Sewer Utility Cost Recovery

1. Conservation incentive – Associating the amount a user pays with water consumption incentivizes users to reduce water use. Not only does this conserve a basic essential finite resource, but also reduces the burden on the sewer system and extends the life of the infrastructure. Currently, 35% of cost recovery is based on a volumetric rate associated with water consumption.
2. Equity – A consumption-based cost recovery model ensures that users of the system pay for the service proportionately to their usage or benefit resulting in a more equitable distribution of the costs of operating and maintaining the sewer system. Because the level of water consumption related to a particular property is generally considered a good indicator of the level of sewer services related to that property, water consumption is a generally accepted measure to determine sewer user fees.
3. Revenue neutrality – a zero-sum game. A change in the cost recovery model is inherently a reallocation of costs. Some property owners will pay more, and the additional revenue will offset other property owners who pay less. Increases to total revenue, based on increases in total costs, are considered annually during the budget process. This report uses 2019 cost recovery targets to compare other recovery models with the status quo, so we’re comparing apples with apples.
4. Revenue stability from the local government’s viewpoint – will the revenue cover the costs of the service? Sewer costs are generally predictable, and uncertainties can be mitigated through budgeting for contingencies, maintaining sufficient surpluses and using conservative estimates for revenue. To the extent that revenue is dependent on a variable factor, such as water consumption, revenue forecasts will be more difficult to predict accurately. This difficulty is mitigated if consumption volumes are known in advance of setting the variable rate.
5. Revenue stability from the consumer’s viewpoint – can users predict what their sewer utility bill will be from year to year? Because most consumer’s income typically is received in a predictable pattern, most prefer their expenses to also be predictable, both in amount and timing from year to year. Consumers will be better able to plan for fluctuating sewer bills if they are aware of their consumption in advance and if they can spread the cost over time without penalty.
6. Tax deferment – the Provincial program available for eligible taxpayers to defer taxes against the equity in their home. View Royal had 215 taxpayers in 2019 that took advantage of the Provincial tax deferment program. This program allows deferral of the CRD sewer portion of the tax bill since this component of sewer cost recovery is levied as taxes, rather than user fees. If this component was converted to a user fee, it could no longer be deferred, because user fees are not eligible for deferral under the tax deferment program. Recognizing that the average residential consumption is 77 m³ these taxpayers will likely pay an amount less than $337 for sewer.
7. Home owner grant – The Provincial grant program that reduces property taxes for home owners. User fees are not eligible for the Provincial Home Owner Grant program. The regular grant amount is $570 and an additional amount of $275 is available for seniors, veterans and certain people with disabilities. The program stipulates a minimum tax payable of $350 for the regular grant and $100 for property owners eligible for the additional grant. The discontinuation of the CRD sewer tax levy would reduce the total taxes such that some eligible taxpayers’ payable amount is reduced to the minimum. There are less than ten taxpayers this would affect.
8. Strata properties – properties that are typically serviced by a single water meter. Strata properties are currently billed the CRD sewer levy individually on each property tax bill. Most strata properties utilize a single strata water meter and therefore all properties within the strata are billed on a single strata sewer bill. Recovery of CRD sewer costs through user fees would remove the tax levy from individual strata tax notices, and increase the amount billed to the strata corporation and subsequently distributed through strata fees. If the CRD sewer levy is discontinued and the charge is included on the user fee bill, property owners and strata corporations may need additional communication to help understand the change.
9. Exempt properties – properties that are connected to the sewer system but are exempt from taxation either by statute or permissive exemption. Exempt properties in View Royal include Craigflower Manor, schools, provincial housing units, the CRD Integrated Water Services building, Town-owned properties and Crown Provincial properties. These properties do not contribute to CRD sewer cost recovery because it is levied as a tax, rather than a user fee. Recovery of CRD sewer costs through user fees would increase the total amount billed to these properties, most significantly for Victoria General Hospital. Implications for exempt properties are described in Attachments A and B under the heading “Institutional impacts”.
10. Single-family unit equivalents (SFEs) – a factor or multiple to equate non-residential sewer consumers with a single residential unit. View Royal’s Sanitary Sewer Rates and Regulations Bylaw No. 397, 2000 (see Attachment C) sets out an SFE for each class of non-residential sewer user. This factor is applied to the flat fee rate (2019 – $20.27) in determining the flat fee charge for that class of user. For example, commercial laundromats are listed with an SFE of 2.0 for each washing machine. A laundromat having 10 washing machines would be charged a flat fee of $405.40 ($20.27 X 2.0 SFE X 10 machines). Conceptually, SFE factors may serve as a proxy in the absence of known consumption. Combined with a volumetric charge based on water consumption, SFEs may be viewed as duplicating the association of user fees with consumption. Additionally, administrative effort to determine the SFE unit counts for each class of users is problematic, as currently there is no system in place to automatically inform the Town of changes in unit counts.
11. Parcel taxes – taxes based on the unit, frontage or area of a property. Parcel taxes are sometimes associated with costs relating to capital asset maintenance or replacement of a utility system and are added to the annual tax notice. While parcel taxes are eligible for tax deferment and home owner grant programs, the implementation and ongoing administration of a parcel tax system removes the attractiveness of this method of cost recovery.
12. Capital or infrastructure levy – a flat fee charged on a utility bill to recover costs associated with capital asset or infrastructure maintenance or replacement. Some municipalities add a separate flat fee to the utility bill to separately identify contributions to reserves, debt charges or capital costs. The flat fee may be a single amount per parcel or different amounts for different classes of users. The fee is best understood and administered when its calculation is simple and easily verifiable. The introduction of an infrastructure levy may be best timed when an asset management plan determines future funding requirements.
13. Transparency – government’s obligation to share information with citizens. Legislation requires local governments to be open about how a user fee is calculated. Given that a significant change to a cost recovery model such as that contemplated by this report will result in the reallocation of costs from some constituents to others, it is imperative that the transition be managed in a thoughtful and communicative manner. Additionally, future sewer utility bills can be configured to describe the various components of the cost recovery method to provide greater clarity about the use of the funds collected. For example, the bill could separately identify the amounts charged for the CRD and View Royal sewer systems, and flat rate or capital asset levy components.

