November 25, 2009

(This blog is the third in a series on the Ontario Environment Minister’s Annual Report on Drinking Water for 2009.)

In his Annual Report on Drinking Water, released last week, Ontario Environment Minister John Gerretsen claims that, through the Financial Plans Regulation, the province is “ensuring that all system owners take the first step in planning for the long-term financial sustainability of their drinking water systems.”

Unfortunately, the Financial Plans Regulation, which was developed in 2007 and will go into effect in 2010, will do little to make drinking water systems financially sustainable. The regulation requires municipalities to prepare financial plans for their systems. But these plans need not ensure that municipalities price water services in order to recover their full costs from their customers.

In guidelines issued along with the Financial Plans Regulation, the province acknowledged the value of making users pay for their water services: “Ensuring users pay for the services they are provided leads to equitable outcomes and can improve conservation. In general, metering and the use of rates can help ensure users pay for services rendered.” It elaborated on two best practices: “1. Rate structures should promote financial sustainability and water conservation. 2. Metering and the use of rates are preferable to cross subsidization using property taxes.” Despite its nod to user-pay, the guideline did not rule out government grants as a source of revenue.

The Environmental Commissioner of Ontario, Gord Miller, criticized the Financial Plans Regulation in his Annual Report for 2007-08. He expressed disappointment that the regulation did not require full-cost recovery or full-cost pricing. In order to achieve financial sustainability and self-sufficiency, he wrote, municipalities need to fully recover all of their costs. Yet full-cost recovery, he explained, “is bound to be unpopular with most municipal residents and, thus, is unlikely to be undertaken on a voluntary basis.” His conclusion? “The Financial Plans Regulation alone is unlikely to push most municipal systems towards achieving financial sustainability.”

Mr. Miller noted other benefits of full-cost pricing, as well: “Requiring municipalities to charge water users appropriate, volume-based rates for the water services provided can help encourage water conservation. Currently, most municipalities in Ontario charge artificially low water rates, providing a disincentive for consumers to conserve water resources.”

The province seems intent on ignoring the financial and ecological benefits of full-cost pricing. Indeed, the Annual Report on Drinking Water devotes almost ten column inches to the many grants and subsidies lavished on municipal water and wastewater systems. It boasts of $90 million for water projects in 57 Ontario communities, up to $140.5 million for upgrades to six sewage treatment plants near the Great Lakes, $20 million in operating funding for 166 small communities, another $158 million in low-interest loans to seven municipalities … and a whopping $274 million in infrastructure stimulus funds for 117 water projects. This isn’t user pay – it’s taxpayer pay!

In order to ensure that water systems operate safely and are upgraded as required, in order to secure their long-term financial self-sufficiency, and in order to promote efficient water use, the province should amend the Financial Plans Regulation to require user-pay, full-cost pricing. Only when municipalities recover their full costs from their customers will water systems be truly sustainable.