Canadians pay remarkably little for the water supplied to our homes and businesses compared to other developed countries (see figure 1). It’s no coincidence that we are also among the highest per capita consumers of water in the world.
The environmental consequences of water overconsumption are by now well established. They range from greenhouse gas emissions associated with unnecessary water heating and pumping, to impacts on natural habitat from premature or over-construction of dams or treatment plants, to impacts on receiving aquatic environments when disposing excess wastewater.
In recent years Canadian communities and water service providers have responded by implementing a range of demand management measures, from product rebates for toilets to education programs for school children and families.
What may surprise some people is the related finding that Canadian municipal water service providers typically do not collect enough revenue through water bills to cover basic operational costs. In fact, Statistics Canada (2008) figures show that in 2007, expenditures by water service providers were, on average, 30 per cent higher than the revenues collected from water bills. As a result, system reliability and infrastructure in many towns and cities are deteriorating. This means municipalities have to depend on frequent injections of subsidy funding from federal and provincial governments just to keep systems operating adequately. The alternative is to let the pipes, treatment plants and other capital assets decay—increasing the so-called infrastructure deficit (Renzetti, 2009).
An obvious response, both environmentally and economically, is to begin charging households and businesses for the real costs of water services.
What is conservation-oriented water pricing?
Conservation-oriented water pricing is a rate structure adopted by water service providers where costs are fully recovered. Individual customers are metered and pay for the volume they use, and the price charged is sufficient to influence customer decisions to make better choices. This includes behavioural choices to consume less water and choices to purchase water-efficient fixtures and appliances more often. Most people and organizations will change their behaviours simply because they recognize that conservation will lead to financial savings.
By collecting the same or more revenue while supplying less water, as a general rule the financial performance of water service providers will improve. Revenue generated by conservation-oriented pricing can be reinvested in the water supply system to repair aging infrastructure, develop and enhance conservation programs, and protect water sources.
Another benefit of improved water pricing is that it can encourage innovation and diffusion of technology. Faced with more appropriate prices, consumers will have incentive to invest their scarce dollars in products and services like low-flow toilets or the most efficient washing machine. Responding to this signal, inventors, engineers and investors will further improve water using technologies.
It’s also a question of fairness. Why should users who waste water and place excess demand on the system pay about the same as those who do their best to conserve? As discussed below, the goal is not to overprice the water that we use for basic things like drinking and personal hygiene. Rather, it is the luxury use for things like excessive outdoor irrigation, car washing or swimming pools that we want to target.
How do we get there?
A key initial step for any water service provider wanting to improve its pricing structure is to get metered. Metering of individual customer connections is a prerequisite for volume-based pricing. It’s also a beneficial general management practice that allows providers to better account for water use and measure performance. As of 2006 (the most recent year for which data are available), only 63.1 per cent of customers living in single-family dwellings in Canada were metered (Environment Canada, 2009). In other words, over one-third of Canadian homes still do not have a water meter. This is puzzling when one considers that universal metering is commonplace and expected in other utility sectors, such as electricity or natural gas. In these sectors, we would be very surprised indeed if usage were not metered. The extent of metering is also highly variable from province to province, with a few jurisdictions clearly bringing up the rear (see figure 2).
Once the metering hurdle is surmounted, most water service providers will also need to look at improving their financial accounting and billing systems. The objective of conservation-oriented pricing is to recover the full costs of providing services, including operations and maintenance, administration, overhead, reserves, costs of complying with regulations, financial costs (depreciation, debt servicing, et cetera) and capital costs. Beyond these obvious items, full cost accounting should ideally also cover soft costs, including environmental externalities—for example, the costs of aquatic habitat restoration or source water protection.
Senior governments can play a crucial role here by providing guidelines and best practices manuals on things like accounting practices. They can also provide advice on matters such as asset management and water use accounting. Most importantly, they can create conducive and supportive regulatory environments. Existing legislation can sometimes create barriers to change by limiting how costs can be recovered, which may constrain progressive municipal governments from implementing improvements.