IMPLICATIONS:

There are a multitude of variations and permutations that could be modeled for sewer utility cost recovery. This study looked at two specific models and compared the implications to the current method for residential, non-residential and institutional users. The scenarios considered were:

Scenario A: 100% revenue based on winter water consumption; and Scenario B: A flat fee to generate 15% of total revenue plus a volumetric fee to generate 85% of total revenue based on winter water consumption.

Both scenarios eliminate the CRD sewer tax levy and instead the CRD sewer requisition is recovered through user fees.

Scenario A eliminates the concept of a flat fee, so if consumption is zero, the property owner would pay nothing.

Scenario B charges 15% of total revenue as a flat fee and 85% is recovered through a volumetric charge based on winter water consumption. Each single-family dwelling or strata unit is charged the flat fee and each non-residential and institutional property is charged a single flat fee.

The key question we wanted to answer was, “What happens if total sewer utility costs (for both CRD’s and View Royal’s systems) are recovered through user fees rather than a hybrid of taxes and user fees?” The results of the modeling exercise were then evaluated for measures of equity and conservation incentive.

Scenario A: 100% revenue based on winter water consumption

Total sewer utility costs (View Royal’s and CRD’s systems) for 2019 were $2,076,000. Total winter water consumption was 472,687 m³. This calculates to a total volumetric rate of $4.38 per m³. Table 2 describes the distribution of revenue and consumption for Scenario A.

Table 2 Scenario A distribution of revenue and consumption by user class

Scenario A demonstrates the equitable distribution of the costs – for each class, the revenue percentage is equal to the proportionate consumption. It also indicates a high conservation incentive since consumption explains 100% of revenue. The implications for each user class compared to the current cost recovery method is shown in Table 3.

Table 3 Scenario A comparison to current method

Scenario A demonstrates the “zero-sum game” effect of the redistribution of revenue primarily from the institutional user class to the non-residential user class. This effect is the result of including tax exempt properties as full contributors to the total costs of both View Royal and CRD sewer systems.

The average residential homeowner with property valued at $727,000 consuming 77 m³ of water paid $402 in 2019 in taxes and fees relating to sewer services. If Scenario A was implemented, this hypothetical homeowner would pay $337 for that same service, a reduction of $65. This calculation is sensitive to both property assessment values and water consumption, such that homeowners with a high assessed value and low consumption will experience a greater reduction, while homeowners with a low assessed value and high consumption may experience an increase. The estimated effect to residential, non-residential and institutional property owners is detailed in Attachment A.

Scenario B: A flat fee to generate 15% of total revenue plus a volumetric fee to generate 85% of total revenue based on winter water consumption.

