THE HALIFAX WATER EXPERIENCE - INTERESTING ANOMALY OR THE FUTURE REVEALED? - THE 2011 NATIONAL ENVIRONMENT, ENERGY AND RESOURCES LAW SUMMIT
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THE 2011 NATIONAL ENVIRONMENT, ENERGY
AND RESOURCES LAW SUMMIT
THE HALIFAX WATER EXPERIENCE - INTERESTING
ANOMALY OR THE FUTURE REVEALED?
John C. MacPherson, Q.C.
McInnes Cooper
PO Box 730
1300-1969 Upper Water Street
HALIFAX NS B3J 2V1INTRODUCTION
The Halifax Regional Water Commission ("HRWC" or "Halifax Water"), is unique among
Canadian utilities in that it provides water, wastewater and stormwater services within an
integrated utility structure which is subject to regulatory oversight of all three services. The
corporate and regulatory history which led to this structure provides useful insights into one
model by which the challenges being faced by water utilities 1 can be addressed.
This paper will initially trace the history of the delivery of water in Halifax, which eventually led to
the HRWC as it exists today, and will then discuss the development of regulatory oversight in
regard to that structure. Finally, the paper will review recent regulatory proceedings involving
HRWC which highlight some of the critical issues facing water utilities and will describe how
those issues were addressed by the regulator in Nova Scotia.
HISTORY OF HALIFAX WATER
As one of Canada's oldest cities, Halifax has a long and colourful history associated with the
supply of potable water to its citizens. The origin of the Halifax Water system was discussed in
an early decision of the Board of Commissioners of Public Utilities ("Board") in 1946:
"History and Description of Water System.
The original water system of the City of Halifax was installed by
the Halifax Water Company, which was incorporated by special
act of the Legislature in the year 1844, with a capital of $15,000.
The water supply was, at the outset, drawn from Chain Lakes
situated about one and one-quarter miles from the head of the
North West Arm. Chain Lakes were connected with Long Lake by
an open canal, through which water was drawn from that lake. In
July 1849, this was replaced by a buried conduit of wood. A dam
was constructed at the south end of Long Lake by which the
surface of the lake was raised 25 feet above its natural level.
Dams were also erected at the east end of the Chain Lakes with
waste weirs, later raised to the same elevation above tide water
as the waste weir in the Long Lake dam, namely 206 feet. From
Chain Lakes a 12" main was laid into the City to the intersection of
Robie Street and Quinpool Road and the water was first turned on
in the year 1848, or 98 years ago." 2
1
In this paper, the terms "water utility" or "water utilities" will be used in reference to municipal utilities which supply
potable water to its customers, regardless of whether they also provide wastewater and stormwater services.
2
In the Matter of the Application of The Public Service Commission for the determining by the Board of
Commissioners of Public Utilities of the Valuation of the Property and Assets of the City of Halifax Water system used
env11_macpherson_paper-2-
It is interesting that the initial water utility was run as a private entity. The Halifax Water
Company was provided its Charter of Incorporation by the provincial legislature on April 17,
1844, and subsequently, as noted, began the supply of water to the City of Halifax in the fall of
1848. 3
The Halifax Water Company operated the water utility until 1861 when a series of catastrophic
fires prompted the City to purchase the utility:
"On January 12, 1861, another great fire destroyed most of
George and Prince Streets, Bedford Row and Cheapside, and
extended into Hollis Street. Twenty-two offices, four houses,
twenty-two stores and the Halifax Library were damaged, but
fortunately no lives were lost. The fire department and insurers
were quick to point out a lack of wintertime water pressure. City
Council could delay no longer. The City obtained the necessary
provincial legislation in 1861 to purchase the Halifax Water
Company. The first attempt to buy all the assets for $110,000 fell
through. The Halifax Water Company then upped its selling price
to $150,000. The City was successful this time. The Halifax
Water Company ceased to exist. A three-man board of
commissioners, headed by Alderman Bell, replaced the company
directors. City Council hoped the board's establishment would get
rid of the "corruption" of the old company, where a few became
rich at the expense of the general public." 4
Since that time, the supply of water to the citizens of Halifax has been provided by a "public"
entity, although the nature of that entity has changed over time. From 1861 to 1894, the water
utility was operated by the Board of Commissioners of Water Supply, a three man Board. In
1894, allegations of patronage and corruption caused the municipal government to transfer
control of the water system to the City Works Department. 5 This situation was to continue until
1944.