Overcoming the challenges
The path to pricing reform is not necessarily a smooth one. Water service providers will almost certainly face a number of challenges, not the least of which is the potential impact on revenue stability. When reliance on volume-based pricing increases, revenue will almost certainly fluctuate. Customers use more water when it is hot and dry, less when it is raining, and much less if faced with watering restrictions during a drought. As a result, some water managers and elected officials believe that increasing per unit costs will create unacceptable revenue variability.
Fortunately, there are many options to minimize impacts on revenue and avoid budget shortfalls. First and foremost, careful planning goes a long way. Organizations need to ensure that they cautiously and conservatively forecast the impact that price change and other water use efficiency measures and trends will have on future consumption. Other tools include use of “rolling average” pricing, where the price is set for a number of years and designed to conservatively account for projected short-term fluctuations in demand. Service providers can then establish reserve funds that can be tapped during lower demand years when there may be a shortfall. They can also link a healthy part of the bill to a fixed component (a “connection charge”) that does not change with the volume of water consumed. Understanding their local situation and using these kinds of mechanisms allows water managers to implement pricing reform over time and with minimal disruption to the business side of operations. Through this path, many utilities around North America have successfully implemented pricing improvements without financial ruin.
Another frequently voiced concern is that price increases might disadvantage low-income families by asking them to spend a disproportionate amount of their earnings on water bills. Options are available to avoid this imbalance. For example, service providers can provide those in need with a “lifeline block” at low cost or no cost, or subsidize part of the basic connection charge, equivalent to enough water to meet a family’s basic requirements. Incentive programs like rebates for efficient toilets can also be targeted at disadvantaged groups. It’s also worth noting that, depending on the extent of rate changes, like all users, some low-income people may actually experience a decrease in their bills because they will have more control over their costs.
There are certainly technical challenges, but the greatest barrier to pricing improvements is political. Many politicians and senior managers worry, with very good reason, that they will be criticized by their communities for trying to change water prices—especially by those whose rates may increase. When water rates go up, some residents will view it as nothing more than a tax grab. Others may feel that their past efforts to save water are being punished by a price increase, arguing that greater efficiency results in lower revenue for the water service provider, which will then simply raise rates to make up the shortfall.
Tackling the political problem takes courage, leadership and planning. There is no substitute for building community support through an effective consultation and public education campaign. No reforms, no matter how beneficial, will be well received unless they are clearly understood. Most municipalities will want to take a cautious and gradual approach to implementing pricing improvements, sometimes over a number of years. This allows time to ensure that potentially negative impacts are mitigated and helps build community consensus.
Another helpful approach is to highlight successes already happening around North America. A number of water utilities in the United States have used robust conservation-oriented pricing approaches for many years, including in Seattle and San Antonio. In Canada, a number of cities, including Toronto, Guelph and Halifax have started down the road of price restructuring with good success. Others can learn from their experiences.
The best water conservation programs will use a variety of tools, of which pricing is only one. But improving our current approach makes sound sense from both economic and environmental perspectives. The objective is simply to cover the costs of supplying water and maintaining assets over the long term. This is also one of the most powerful instruments available to impact short-term water demand, thereby improving environmental performance. WC
Kirk Stinchcombe is principal of Econnics, a Victoria-based consulting firm that specializes in water use efficiency.
Oliver M. Brandes is the associate director and leader of the POLIS Water Sustainability Project.
Steven Renzetti is a professor at Brock University and one of Canada’s leading water economists.
This article is based on a new University of Victoria report intended to stimulate a national dialogue on conservation-oriented pricing as part of a sustainable approach to water management. Developed by the POLIS Water Sustainability Project, Worth Every Penny – A Primer on Conservation-Oriented Water Pricing, introduces water pricing options for water managers, policy makers and municipal leaders across Canada. Visit polisproject.org