As municipalities across the province are aware, water and wastewater systems are an expensive service to provide. The cost of infrastructure, maintenance, and staff is rapidly increasing along with Alberta’s booming population, and many municipalities are already struggling to fund their systems. This means that it is essential to know exactly how much water systems cost to operate. Full-cost accounting provides municipalities with a clear approach to understanding the exact costs of water services. Once full cost accounting has been performed, municipalities can shift toward full cost pricing, which recovers the true cost of operation from ratepayers.
Full cost accounting
One of the most important factors in ensuring the viability of water and wastewater systems is creating a sound financial plan that addresses the system’s assets and operations. This requires the costs of providing services to be fully understood to inform decisions on pricing, operations, and infrastructure choices. Full cost accounting does not necessarily mean that full cost pricing must be adopted, but it is a vital first step to informing decision-makers in your water system.
An essential part of full cost pricing and accounting for water and wastewater services is ensuring that all water users are metered. According to a 2004 national study of Canadian municipalities, unmetered communities consume 75 per cent more water than full metered ones. Metering allows consumption-based billing, which helps municipalities recover costs and provides a strong incentive for water efficiency. Metering is also vital to determining how well your distribution system is functioning and where there are leaks in the system. For more information and a list of municipal examples and resources in water metering, visit AUMA’s Water Operations and Management for Water Conservation page.
Full cost pricing
Once your community has a firm understanding of the costs associated with operating your systems, you may choose to employ full cost pricing to recover expenditures. Full cost pricing involves setting the prices customers pay to utilize your system at a rate that meets the full costs you assume to provide the service. Full cost pricing is not always an easy transition, especially if your municipality is transitioning off of a non-metered flat rate.
Increases in pricing or changes in the method of pricing may come with significant ratepayer pushback. Some municipalities may choose to approach full cost pricing incrementally, increasing pricing year by year to soften the transition. In addition, education and outreach about the importance of pricing changes are very important to achieve ratepayer buy-in. To learn more about education and outreach measures on water issues, see Education and Outreach.
In addition to pricing adjustments to ensure financial viability, many municipalities are creating “conservation pricing systems” that both cover the costs of expenditures and encourage consumers to use less water. These systems involve either increasing rates above full cost levels for high water users or reducing rates for those who use very little. Caution must be taken when using this approach to avoid a negative cycle where customers reduce water use to the point that rates must be increased, which leads to further water use reductions. For more information on conservation pricing, including a list of municipal examples and resources, visit AUMA’s Economic and Financial Tools for Water Conservation page.
AUMA policy on full cost accounting and pricing
AUMA’s Municipal Water Policy includes the following policy statements pertaining to full cost pricing and accounting:
- AUMA encourages and will partner with the Government of Alberta to support municipalities in adopting full cost accounting and implementing water pricing that will:
- Educate users on the true cost of the water resources they are consuming, thereby providing a financial incentive to conserve and use more efficiently;
- Provide enough revenue to cover the full costs of providing water and wastewater services including maintaining and replacing infrastructure and implementing water conservation and source water protection measures; and,
- Provide financial reporting on water and wastewater utility functions separate from general revenues.
- The Government of Alberta should update the criteria for water funding to give priority to requests from municipalities that have implemented or are working towards full metering, water conservation, efficiency, and productivity planning, asset management and full cost accounting.
- AUMA urges the Government of Alberta to aid in funding and supporting small municipal and regional systems where users may not be able to fully cover capital costs.