During the early 1940s, there were numerous complaints in respect of the condition of the water
system in Halifax. The dire situation of the Halifax Water utility was described in the following
terms in a report delivered to the Canadian Section of the American Waterworks Association in
1945 by the then Manager of the Public Service Commission of Halifax:
and useful in Furnishing, rendering or supplying water in the City of Halifax and Vicinity, February 1, 1946, Journals
and Proceedings of the House of Assembly of the Province of Nova Scotia, 1947, Part II, Appendix 22, page 7.
3
"Downstream, an historical reflection of the Halifax water supply system", Halifax Regional Water Commission,
(1995), pages 13-14.
4
Ibid at page 19.
5
Ibid at page 31.
env11_macpherson_paper-3-
"... The most striking example of conditions at the time was the
Halifax Water Supply System. Operated by the City as one
branch of the City Works Department, it was near the point of
complete collapse. How true this statement is may be seen if we
look at the reprint of a report delivered before the Canadian
Section of the American Waterworks Association in 1945 by
H.W.L. Doane, then Manager of Public Service Commission of
Halifax:
"In 1943 conditions were as follows:
Much of the water system had just about lived its normal
life and was due for replacement. The population had
increased from 70,000 to 130,000 and there were more
ships leaving Halifax than any other port in the world,
except one in England....
The public relations of the water department were bad....
There were only eight men to operate the distribution
system, repair leaks, attend fires and the like. Some of
these men were so worn out and run down that their health
was endangered. How they ever kept the system
operating is a mystery.
Out of some 13,000 customers' meters, nearly 7,000 were
out of order so bills were merely estimated.
In parts of the City, the water available for fire fighting was
inadequate. At the First Baptist Church fire it would hardly
fill a garden hose. At Crane Limited the pumpers sucked
the mains dry. Both of these fires resulted in serious total
losses. The fire underwriters were seriously considering a
jump of possibly 30% in the fire insurance rates.
The situation was brought to a head by the filing of a
complaint by five residents of Spring Garden Road with the
Board. As a result of the evidence brought forth in the
enquiry into the complaint the Board ordered Engineering
Service Company of Halifax to undertake a complete
survey of the situation. The Company in conducting a
survey actually ended by operating the service for over a
year. During this time the Company made frequent reports
to the Board, which co-operated by issuing orders on its
authority, to have the recommendations of the Engineering
Service Company implemented. In January 1945 the City,
acting on the recommendations the Board appointed a
commission, consisting of the mayor, an alderman, three
citizens at large and a civil engineer as manager, to take
over and operate the entire water system. The results
were amazing.
env11_macpherson_paper-4-
In a single year the new Commission, known as the Public
Service Commission, repaired some 15,000 leaks,
collected $340,000 in back water rates, replaced nearly
7,000 meters and increased the supply of water for fire
fighting, so that at one fire in 1945 there were twenty-four
full streams of water in play. While the Board remained in
the background during much of this work the constant
supervision of the task was going on and the new
Commission owed its origin to the initiative of the Board in
forcing the entire situation to be investigated." 6
As will be discuss subsequently in this paper, many water utilities in North America suffer an
increasingly serious "infrastructure deficit". That deficit is especially acute in areas, such as the
City of Halifax, which have some pipes in the ground exceeding a hundred years of age. The
age of this infrastructure, coupled with increasing stringent regulations in regard to water quality
and wastewater discharge, have combined to place water utilities in the position where they will
be required to engage in extensive and expensive infrastructure renewal projects.
In respect of the water utility, this "infrastructure deficit" was described as early as 1947 in a
Board decision as follows:
"Samples of some of the older pipe were submitted at the hearing.
The original 12" pipe which was laid in 1848 from Chain Lakes
and, later moved to Barrington and other streets, was found to be
almost completely graphitized." 7
In that same decision, the Board made the following comments:
"As already pointed out, the Board, on investigation, found the
situation most serious and under date of March 20th, 1943, an
Order was issued by the Board appointing Engineering Service
Company, Consulting Engineers of Halifax, to make a complete
investigation of the system and report to the Board.
