MOE’s Financial Plans Regulation for Municipal Drinking Water Systems
On August 14, 2007, the Ministry of the Environment (MOE) filed O. Reg. 453/07, the Financial Plans Regulation under the Safe Drinking Water Act (SDWA). This new regulation sets out requirements for “Financial Plans,” which all municipal drinking water systems will be required to prepare as early as July 2010 as part of their requirement to obtain a Drinking Water Licence under the SDWA. MOE also published a guidance document entitled “Toward Financially Sustainable Drinking-Water and Wastewater Systems,” which sets out a number of guiding (though not mandatory) principles to assist municipalities in the preparation of their Financial Plans.
Following the May 2000 contaminated water tragedy in Walkerton, Justice Dennis O’Connor released his Report of the Walkerton Inquiry, which sets out strategies for preventing such a tragedy from reoccurring. Among his many recommendations, Justice O’Connor recommended that all owners of municipal drinking water systems should be required to submit a financial plan as a condition of obtaining their Drinking Water Licences, in order to ensure that drinking water providers can adequately finance the total costs of their systems.
In December 2002, in accordance with this recommendation, the Ontario government passed the Sustainable Water and Sewage Systems Act, 2002 (SWSSA). The SWSSA was intended to address the financial sustainability of municipal water and wastewater systems in Ontario by requiring municipalities to:
- prepare a “Full-Cost Accounting Report” that assesses the total cost of providing its municipal water and sewer services (including its operating, capital, financing and source protection costs); and
- develop a “Cost Recovery Plan” that indicates how the system intends to recover the full amount of its costs.
Although the SWSSA received Royal Assent in 2002, no supporting regulations have ever been developed, and the Act has never been proclaimed in force. (For the ECO's review of the SWSSA, see The Sustainable Water and Sewage Systems Act.)
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The Financial Plans Regulation
In 2007, with the SWSSA still unproclaimed, MOE developed the Financial Plans Regulation under the SDWA to satisfy the financial plan requirement for Drinking Water Licenses. The Financial Plans Regulation requires all owners of municipal residential drinking water systems to prepare Financial Plans that detail the system’s financial information projected forward for at least six years. The Financial Plans must include income statements (which set out revenues and expenses), as well as balance sheets (which include financial assets, non-financial assets, total liabilities, cash flow, etc.).
The Financial Plans must then be formally approved by the owner of the municipal system through a resolution of the municipal council (or the governing body if the municipality is not the owner). For new municipal drinking water systems, the Financial Plan must state that the financial impacts of the drinking water system have been considered, and the resolution must state that the drinking water system is financially viable. (For more detail on the Financial Plans Regulation, see 2007 Review of Financial Plans Regulation under the SDWA.
Implications of the Decision
The regulation is being used in place of the SWSSA
For the short-term, at least, the Financial Plans Regulation is being used in place of the SWSSA in defining the financial plan requirements for municipal drinking water systems. MOE has not made it known if the province’s long-term intention is for the Financial Plans Regulation to replace the SWSSA, or if the Financial Plans Regulation is merely a transitional regulation until the province is ready to proclaim the SWSSA in force (or develop some alternate regulation or legislation). Regardless, it is clear that the province is taking a more flexible and gradual approach to phasing-in the requirements for sustainable financial planning, than had originally been intended under the SWSSA.
The regulation requires full-cost accounting
The Financial Plans Regulation introduces a requirement for municipal drinking water system owners to undertake a “full-cost accounting” of their system to determine the true cost of providing safe water. The regulation requires municipalities to determine the full cost of operating their drinking water system, including the projected long-term capital costs of repairing, improving and building new infrastructure.
The full-cost accounting must also set out the system’s total projected revenues; however, there is no requirement that those revenues be sufficient to cover the system’s costs.
Full-cost accounting is a crucial first step in moving drinking water systems towards financial sustainability by:
- making municipalities more aware of the annualized investment costs of the infrastructure assets over their useful lives;
- encouraging better long-term planning for capital renewal and replacement; and
- providing a more informed basis for setting water rates.
Full-cost recovery is encouraged, but not required
Unlike the SWSSA, the Financial Plans Regulation does not include a requirement for “full-cost recovery,” which Justice O’Connor described as the second critical component of financial sustainability. While full-cost accounting requires the municipal systems to prepare a balance sheet; full-cost recovery requires that balance sheet to actually balance. “Full-cost recovery” would require that a system’s owner raise sufficient funds to cover its full costs and ensure that the system will be able to provide safe and sustainable drinking water for both the short and long-term.
While the regulation does not explicitly require full-cost recovery, it does state that all new systems must be “financially viable.” Although the term is not defined, financial viability arguably suggests that new drinking water systems must achieve full-cost recovery. In addition, the regulation’s supporting guidance document strongly encourages municipalities to collect sufficient revenues to cover all of their costs.
