No water regulation without privatization

Lawrence Solomon
National Post
January 23, 2001

The Mike Harris government, regaining its feet after reeling from the Walkerton tragedy, is considering various types of privatization to fund the improvements needed to set Ontario’s water system aright.

Most of these — half-hearted measures designed to partially placate privatization foes — would fail miserably, giving Ontarians unfairly high rates, compromised regulation, poor water quality and weak environmental protections, and opening the province to a repeat of the bungled electricity deregulations that we’re seeing in Ontario, Alberta and California. Only one option — clean, uncompromised privatization — can provide citizens with clean, uncompromised regulation.

Water pipeline systems are natural monopolies. Because pure competition here is, for all intents and purposes, impossible, free market forces could never guarantee either reasonable rates or strict public safety. As a practical matter, only a government agency can set strict standards and only a government agency can be trusted enough to regulate with authority.

But governments cannot be fully trusted when they have a conflict of interest, such as when they’re regulating themselves.

Ontario’s power system provides one real-life example. The Ontario Energy Board, an independent government regulator, for decades provided excellent oversight over Consumers Gas, Union Gas and Centra, the province’s privately owned natural gas companies. At the same time, the board was a toothless regulator over government-owned Ontario Hydro which, thanks to the numerous concessions Hydro routinely extracted from its friends in government, ran roughshod over the province’s finances and environment.

Ontario’s water system provides another real-life example. For decades, whether under Tory, NDP or Liberal government, Ontario’s water system was allowed to fall into disrepair, with provincial regulators turning a blind eye to problems in both municipal and provincial water utilities.

For a government regulator to be most removed from the utility that it regulates, the utility must be in the private sector. This arrangement is not perfect but it is as near to perfect as any country, anywhere, has managed.

The world’s strictest water quality standards exist in the United States, the United Kingdom, France and other members of the European community, countries which welcome private sector water utilities. Even the Canadian Union of Public Employees, a fierce opponent of water privatizations, acknowledged the superiority of the United States and the EEC in a water quality report, produced with Sierra Legal Defence Fund, that it released last week.

“Canada lags far behind the United States,” the report explains, in calling the United States “… a world leader in establishing strong and comprehensive requirements” in water quality. In contrast, Canada’s publicly owned water utilities fared poorly in the union’s own study.

In several partial privatization approaches that the Ontario government — through its SuperBuild agency — is considering, the government would be directly or indirectly regulating itself. One approach, for example, would see the government creating publicly owned regional water utilities — akin to a series of Ontario Hydros for water — that the province would manage. SuperBuild is making brave noises about making consumers pay for the full cost of water services — necessary both to induce water conservation and to pay for the improvements the water systems so urgently require. Fine, in theory. In practice, government-owned utilities crumble under pressure from customers, who could throw their political masters out of office. Utilities then delay needed repairs for the next government to worry about. That’s one dominant reason why water utilities across the country arrived at their present state.

In another partial privatization option, the provincial government would let the municipalities own the utilities, as they now do, with the province forcing them to raise rates to finance improvements whenever necessary. SuperBuild forgets that, whenever the province has changed rules affecting municipalities in the past, the municipalities have proved to be powerful lobbyists, demanding — and receiving — subsidies from the province to pay for needed improvements. In the case of Ontario, the province has paid up to 90% of the cost of new municipal capital improvements, making the province loath to force on municipalities new requirements that will come back to haunt the provincial purse. That’s another dominant reason for the water utilities’ disrepair.

In her full privatization of the U.K. water system, prime minister Margaret Thatcher understood these dynamics very clearly. For decades, previous Labour governments and previous Conservative governments, fearing the consequences of either raising taxes or raising rates to maintain the water system, let the water system degrade. By the time Ms. Thatcher came to power, the U.K.’s publicly owned and publicly run system had one of the worst records in Europe. And avoiding the billions needed for improvements was no longer an option for her — the U.K. had joined the European Community, and was committed to meeting European standards.

Instead of having government raise the capital that the U.K.’s water systems needed — the tab would ultimately approach $100-billion — Ms. Thatcher privatized the water authorities, knowing they would be able to introduce the user-pay system that governments have rarely had the stomach to maintain. The water companies did raise water rates — by 38% over the decade following privatization — partly to provide shareholders with a return on their investment but mostly to overcome the decay that had come from decades of neglect. And although consumers weren’t happy with the price hike, they were happy with the results in water quality. Water quality shot up dramatically — by 1998, 99.8% of the 2.8 million tests conducted met the required standard, as drinking water has been largely purged of the fecal coliforms, pesticides and other unwanted chemicals.

The environment has also improved dramatically, with the number of rivers and canals classified as good or very good increasing from 37% to 59% within just five years, and the number of usable beaches increasing from 401 in 1989 to 463 in 1999. The private companies did all this while also increasing their efficiency — operating costs have steadily fallen, enabling the regulator to force rates down. In November, 1999, household rates dropped by about 12%, and they’re expected to stay stable. One bottom line: By 2005, the average annual household bill will be only £38 higher than it was in 1989 under public ownership, when both water quality from the tap and in the streams was poor. Another bottom line: The U.K. is now one of the world’s best regulated systems, with one government regulator for rates, one for water quality and a third for environmental protection.

Mr. Harris understands, as Ms. Thatcher did, that the private sector is inherently more efficient in business activities. Canada, like the U.K., faces a huge tab to pay for decades of neglect to our own water and sewage systems — an estimated $90-billion for the country, one-third of that for Ontario. If Mr. Harris entrusts the task to a private company, its shareholders bear the risks. If he entrusts an Ontario Hydro-style utility, whose excesses at the Darlington Nuclear Plant and elsewhere will be costing taxpayers and ratepayers for years to come, he will be exposing taxpayers to needless risk.

Mr. Harris should also understand that the government can only regulate effectively if government and industry get entirely out of bed with each other. Leave commercial operations to the private sector; leave regulation to the government.

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