The investigation revealed that some thousands of meters were
either not working at all or were registering inaccurately, the
inaccurate readings being almost entirely on the low side; that in
many instances sectionalizing valves were closed, resulting in
blocking the free flow of water in the distribution system; that in
many cases existing distribution mains were too small resulting in
6
William Joseph Dalton, "Public Utility Regulation in Nova Scotia", a Paper Submitted in Partial Fulfilment of the
Requirements for the Degree of Master of Arts, Political Economy, Toronto University, May 1954, Public Archives of
Nova Scotia, at pages 44-46.
7
Supra, note 2, at page 9.
env11_macpherson_paper-5-
restricted flow; that in some areas additional distribution lines were
needed to facilitate the flow; that in many parts of the system
serious leaks existed resulting in a heavy waste of water with
consequent loss in pressure; that there was not sufficient suitable
equipment for testing meters, nor was there sufficient equipment
for checking and locating leaks." 8
These findings prompted the legislature to pass the "Halifax Public Utilities Commission Act" in
1944 creating the Halifax Public Utilities Commission. That Commission was given the power,
among other things, to:
"6. In addition to all powers of the Commission under any
other Act or Law the Commission shall have power-
(a) to purchase, acquire, operate, manage and/or control the
whole or any part of the water works facilities of the City of Halifax
and to assume any part or all of the assets and liabilities
necessary to the carrying out of such purchase, acquisition,
operation, management and control of the system."
This Commission, in its various forms, is the predecessor of the Halifax Regional Water
Commission.
The Legislature subsequently amended the Halifax Public Utilities Commission Act in 1952 to
enable the Public Service Commission to purchase the City's assets and the City was "...
deemed to stand in the same position with respect to the property and assets of the
Commission as if the Commission were a Joint Stock Company, incorporated under the Nova
Scotia Companies Act, 1935, and the City were the owners of all shares therein". 9 This
relationship of City ownership, but no direct control, of the HRWC has continued to the present
with successful results. In a situation which was to be repeated some fifty years later in respect
of the wastewater and stormwater operations of HRM, the sale required the approval of the
Board which was granted in a decision dated January 4, 1952. 10
8
Ibid, page 11.
9
Statutes of Nova Scotia, 1952, Chapter 91, Section 2.
10
In the Matter of the Application of the City of Halifax, a Municipal Corporation, for an Order approving of the sale
and transfer by the City of Halifax to Public Service Commission of Halifax of assets forming part of the public utility
supplying water to the City of Halifax, Journals and Proceedings of the House of Assembly of the Province of Nova
Scotia, 1953, Appendix No. 22, pages 3-5.
env11_macpherson_paper-6-
Subsequent to 1952, the major developments in respect of the City of Halifax water utility
related to the growth of the city itself as various adjoining suburbs were amalgamated into the
city proper, thereby extending the service boundaries of the utility.
The most significant recent change occurred in 1996 with the amalgamation of the Cities of
Halifax and Dartmouth, the Town of Bedford, and the Municipality of the County of Halifax
("Halifax County") into a regional entity known as the "Halifax Regional Municipality" ("HRM").
The water utilities previously operated by the City of Dartmouth, Town of Bedford and Halifax
County were amalgamated into what became the Halifax Regional Water Commission. 11
Halifax Water continues to serve those areas today.
Prior to 2007, the wastewater and stormwater operations of HRM, and its predecessor
municipalities, were operated as municipal services. In 2006, it was becoming apparent that the
wastewater and stormwater services of HRM would require substantial infrastructure
improvements in the coming years. This problem was compounded by more stringent
regulations in respect to wastewater discharge. There was also an ongoing major capital
infrastructure program to improve the water quality in Halifax Harbour, known as the Halifax
Harbour Solutions Project ("HHSP"). This project consisted of three large wastewater treatment
facilities located around Halifax Harbour together with the elimination of a number of private
outfalls which discharged untreated sewage directly into the harbour.
