Water, water everywhere, and not a drop is free

AACI | Vice President, The Regional Group of Companies Inc.
  • Feb. 18, 2015

Municipal water and sewer services may not be a sexy topic, but start talking about budget shortfalls and rate hikes for residents and it becomes hot news – quickly.

Earlier this month, the City of Ottawa confessed it ended up $22 million short in 2014 in terms of the revenue it expected to collect for drinking water, sanitary and stormwater services. There was also a shortfall the previous year.

This leaves city hall sliding into the red ink, and having to cover the difference with debt or direct property taxes.

And this has happened despite annual water and sewer rate increases of about six per cent for the past several years, on top of the annual municipal tax hike.

Why is this happening?

Because the good residents of Ottawa, by and large, are doing what they are supposed to do – reform their wasteful habits and reduce their consumption.

As the Ottawa Citizen reported, local residents used 87.3 million cubic metres of water in 2012. That dropped by six per cent to 81.8 million cubic metres in 2013. A further decrease is believed to have occurred in 2014.

But as city treasurer Marian Simulik told the Citizen, the costs of maintaining the system don’t go away just because people are using less water.

If anything, they go up, as more aging infrastructure needs repair or replacement, and new developments come online.

This is the infrastructure funding challenge that faces communities across Canada.

An interesting public policy debate

Many of the services we invariably take for granted are based on some form of volumetric billing – we pay for what we use. The more we use, the more revenue, and vice versa. For the City of Ottawa, about 93 per cent of its annual revenue to maintain, repair and expand our water and sewer system is generated through volumetric billing.

But this introduces a degree of volatility into the city’s revenue stream, as it tries to budget for its current needs, anticipate future needs, and balance these against expected consumption.

Meanwhile, we are all being urged to conserve. There’s an obvious gap here. How do we bridge it?

Pay for what you use …

One the one hand, to reduce waste and promote efficient use of our infrastructure resources, user fees should be 100 per cent variable with demand, and cover 100 per cent of the cost of providing the infrastructure, and maintaining, replacing and operating it. This applies whether it’s water, electricity or some other the consumable product.

This gives individuals the greatest choice in what they do. People who want to use lots of water pay a larger water bill. Those who invest in efficient plumbing fixtures like low-flush toilets, and more efficient washing machines get a better return on their investment in the form of a smaller water bill. Or at least a bill that isn’t increasing as quickly from rate hikes.

For example, at our house we replaced a toilet from the 1970s with a new low-flush unit. Water consumption for the whole house went down by more than 30 per cent – the old unit must have been leaking like a sieve. Similar results come from front-load versus top-load clothes washers.

Or paying the same rate, regardless of usage

The other extreme is for the provision of water to be included in property taxes, and there is no charge directly for it.

In this scenario, there is no incentive to be an efficient water user! This model does, however, push the greater proportion of the cost of water services to higher-valued properties. Homeowners with higher assessed properties pay a greater proportion of the cost of providing the water infrastructure, while lower-income households, typically with lower-valued properties, pay less.

Following this model would in the end cost us all a lot more – anything that appears to be free gets used to excess. If water, for example, could be used without a direct cost we’d all use a lot more of it, watering our lawns until they were as green as the grass in Ireland.

We pay, no matter what

Regardless of which model we chose, it is we, the taxpayers, who are the only source of revenue to pay for infrastructure.

Whether we pay for it out of general taxation, or user fees that are either based on 100 per cent variable consumption charges, or a partly fixed charge, we are the only ones who are going to pay for it. No fairy godmother is going to appear and pay our bills for us.

So the question is, what is the most efficient way for us to pay, knowing we can’t escape?

I’m in favour of policies that give people the greatest ability to choose. Having water billed as part of general taxes doesn’t satisfy that goal. Having part of the bill be a fixed charge that is unrelated to consumption rewards the wasteful – I don’t find that attractive.

That leaves us back where we started, with a 100 per cent consumption charge that covers 100 per cent of the total cost of providing the utility or service.

But this still leaves a municipality like Ottawa trying to make up budget shortfalls due to reduced consumption with unpopular rate hikes.

There’s no avoiding it. We have to pay the piper with our aging infrastructure.

As I have written before, we are all living with the consequences of past political decisions – good or bad. New infrastructure projects make great politics, but not so much when we have to create reserve funds to hedge against their eventual repair.

Recognizing that we’re going to have to pay for it anyway, let’s choose an option that encourages efficient use, covers the cost directly, and rewards those make the effort not to waste.

To discuss this or any other valuation topic in the context of your property, please contact me at [email protected]. I am also interested in your feedback and suggestions for future articles.

John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

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John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

Read more

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