Municipal Water Rates in Canada - Current Practices and Prices, 1991

Social Science Series No. 30

Executive Summary

Water rates and the prices determined by them comprise the largest source of revenue for municipal water and wastewater utilities. This paper examines the characteristics of this important source of revenue, based on a survey of almost 1200 Canadian municipalities. The paper is framed in terms of determining not only the characteristics of municipal water pricing, but also the nature of the incentives implicit in the rates and prices for efficient, non-wasteful water use – what we refer to variously as "water demand management," "conservation," and "water use efficiency."

The survey resulted in the receipt of over 2700 residential and commercial rate schedules, of which fully half were of the flat rate type. Flat rates offer no incentive at all for efficient water use. Interestingly, substantial portions of some of Canada's major metropolitan areas billed their customers on a flat rate basis. An additional 19% of rate schedules were of the declining block rate type, which, while a form of volume-based pricing, offers only declining and weak incentives for efficient water use. Only about 30% of rates, accordingly, had any significant efficiency incentives.

In terms of customer classes, flat rates applied significantly more to residential than to commercial customers. Also, many of the so-called volume-based schedules had quite large volumes of water (i.e., above average usage) "attached" to their minimum charges, thereby effectively placing their customers into the flat rate category.

For the volume-based rates, unit prices were very low, usually under $1.00 per cubic metre. The unit prices increased by an average of 67% over the 1986 to 1991 period. There was no evidence of economies of large scale in the unit price statistics.

Sewer surcharges are becoming an increasingly popular method of recovering waste treatment costs. Most commonly, they take the form of a percentage added to the basic water supply bill, for sewage return flows are rarely measured for individual services. In 1991, 23% of the water rates contained such sewer charges, with the average effect of the charges being to raise basic water bills by 30%. Some municipalities, however, had sewer charges of over 100% of the basic water bill.

Marginal prices are, at least theoretically, key benchmarks in the decision to use one unit more or less of a commodity, in this case municipal water services. Marginal water prices in Canada were very low, and, subsequently, economic factors seldom enter the decision-making "calculus" related to water use. In the case of flat rates, marginal prices are zero, and this factor alone, often acting implicitly, leads to very high demands on municipal water services.

Meters are key instruments in implementing an effective water pricing regime, and yet some 10 million customers received unmetered water services in 1991, including large portions of those in some of Canada's largest cities. The municipal water "industry" has annual revenues in excess of $3 billion, and is the only industry in Canada of that magnitude failing to measure such a large proportion of its primary product. Full metering is the most important step that could be taken to improve the financial condition of municipal water utilities.

Retail prices of water (and wastewater) services averaged just under $23.50 per month (at the 35 m³ level of usage). This represented a 45% overall price increase in the 1986 to 1991 period. While this appears significant in proportional terms, it represents a very small amount in absolute terms, especially when considering the very great benefits to society of public water services. Commercial water prices were somewhat higher than residential ones, but were still minimal on average. Retail water prices varied geographically, reaching highs in the Prairies and the territories and lows on both coasts and in Quebec. Water availability, climate, and tradition may account for these geographic variations.

Water infrastructure financing has recently been an issue of some importance for public policy. While water rate revenues comprise the major source of funds, total costs are almost certainly greater than the estimated $3.3 billion raised. Any remaining deficit has to be picked up though transfers from other levels of government. In the future, several major capital needs will arise if water systems are to remain effective components of national infrastructure, including renovation and expansion of existing systems, improved wastewater treatment to the secondary level, and complete water metering. Estimated net additional capital plus associated O&M costs lie in the $4.5 billion range annually between 1993 and 2003 and fall to $1.8 billion thereafter.

Modest revisions to water pricing practices, including an overall doubling of average prices, an across-the-board 60% sewer charge and full metering would raise an estimated additional revenue between $4.3 billion and $4.5 billion annually. These additional revenues would be sufficient to meet the estimated required costs. The need for additional general cross-subsidies from other levels of government are not required in our opinion in most areas. However, the analysis reported here is a macro-level one, and individual circumstances may vary. A few municipalities may require additional help, but this requirement should not cloud the overall "message," indeed public policy, of moving as quickly as possible to full cost recovery.

In terms of sustainability, current municipal water pricing practices give cause for concern. A brief consideration of financial, economic and physical viability, as well as environmental and public health, leads to the conclusion that municipal water systems are unsustainable under current pricing practices.

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Sustainable Water Management
Environmental Stewardship Branch
Environment Canada
Ottawa, Ontario  K1A 0H3
Fax: 819-934-5101 or
H2O@ec.gc.ca