HRM Council, in consultation with Halifax Water, undertook a review which considered all of the
options available to provide the most efficient and effective wastewater and stormwater services
in the municipality. That process culminated with a motion by HRM to have its wastewater and
stormwater services operated by Halifax Water and a coincident motion from Halifax Water to
accept those services.
11
Halifax County supplied water services to the Halifax International Airport and nearby Aerotech Business Park.
The "Airport/Aerotech System" is regulated by the Nova Scotia Utility and Review Board ("NSUARB") as a "stand
alone" system. The regulatory principles and approach adopted by the NSUARB to Halifax Water generally have
also been applied to the Airport/Aerotech System.
env11_macpherson_paper-7-
This process was described in the following terms in the Board decision which approved the
transfer:
"Until 2006, none of the wastewater and stormwater charges
charged by HRM were subject to the jurisdiction of the Board.
In 2006, at the request of HRM and HRWC, the Halifax Regional
Water Commission Act was amended in part as follows:
"Section 28
Any sewer system, either storm or sanitary, or sewage-
treatment facility, owned, operated, managed or controlled
by the Commission is deemed to be a public utility within
the meaning of the Public Utilities Act."
Thus, the Legislature of the Province of Nova Scotia has
determined, as a matter of public policy, that HRWC may
operate a sewer and wastewater system and that such a
system will be subject to Board regulation pursuant to the
Act.
By motion of its Board dated May 24, 2007, HRWC agreed to
assume responsibility for the sewer system and sewage treatment
facilities owned and operated by HRM.
By motion of its Council dated May 29, 2007, HRM agreed to
transfer its sewer system and sewage treatment facilities to
HRWC pursuant to the Transfer Agreement. In its Application
HRWC outlines the following objectives:
12. HRWC makes the above requests in order to
enable HRWC to meet the following objectives:
(a) to provide, through the approval of the existing
pollution control rates being levied by HRM, funding
to meet the operating and non operating costs of
the wastewater and stormwater division of the
Environmental Management Services ("EMS") of
HRM that is being transferred to HRWC so as to
maintain the current level of service to customers
for the remainder of the 2007/2008 fiscal year and
the 2008/2009 fiscal year;
(b) to provide, through the approval of the rate
increases in those rates already approved by HRM
Council ("Council") to be effective October 1, 2007
and October 1, 2008, funding to meet the operating
and debt servicing costs of the Halifax Harbour
Solutions ("HHS") infrastructure and the projected
env11_macpherson_paper-8-
debt servicing costs of the upgrades to the Eastern
Passage treatment facility;
(c) to provide time to analyze and integrate the
wastewater/stormwater operations into the HRWC
utility framework and build a cost base to use as a
test year;
(d) to provide, through the approval of these Schedules
of Rules and Regulations, a framework to govern
the operation of the wastewater/stormwater system
by HRWC. These Schedules of Rules and
Regulations were developed from the HRM By-laws
enacted to regulate the operation of the
wastewater/stormwater system;
(e) to provide time to commission and establish an
operating base for the collection and treatment
infrastructure of the HHS project to establish a test
year for this significant project;
(f) to provide time for the cost of service study that
was mandated by the Board for the water utility to
be completed and to determine the relevance of the
cost of service study for the provision of
wastewater/stormwater service;
(g) to provide the approval of the 2007/2008
wastewater/stormwater capital plan previously
approved by Council and associated funding that
provides for the renewal and extension of
wastewater/stormwater infrastructure in accordance
with the HRM priority rating system which is
included in the Application as Appendix 3;
(h) to provide for the remaining funding commitments
for the construction of the HHS project as detailed
in Schedule E of the Transfer Agreement.
(emphasis added)
[HRWC Application, pp.2-3]" 12
With the passage of the above noted amendment to the Halifax Regional Water Commission
Act, Halifax Water became the first and currently only municipality in Nova Scotia which is
subject to regulatory oversight in regard to the provision of wastewater and stormwater services.
To its knowledge, it is the only such utility in Canada. It is significant that the amendment to the
12
"Request Board Approval - Transfer of the Sewer System and Sewage Treatment Facilities of the Halifax Regional
Municipality to HRWC - W-HRWC-R-07", NSUARB letter decision, July 26, 2007.
env11_macpherson_paper-9-
HRWC Act which resulted in the wastewater and stormwater systems being deemed to be
public utilities was the result of a pro-active request from HRWC for such an amendment.