Full-cost pricing is encouraged, but not required
In addition to recommending that municipal systems implement “full-cost recovery” strategies, the guidance document also encourages (but does not require) municipal systems to introduce “full-cost pricing.” Whereas “full-cost recovery” requires systems to recover the full costs of the water services by any means, “full-cost pricing” goes one step further by requiring the full costs to be recovered through customer water charges.
Full-cost pricing applies the user-pay principle by requiring those consumers who benefit from services to pay for them. In addition, charging water users appropriate, volumetric rates for the water services provided (typically through the use of water meters) can encourage water conservation.
Currently, most municipalities in Ontario do not charge consumers anywhere near the full costs for their water services. Rather, most municipalities heavily subsidize their water systems through other sources of revenue, such as property taxes or provincial grants. Most municipalities have also under-invested in their water systems creating a serious backlog of repairs and upgrades to the water infrastructure. Without a legal requirement to implement full-cost pricing, it is unknown to what extent municipalities will implement this – generally politically unpopular – recommendation to increase water rates.
No provincial approval
Unlike the SWSSA, which would require the Full-Cost Accounting Reports to be approved by MOE, the Financial Plans Regulation does not require the Financial Plans to be approved by the province. Accordingly, there does not appear to be any provincial control exercised over the quality or sufficiency of individual Financial Plans.
ECO Comment
Approximately six years after the province first passed the Sustainable Water and Sewage Systems Act, the ministry is finally implementing a requirement for municipal drinking water systems to develop Financial Plans. The Financial Plans Regulation puts into place a long overdue requirement for municipalities to develop a full accounting of their drinking water systems – the first step in moving municipal water systems toward financial sustainability. The Financial Plans should help municipalities make the fundamental link between asset management and financial planning, which will hopefully result in better long-term planning for capital renewal and replacement, as well as more appropriate setting of water rates.
It appears, however, that the Financial Plans Regulation is being used, at least temporarily, to replace the more comprehensive and prescriptive requirements developed under the SWSSA. The Financial Plans Regulation cannot reasonably be viewed as an adequate replacement for the SWSSA. Whereas the SWSSA would require municipalities to develop financial plans for both drinking water and wastewater systems, the Financial Plans Regulation only applies to drinking water systems. Where the SWSSA would require municipal systems to develop both a full-cost accounting plan and a full-cost recovery plan, the Financial Plans Regulation only requires a full-cost accounting plan. And, where the SWSSA would provide strong mandatory requirements, including a requirement for provincial approval of the financial plans, the Financial Plans Regulation provides a much more permissive and flexible approach.
The ECO is very disappointed that the new regulation does not include requirements for full-cost recovery and full-cost pricing. Full-cost recovery of a water system’s total costs is necessary for the system to achieve financial sustainability and self-sufficiency. However, the necessary shift by municipal systems to full- cost recovery – to both overcome their enormous infrastructure deficits and to achieve financial sustainability – is bound to be unpopular with most municipal residents and, thus, is unlikely to be undertaken on a voluntary basis. Accordingly, a mandatory and timely requirement for full-cost recovery is needed. The longer the province delays instituting such a requirement, the more likely that the existing infrastructure deficits will grow – potentially threatening the safety of the province’s drinking water supply systems.
In addition, requiring municipalities to charge water users appropriate, volume- based rates for the water services provided can help encourage water conservation. Currently, most municipalities in Ontario charge artificially low water rates, providing a disincentive for consumers to conserve water resources. The ECO believes that there is significant room for most municipal systems in Ontario to raise water rates, which are generally quite low compared to many other jurisdictions, as well as compared to other household costs (such as cable and internet services).
It is still not clear whether the province intends that the Financial Plans Regulation replace the SWSSA, or whether the new regulation is merely the first step in a phased-in approach to requiring water systems to become financially sustainable. However, the ECO notes that the Financial Plans Regulation alone is unlikely to push most municipal systems towards achieving financial sustainability. Therefore, the ECO urges the ministry to follow up on the Financial Plans Regulation in a timely manner – by either proclaiming the SWSSA or developing some other comparable legislation or regulation – to ensure that financial sustainability is achieved for all municipal drinking water and wastewater systems in Ontario.
| This is an article from the 2007/08 Annual Report to the Legislature from the Environmental Commissioner of Ontario. |
Citing This Article:
Environmental Commissioner of Ontario. 2008. "MOE's Financial Plans Regulation for Municipal Drinking Water Systems." Getting to K(No)w, ECO Annual Report, 2007-08. Toronto, ON : Environmental Commissioner of Ontario. 90-94.
