Only the Pipes Should Be Hidden: Best practices for pricing and improving municipal water and wastewater services - Canada's Ecofiscal Commission

Only the Pipes Should Be Hidden: Best practices for pricing and improving municipal water and wastewater services

Abstract

Well-designed user fees can improve conservation, fund infrastructure, and protect water quality.
Municipal water and wastewater services are vital to our health, the economy, and the environment. They are complex systems, comprised of vast networks of infrastructure that treat and deliver water and wastewater. Yet there’s a hidden problem in some Canadian municipalities: using too much water and neglecting our infrastructure threatens both the quality and quantity of our water. Municipalities across the country are adopting well-designed user fees to address these interconnected challenges. Well-designed user fees can improve conservation, fund infrastructure, and protect water quality. They can also be designed to be fair, ensuring water stays affordable for low-income households. This report uses five case studies to highlight the progress that Canadian municipalities have made in improving the sustainability of their water and wastewater systems. It concludes with 10 best practices for designing and implementing user fees for water and wastewater services, based on experience in Canadian cities.

 

10 Best Practices

#1: Installing water meters for all residential and commercial users

Water meters have proven benefits: they allow utilities to charge water users based on the amount they consume and help identify leaks.

#2: Estimating all private and social costs using a lifecycle approach

A comprehensive asset-management plan includes all private costs borne by the water utility (operations, maintenance, capital) and broader social costs (protecting our water sources).

#3: Estimating existing and future revenues from all sources

Determining existing and likely future revenues requires looking at all sources of revenue, including user fees, development fees, fire protection charges, property taxes, and government grants.

#4: Identifying the funding gap and developing a full-cost-recovery strategy

With an asset-management plan in place and a comprehensive understanding of current and forecasted revenues, municipalities can estimate their funding gap.

#5: Relying on user fees to help close the funding gap

User fees are the most flexible and practical revenue tool available to municipalities. User fees can recover the full spectrum of private and social costs. If designed well, they also provide a clear pricing signal and encourage water conservation.

#6: Design rate structures to achieve multiple objectives

A multi-part user fee is the best way to achieve full-cost recovery while encouraging water conservation. The fixed portion allows utilities to recoup fixed costs and provides predictable revenues. The volumetric portion recovers variable costs and drives conservation with a price signal.

#7: Tailoring rates to the local context

Designing user fees to reflect the local context helps ensure that they are cost-effective, environmentally sustainable, and equitable. Municipalities can tailor rates according to the costs of supplying different types of users or to address environmental pressures.

#8: Integrating relief for low-income water users

Municipalities can take different approaches to ensure that water remains affordable. For example, they can provide low-income households with financial assistance with their water bills, or they can include a basic allotment of water within their fixed rate.

#9: Making adjustments over time—in a predictable and transparent way

User fees should be adjusted over time, as conditions change. The right rate structure today may not be appropriate in the future. Events such as larger-than-forecasted reductions in water demand or an economic downturn necessitate re-evaluating and calibrating water fees to changing contexts.

#10: Complementing user fees with other tools, especially for small municipalities

User fees should be the main revenue tool for improving the financial and environmental sustainability of municipal water systems. Other tools, however, can be valuable complements to user fees. This can be particularly important for small municipalities.

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