HRWC, and its owner, HRM, were both of the view that regulatory oversight of the provision of
these services by the NSUARB was in the best interests of the utility over the long term.
As is apparent from the above extract from the Board's decision, the combined utility was faced
with a number of daunting challenges as it transitioned from an unregulated to a regulated
environment. These will be explored in more detail later in this paper.
UTILITY REGULATION IN NOVA SCOTIA
In 1907, the Nova Scotia Legislature passed "an Act to Regulate the Prices of Electric Light and
Electric Energy". 13 This was followed in reasonably short order by "an Act to Establish a Board
of Public Utilities Commissioners". 14 Section 1(b) of that legislation defined a public utility as
follows:
"(b) "Public Utility" means and includes every corporation,
company, person, association of persons, their lessees, trustees,
liquidators or receivers appointed by any court that now or
hereafter owns or may own, operate, manage or control any plant
or equipment for the conveyance of telephone messages or for
the production, transmission, delivery or furnishing of heat, light,
water or power, either directly or indirectly to or for the public."
(emphasis added)
This is the first recorded regulation of water utilities in Nova Scotia. The Act required, in
Section 5, that the rates charged by any public utility, which included the charges for water,
"shall be just and reasonable".
This Act was amended by legislation passed in 1913. 15 The "new" Public Utilities Act also
included the supply of water in the definition of a public utility and contained many principles and
regulatory concepts which would be familiar to those who practice law in this area today.
The first known decision of the Board in respect of the Halifax water utility was issued in 1913
and is reproduced in its entirety below:
13
S.N.S. 1907, c. 40.
14
S.N.S. 1909, c. 1.
15
S.N.S. 1913, c. 1.
env11_macpherson_paper- 10 -
CITY OF HALIFAX
12 c. Per $100.00 of assessment, and
14 c. Per $100.00
$4.00 for first water closet
$2.00 for each additional water closet
5 c. to 15 c. per 1,000 gallons by meter
This regulatory regime continues essentially unchanged to the present day in respect of the
regulation of the water services provided by HRWC and other municipalities in Nova Scotia. 16
Regulatory oversight of the wastewater and stormwater services provided by HRWC did not
occur until almost a hundred years later as a result of the 2006 amendment of the Halifax
Regional Water Commission Act noted previously.
Similar services provided by other municipalities in Nova Scotia continue to be unregulated with
the prices for those services set by municipal councils.
RECENT REGULATORY HISTORY
2006
In 2006, Halifax Water applied for amendments to its schedule of rates and charges in regard to
its water service. The NSUARB decision 17 in respect of that Application is significant because it
was the first time the Board explored the use of cost of service principles commonly applied in
the regulation of electrical and natural gas utilities to determine the rates charged by a water
utility. The Board ordered, at page 58 of its decision:
"8. The Board approves rates for 2006/07 based upon the
revenue requirement, as amended by the Board and the
allocations presented in the Application. The Board approves the
revenue requirements, as amended by the Board's directives
for2007/08, 2008/09 and 2009/10. HRWC is directed to
determine whether a cost of service study that considers the
impact of consumption patterns can be undertaken in a cost
effective manner and file the results of the investigation with
the Board by September 1, 2006. The Board will then determine
if rate design adjustments are required to the approved revenue
requirements for the remaining test years." (emphasis added)
16
The author notes that although the general regulatory framework has remained essentially unchanged, the Board's
decisions have become considerably longer.
17
2006 NSUARB 38.
env11_macpherson_paper- 11 -
On a practical level, this direction from the Board required Halifax Water to obtain equipment to
track the consumption patterns of its customers. The process followed by HRWC was
described in the material filed in support of its 2010 Rate Application.
"The key issue was whether local customer demand characteristic
data was available in enough detail to satisfy the needs of a
rigorous cost of service study (CSS). Local customer demand
characteristics are an important element in the development of
cost-based volumetric multi-block rates.