Based on the same total cost and consumption factors as for Scenario A, a flat fee sufficient to generate 15% of total revenue calculates to $72 per residential unit or account. The volumetric rate sufficient to generate 85% of total revenue is $3.73 per cubic metre. Note that this scenario eliminates the concept of an SFE factor, since 85% of the total revenue is based on consumption and the effect of the SFE factors somewhat duplicates the effect of a volumetric charge. The flat fee calculation used for this scenario is similar to that used for parcel taxes. Table 4 describes the distribution of revenue and consumption for Scenario B.

Table 4 Scenario B comparison to current method

Once again, we see in Scenario B the effect of the “zero-sum game” as revenue is redistributed compared to the current method. However, the effect of the flat fee increases the shift to the residential class. The non-residential class benefits from both this shift and contribution from the institutional class as it fully participates in the total costs for both View Royal and CRD sewer systems.

The average residential homeowner with property valued at $727,000 consuming 77 m³ of water paid $402 in 2019 in taxes and fees relating to sewer services. If Scenario B was implemented, this hypothetical homeowner would pay $359 for that same service, a reduction of $43. Similar to Scenario A, this calculation is sensitive to both property assessment values and water consumption, such that homeowners with a high assessed value and low consumption will experience a greater reduction, while homeowners with a low assessed value and high consumption may experience an increase. The application of the flat fee somewhat moderates this effect. The estimated effect to residential, non-residential and institutional property owners is detailed in Attachment B.

Conclusion

While comparing the effect of different scenarios to the current method of cost recovery for sewer utility costs is difficult, we can summarize the effect by evaluating the results based on effective rate per cubic metre. This is calculated in each instance by looking at the total amount charged and dividing that total by the related cubic metre consumption. This provides an “apples to apples” basis for comparison.

The current method of cost recovery includes a sewer tax, which results in a highly variable effective rate per cubic metre based on sampled data provided in Attachments A and B, as summarized in the Current Method column of Table 5 below. Scenario A, since it is based purely on consumption, results in an effective rate equivalent to the calculated rate. Scenario B results in greater variability than Scenario A, because the sewer utility charge comprises a flat rate component. However, the variability in the effective cubic metre rate is much less than it is under the current method, because the flat rate is based on unit count, rather than assessed values.

Table 5 Comparison of effective cubic metre rates

When we look at other municipalities connected to the CRD wastewater system, we find that the City of Victoria, District of Saanich, District of Oak Bay and the City of Colwood are billing all or most of the CRD sewer requisition on sewer utility bills rather than through a tax levy.

Options

If Council wishes to eliminate the CRD tax and implement a user fee that incorporates the total cost of the sewer utility system, there are several options and choices to consider:

1. Should the rate be based on 100% consumption or should it have both flat and volumetric components?
2. If there is a flat rate component, how should it be structured, and what is the objective? 15% of total revenue or some other amount?
3. Should the components of the sewer utility charge be shown separately on the bill (i.e. separate rates for CRD’s versus View Royal’s systems)?
4. Should the billing cycle be more frequent than annual? Bi-annual? Quarterly?
5. Should the volumetric rate continue to be based on the winter water usage or some other calculation (i.e. actual annual usage, annualized winter usage, discounted annual usage)?
6. Should View Royal offer discounts for early payment or penalties for late payment?

Council may also choose to do nothing at this time; however, there is a limited opportunity to make any change effective for next year. In order to be effective for the 2020 fiscal year, an agreement between View Royal and the CRD would need to be executed early in 2020. This agreement would provide the legal basis for the Regional District to remove the sewer tax requisition under CRD’s Bylaw 2312 and instead invoice View Royal for CRD’s sewer system costs. These costs then would be integrated with View Royal’s sewer utility budget and the revenue requirement would be calculated on the combined costs from both systems. A copy of the proposed agreement is attached as Attachment D.

If Council approves the transition from the tax roll to a user pay approach for charging all sewer costs, staff would develop specific rate structure options and return with implications and comparatives to other jurisdictions.

RECOMMENDATION:

THAT the Committee recommend to Council that the Town enter into an agreement with the Capital Regional District to facilitate the recovery of 100% of the amount of annual operating costs, capital contributions and debt costs under Capital Regional District’s Bylaw No. 2312 Liquid Waste Management Core Area and Western Communities Service Establishment Bylaw No. 1, 1995 effective for the 2020 fiscal period, permitting the Town to impose a fee or charge for these costs.

SUBMITTED BY: D. Christenson, Director of Finance

REVIEWED BY: K. Anema, Chief Administrative Officer

Attachment A: Scenario A Details Attachment B: Scenario B Details Attachment C: Schedule D of Sanitary Sewer Rates and Regulations Bylaw No. 397, 2000 Attachment D: Proposed Service Fee Agreement