A Hundred Billion Dollar Problem
Originally published: 02/11/2020
Canada’s Water Crisis
Canada possesses a mere 0.6% of the world’s population, yet a sizeable 7% of the world’s fresh water supply. While this may reflect a state of abundance, Canada, like much of the planet, is facing multiple threats to its fresh water supply. These threats include a possible contamination of source water, significant leakage, insufficient funding models, aging infrastructure as well as high energy use/costs.
Perhaps the most severe of these threats is aging infrastructure. It would cost over $100 billion to replace the drinking water and wastewater infrastructure that is in poor condition in Canada. This deteriorating infrastructure stems from a lack of emphasis on conservation, inadequate metering, lack of innovation, as well as incomplete cost accounting. Ultimately, virtually all of these contributing factors can be tied to a fundamental underpricing.
Canadian municipal water agencies are largely neglecting to employ water prices as a policy instrument to signal scarcity and water use efficiency. When pondering over the relationship between energy and water, most are inclined to consider how water is used to create energy through hydropower or how it is used to cool power stations. Rarely do we consider the energy and, by extension, capital required to pump, process, and transport water. Rates have historically reflected only a portion (roughly 70%) of the landed cost of water.
Canada’s water prices are staggeringly low by international standards. 25% of Canada’s population pays a flat rate for unlimited water use. The other 75% pays a flat, constant price for each unit of water consumed, which essentially allows Canadians to overconsume water relative to the price they pay. In brief, water prices are set at a level where associated expenditures exceed revenues. This is due to two reasons: inaccurate cost projections from water agencies as well as resistance from the Canadian population to higher prices. Improper pricing translates to a lack of necessary funds to invest in required infrastructure maintenance and development costs. It also sends a signal to policymakers about demand for public infrastructure, which exacerbates issues in long-term capital planning.
Perhaps the most problematic aspect of underpricing is that it encourages households and businesses to rely heavily on water overuse. After years and years of overconsumption, current levels of usage have in many ways become engrained in Canadian lifestyle, and an attempt to lower that use back down to a social level could be a very arduous process. Beyond the minimum amount of water for survival that is required by the households in Canada, higher prices would influence water use patterns and encourage conservation and increased efficiency.
It is crucial to understand the relationship between prices, demand, infrastructure planning and investment and how it provides the feedback necessary for efficient water use and agency operations. Accurately and comprehensively measured operating and capital costs result in more efficient prices, which then determine water demand. This helps agencies determine when expansions to existing capacity are required. Therefore, pricing signals are crucial to helping decision-makers know how much public infrastructure is required.
Why Government Funding Isn’t the Problem
The infusion of capital spending from the government typically takes the form of grants, rather than loans. Municipalities who receive these grants thus realize the benefits of taxes raised elsewhere in Canada. As a result, they fail to hike the price of water as necessary. This underpriced water results in decreased water use efficiency, inflicting greater wear and tear on water infrastructure. This generates a death spiral entirely attributed to a misallocation of capital.
An Expert Opinion
Usman Ejaz is a Senior Manager within Deloitte Canada’s Infrastructure Advisory and Project Finance practice who is actively involved with the group’s water and wastewater infrastructure projects. He believes that the greatest area for improvement with regards to water infrastructure and water waste management in Canada is greater technology and, by extension, access to more comprehensive data. Usman thinks Canadians should begin to treat water the way we have been approaching electricity management. Increased adoption of modern technologies and implementation of universal, smart metering systems has provided residents of Canada access to data that allows them to be more cognizant of their electricity use consumption and efficiency. These data are also utilized by municipal and provincial governments to generate more accurate fee structures as well as capital spending budgets. Time-of-Use prices, for example, reflect the cost of producing electricity at three different periods (on-peak, mid-peak, and off-peak) based on demand, and provides users with more control over their electricity bills. Usman also alluded to best practices employed in Europe where virtually every utility has a fee attached to it. This allows residents to be highly aware of how efficient they should be in their utilization. Overall, an increased access to information and subsequently, economic pressure, at a governing and consumer level will lead to moderated consumption without putting quality of life at risk.
Need for Greater Water Technology and an Accurate Pricing Framework
Canadian agencies must implement a public pricing framework that charges appropriate usage fees to water users. The prices should factor in distance from source and quality of freshwater available. A variety of different pricing strategies could be adopted via a price-per-unit method: 1) seasonal water pricing; 2) “lifeline” water rates that exempt relatively small volumes of water; 3) block-rate charges charge higher prices for higher levels of consumption and use excess revenues to subsidize use by low-income consumers.
A move towards universal metering is perhaps the most basic step for implementing improved price- per-unit charges. Universal metering will essentially measure the amount of water entering each property. The more detailed and comprehensive the data provided by the meter, the more the accurate pricing framework. The installation of water metering also allowed participating communities to reduce their water consumption by 20–30%.
An accurate pricing framework will more precisely predict water demand, which will signal to respective agencies when expansion or maintenance to current capacity is required. Local decision makers will now have a clearer representation of how much public infrastructure investment is necessary. With this information, capital and operating costs will be more realistic, leading to more efficient prices. This generates a virtuous cycle.
Implementation
According to Adam Fremeth, E.J. Kernaghan Professor in Energy Policy and Associate Professor of Business, Economics, and Public Policy at the Ivey Business School, the costs associated with implementing smart meter technology would pale in comparison to the savings generated via heighted water use efficiency over time. He discussed how costs would largely be associated with installation and the development of a user-friendly, online and mobile platform that could be utilized by residents to help them track their consumption. Professor Fremeth believes these costs would not actually be that high, and pointed to the city of London, ON as an example.
Other cities in Ontario have followed suit. In 2017, for example, the municipality of Chatham-Kent invested $10 million into a two-year project to upgrade its 36,0000 analogue meters with smart water meters. Their goal was to help customers improve water use efficiency and reduce monthly bills.
The wear-and-tear on Canada’s water infrastructure has steadily increased alongside the consumption of the resource it provides. Fundamental changes in policy and public sentiment are required to reverse decades of degradation in infrastructure that is so vital to our day-to-day lives. These changes will be most effectively realized by investing in technological improvements that allow for greater proliferation of data for both governments and end-users alike.