As a result of the ruling a Feasibility Study1 was carried out. It
found that the HWRC already gathered conventional daily and
peak water system demand performance data using meters
located at supply points and storage reservoirs. It also metered
retail sales and so had periodic customer meter readings and
consumption used for billing purposes.
In addition, HWRC already had advanced consumption monitoring
in place, namely District Metering Areas (DMAs) which provide
local area demand information.
Data from all of these sites is transmitted to a central site by
means of remote telemetry using a fixed SCADA (Supervisory
Control and Data Acquisition) system. The data is stored in a
device referred to as the "Historian". The level of system utilization
data available is unusual and would provide a high level of
demand information for rate calculation purposes.
In order to derive more precise individual customer demand
profiles, the installation of rate-of-flow water meters was
recommended on a selection of individual non-residential
customer water services. It was planned to obtain residential
consumption data from predominantly residential DMAs. A
minimum of one year of monitoring was suggested in order to
cover a full range of seasons. This demand information could then
be used in conjunction with the other water demand data already
collected by HWRC on an ongoing basis to refine an assessment
of whether non- customer demand characteristics were such that
multi-block rates could be considered.
HWRC submitted the Feasibility Study to the Board, which agreed
that an individual customer demand monitoring program should
proceed.
A second report dealing with the selection of SCADA monitoring
candidates2 was submitted in early 2007. It recommended 20
individual customer locations for the installation of SCADA
equipped water meters. This equipment has the capability of
transmitting the customer demand information to a central data
gathering facility operated by HRWC.
env11_macpherson_paper- 12 -
The installation of the SCADA equipment was time consuming,
with all meters fully equipped and functional in early 2008. A full
year monitoring period was complete at the end of February 2009.
A full Cost of Service Study has been assigned to G. A. Isenor
Consultants Ltd and was scheduled to be carried out mid 2009.
This Demand Analysis is intended to be used as input to that
study." 18
2008 Decision
In October, 2007, following the transfer from the Halifax Regional Municipality to HRWC of the
wastewater and stormwater services of HRM, Halifax Water applied for approval of the rates to
be charged for those wastewater and stormwater services. The application was intended, in the
short term, to maintain the status quo during the transition of these services to Halifax Water so
that the utility could obtain additional operational experience prior to seeking rates based on
regulatory principles. A significant unknown was the costs which would be incurred to operate
the new HHSP wastewater treatment plants.
The Board, in its 2008 decision, ordered, at page 29:
"52 Accordingly, the Board orders that HRWC file a full COSS,
and if required, a rate application no later than November 1, 2008,
for the wastewater and stormwater components of its operation."
Subsequently, the Board granted Halifax Water extensions in respect of the filing of the COSS
for both water and wastewater, so that HRWC could put in the place the monitoring equipment
necessary to undertake this study, as described above.
These various decisions set the stage for the first "omnibus" Application by Halifax Water for
approval of a schedule of rates and charges for its water, wastewater and stormwater services.
2010 Decision
The decision of the Board is of significance because it addressed, in a regulatory context,
issues currently being faced by many water utilities.
18
R.M. Loudon Ltd., "Cost of Service Demand Analysis Report", October, 2009, HRWC Submission in Support of
Rate Application, March, 2010, Appendix 2, pages 10-11.
env11_macpherson_paper- 13 -
As was stated by the Board at page 7 of its decision:
"[9] With the transfer of the wastewater and stormwater
operations from the Halifax Regional Municipality ("HRM") in 2007,
HRWC became the first regulated water, wastewater and
stormwater utility in Canada. The current rate structure for water
is based on a traditional utility model. In the case of wastewater
and stormwater, HRWC did not operate in a regulated
environment, and therefore, the rate structure needs to be
revised." [emphasis added]
The transformation from an unregulated environment to the application of regulatory principles
to the wastewater and stormwater services provided by HRWC has not been without its
difficulties, as is reflected in the ultimate decision of the Board in respect of this Application.
Context of Application
The context in which this Application was made was addressed in the material filed by HRWC in
support of its Application:
"The existing wastewater/stormwater rate structure generally
provided sufficient funding for the direct operating costs of the
wastewater and stormwater systems including engineering costs.
