were very or somewhat willing to pay more for water. Only 22 percent were somewhat or very unwilling to pay more.
The federal government cottoned on to the importance of water pricing in the late eighties. The province is coming around, too. Water for Life has endorsed higher prices. And Alberta Environment has developed a full-cost accounting program for municipal waterworks. Of course, full-cost accounting isn’t the same as full-cost pricing, but it’s a good first step.
It’s municipalities that have dragged their feet. Which is crazy, since you stand to benefit enormously from pricing reforms. Full-cost pricing will give you economically self-sustainable water systems. And paradoxically, charging more can help you reduce your costs. Consumers will respond to price signals by using less water. That will help you reduce your operating costs, especially your energy consumption. And it will enable you to avoid the cost of new water supplies or new capacity.
Of course, it’s not just about how much money you charge. It’s about how effectively and efficiently you use the money. You have an obligation to your ratepayers to use your water revenues as efficiently as possible. You have to adopt practices and technologies that enable you to provide the best services at the lowest cost.
Here in Alberta, regionalization is often touted as a way to do that. In 2003, Water for Life proposed the development of regional water systems. The following year, the Waterworks Facility Assessment Report also recommended regional solutions. It noted that regionalization can involve the linking of physical infrastructure. For example, it can involve pipelines in a hub and spoke arrangement. But it also noted that regionalization can simply involve operational linkages. For example, water providers can pool and share equipment or other operational, technical, or administrative resources.
The report acknowledged that regionalization is not the best solution for all communities. "In many instances," it said, "stand-alone operation still makes perfect sense." The best candidates for regionalization are those that have serious source problems, and those that are performing poorly. If a facility is exceeding health parameters, or is having difficulty attracting certified operators, regionalization can help. It can enable such facilities to increase their operational, technical, managerial, and sometimes financial capacity. This will help them reduce risks and improve service.
The most detailed arguments for regionalization that I know of appeared in a 2005 report called Watertight. This came from Ontario’s Water Strategy Expert Panel. The panel picked up where the Walkerton Inquiry left off. Its job was to provide advice on the organization and financing of Ontario’s water systems. The panel pushed hard for consolidation. In its view, whenever possible, systems should serve at least 10,000 customers.
Larger systems, the panel said, can afford a higher quality of management, planning, operating, and reporting than smaller ones. They have better equipment, more sophisticated systems, better trained and more specialized staff, and more expertise. These things equip them to meet standards better and to respond faster and more effectively in an emergency.
The panel also noted that larger systems benefit from economies of scale. This isn’t true of the pipes themselves. According to the panel, "economies of scale in water distribution and sewage collection decline as systems grow, and disappear at relatively small distances from treatment facilities." Instead, economies of scale are found in the capital costs of treatment plants. And they’re found in operating costs. Larger systems benefit from bulk procurement of chemicals and supplies. They can negotiate better prices for services such as testing.
And if municipalities want to contract out operations, consolidation may facilitate this, too. As the panel explained, "coordinating the contracting at a higher level will minimize the costs of developing and managing the contract."
There’s another argument for consolidating water and wastewater systems: It may facilitate private investment. Some municipal projects will be too small for large investors, such as pension plans, to invest in. It’s not efficient for them – the transaction costs are just too high. The bundling together of several projects may solve this problem.
I certainly have no objections to regionalization or other forms of consolidation. But I do want to propose another option that can be even more attractive: partnerships with expert water providers. Such partnerships can bring the benefits of regionalization, such as economies of scale, and then some.
There are a number of water companies out there that have far greater expertise than you’ll find in a typical regional water system. These firms have more experience meeting a wider range of challenges. They’ve put more into research, and innovation. They have more resources to draw on.
This is why our most troubled systems have turned to expert partners for assistance. After E. coli contaminated the water in Kashechewan, the federal government called in Northern Waterworks, a firm that operates several dozen plants in Northern Ontario. The firm’s technician flew into the community and repaired the chlorination system in less than six hours. The firm now operates the plant.
Expertise is likewise the biggest reason behind Walkerton’s decision to contract out operations, maintenance, and management to Veolia. Cost savings (which I’ll talk about in a minute) were important. But not as important as the firm’s expertise, its pool of trained staff, and its presence in several nearby communities.
Hopefully, you’ll never face the kinds of challenges that Walkerton faced. But expertise isn’t just required to stave off tragedies. Water service providers put their expertise to work every day, figuring out how to operate effectively and efficiently. Colin Saunders, the utilities manager for Walkerton, points out that "municipalities are notorious for inefficiencies." His was no exception. It was wasting a lot of money. He and Veolia are now working together to optimize operations, conserve energy, automate systems, and carry out preventative maintenance. O&M costs are way down, and the municipality expects to save $1.5 million over the five-year contract – savings that it will be able to invest in the system.
A competitive bidding process is an especially valuable way to tease out efficiencies. Competition for contracts creates powerful incentives to design and operate systems efficiently. A bidder will be more attractive if it can bring its price below its competitors’. So it looks for smarter ways of doing things. It may find them in design changes, in technological innovations, in the elimination of waste and duplication, in staff reductions, or in economies of scale. These efficiencies often bring impressive savings.
Canmore is benefiting from that kind of innovative efficiency. In this case, the expertise comes from EPCOR. In 2000, after a competitive RFP process, the town and the firm signed a 10-year utility management agreement for water and wastewater. Canmore saved more than $1 million on operating costs over the first five years. And it has enjoyed a higher level of water treatment, and better customer service.
Okotoks is also benefiting from EPCOR’s expertise and efficiencies. Okotoks and the firm have a 20-year agreement covering the design, construction, operation and maintenance of the town’s water and wastewater utilities. EPCOR completed an $11.2 million upgrade to the wastewater treatment plant in 2006. The plant’s innovative design saved the town $13 million over initial estimates. Among other things, it took advantage of existing facilities and buildings, which reduced land requirements and brought project costs down.
Water partnerships come with one other great benefit as well. Contracts give municipalities the power to spell out expectations and to compel compliance with them. Contracts can set tough operating standards – tougher than those set by the province, if the parties agree. They can guarantee water quality, monitoring and reporting procedures, maintenance levels, and customer service levels. Municipalities can write incentives for good performance right into these contracts. They can include bonuses for good performance. And they can penalize bad performance with fines – or even termination. Enforceable contracts give municipalities meaningful control over their utilities. They are powerful accountability mechanisms.
That’s my pitch for richer, bigger, smarter, and more accountable water systems. Price your water right, invest in your systems, get real experts to operate them, and hold them accountable for their performance. These strategies will help you survive even the worst storms that might be coming your way.