The rate structure however, did not provide for administrative,
human resource, information services and customer service costs
as these were previously covered by the tax base or covered by
the water rate. In addition there was no provision for
depreciation of the infrastructure to provide for its eventual
replacement which was not common in municipal accounting
but an essential component of regulated utility rate
structures. The wastewater/stormwater collection system
transferred to HRWC is facing a significant infrastructure deficit as
this system is one of the oldest in Canada and much of it is
reaching the end of its useful life and is in need of replacement.
This, as well as a changing regulatory environment will result in
additional capital requirements and the current rate structure does
not provide any funding for capital. A conservative estimate of
the annual collection system infrastructure replacement and
rehabilitation needs in addition to regulatory compliance
issues is in excess of $40 million annually. With current
revenue of $45 million, HRWC and its customers are facing a
daunting challenge.
While the model established for the HHS project provided for
operating cost funding, the model was developed prior to the start
env11_macpherson_paper- 14 -
of the project and the assumptions used have proved to be
understated
1) The model provided for an annual increase in metered
consumption of 1% annually based on a projected
increase in customer base and stable consumption
patterns. The actual change in metered consumption
has been a decrease in total consumption in excess of
1% annually through conservation despite an annual
increase in customer base. As the existing rate structure
was all consumption based this resulted in less revenue
than projected during the construction phase and now for
operations upon the completion of construction.
2) The operating costs for the HHS components are projected
to be higher than that projected in the model. The increase
in world oil prices and their relation to energy and petrol-
chemical costs have resulted in cost increases that are
higher that that projected in the model. In addition, the
amount of chemical usage has proven to be greater than
projected and the staffing requirements of the HHS plants
are greater than that projected in the model. The decision
to staff the Halifax plant on a 24/7 basis to manage risk
decision has contributed to projected increased operating
costs over that predicted in the model.
Although the transition of the rate structure for wastewater and
stormwater will result in a fairer and more equitable rate structure,
it will not provide sufficient operating and capital funding to meet
the needs of the utility on a go forward basis. In that regard
HRWC believes that it is appropriate to transition the wastewater
rate structure as soon as possible. In accordance with the COSS
HRWC has separated the wastewater and stormwater costs and
proposed a separate rate structure for each service based on the
cost of providing that service. The stormwater rate structure is
proposed as an interim measure in accordance with the
recommendations of the COSS until such time as a structure
can be implemented based on impervious and semi-
impervious area of service lots and structural changes can be
made to the customer service and billing software to
accommodate this structure.
HRWC is facing significant capital requirements with its
operation as a water, wastewater and stormwater utility both
from aging infrastructure, as well as the challenge of meeting
current and future regulatory requirements. This is particularly
significant in the wastewater and stormwater collection system
which is old and is reaching the end of its useful life. There has
been little or no replacement of this infrastructure for the past
number of years and no depreciation in the rate structure to
provide a reserve to start this process. Although the water
env11_macpherson_paper- 15 -
distribution system is also facing an infrastructure deficit the
degree is significantly less than the wastewater/stormwater
system as there has been an ongoing replacement and
rehabilitation program. The program however needs to be
expanded from its current level. Depreciation of water
infrastructure has provided the core funding for this program and
depreciation of wastewater and stormwater infrastructure is
phased into in the proposed rate structure to recognize the use of
the asset over time as well as provide a core funding component
for its replacement and rehabilitation." 19 (emphasis added)
This extract from HRWC Application highlights some of the challenges faced by the utility with
all three of its services. In addition to the previously mentioned need for infrastructure renewal
and higher levels of wastewater treatment to meet new regulatory standards, there was static
growth in the revenue generated by the water portion of the operations. While the overall
number of customers was growing, total consumption was decreasing as customers became
better stewards of the water resource. This trend places that portion of the utilities revenue
based solely on volumetric charges at risk. This, in turn, led to vigorous debates as to the
appropriate rate design and what portion of revenues should legitimately be generated from
fixed customers charges as opposed to consumption charges. Not surprisingly, there were
serious disagreements between the various rate classes in respect of these issues at this
hearing.
Customer Charges
Halifax Water was not required to seek substantial increases in the rates charged for its water
service in this Application. In that regard, the Board concluded at page 29:
"[71] Accordingly the Board finds that the present rates, in total,
for water service, for the 15 month test period, are sufficient. The
Board does not approve changes to water rates based upon
change in revenue requirements." 20
The situation in respect of wastewater and stormwater was significantly different. Due to the
significant infrastructure deficit facing the wastewater service, a substantial increase in rates, in
the area of 40%, was sought in this Application. An increase of this magnitude was also
19
HRWC Submission in Support of Rate Application, March 2010, at pages 8-9.
20
2010 NSUARB 244.
env11_macpherson_paper- 16 -
required because the previous method of setting rates for this services, through municipal
Council, was divorced from the cost of providing the service.
Following extensive consideration of a number of issues, the Board concluded on page 95:
"291. Based upon the Board's directives in the revised test
period, the rate increase for an average residential customer, for
its supply of water, wastewater and stormwater services is
approximately 27% ..." 21
This conclusion is of interest because it was based on a thorough and rigorous "cost of service"
analysis undertaken by the Board. Given the Board's finding that a rate increase of 27% was
appropriate in all the circumstances of this Application, one could argue that the existing
wastewater and stormwater rates were substantially less than the cost of providing these
services. The requirement for funds to upgrade and renew the current wastewater
infrastructure, which was a significant "driver" of this rate increase, also impacts the HRWC debt
policy, as will be discussed below.
Cost of Service
There was significant debate as to the appropriate methodology to be utilized in determining the
cost of service for HRWC. Halifax Water took the position that the models traditionally utilized
by water utilities of North America were appropriate for use in this instance. Various intervenors
advanced the argument that the cost of service methodology used in electricity and natural gas
regulation was a more appropriate model to be applied to Halifax Water. 22
In the end result, the Board determined that the cost of service methodology and rate design
questions were best dealt with in a "stand alone" hearing divorced from the actual rate
increases themselves.
"152 In its electricity mandate the Board has found it useful to
divorce cost of service from a rate proceeding and have a stand-
alone cost of service hearing. In the Board's judgment that should
21
Ibid.
22
This Application attracted considerably more interest, in the form of formal intervenors, than any previous HRWC
application. This was a result of the substantial increases in rates which the utility was seeking. This is a trend which
is likely to continue wherever the cost of water is regulated in a public utility structure which imposes a "cost of
service" model on the determination of the price of the commodity.
env11_macpherson_paper- 17 -
happen with respect to HRWC. Ideally such a proceeding would
be concluded prior to the next rate case. 23
This proceeding will occur later in 2011.
Debt Policy
Halifax Water, when it was a "stand alone" water utility, had traditionally endeavoured, to the
greatest extent possible, to utilize a "pay as you go" or "capital out of rates" approach to
"regular" infrastructure renewal. Larger "one off" projects such as major water treatment or
wastewater treatment facilities would be financed on the basis of long term debt. This produced
a relatively modest debt to equity ratio.
In its Application, HRWC described its debt policy as follows:
"In addition to the replacement and rehabilitation of aging
wastewater infrastructure, investment must be made for other
reasons. There are upgrades required to the eastern Passage
WTP and there will have to be upgrades and improvements to
other treatment facilities to comply with changing regulations or to
expand capacity or upgrade treatment. To manage its capital
funding, HRWC has developed a debt policy to provide funding for
its capital needs that is ongoing, sustainable, provide sufficient
debt capacity when needed and avoid rate shock. The
components of the policy are as follows.
Long term debt should not be issued for a term longer than the
useful life of the asset being funded.
There is a cap placed on the amount of long term debt based on a
30/70 ratio of debt to equity.
The cap is divided between large capital projects such as
treatment plants, transmission and trunk mains that tend to be
infrequent in nature, and ongoing capital renewal of water
distribution and sewer collection infrastructure that require capital
expenditures on an annual and sustained basis. A sub limit has
been established for each group and that group cannot access
any unused capacity from the other. For the 2010/11 to 2011/12
Business Plan the overall debt cap is recommended to be
$312,000,000 with $200,000,000 allocated to large projects and
$112,000,000 allocated to ongoing infrastructure maintenance.
23
Supra, note 20, at page 54.
env11_macpherson_paper- 18 -
The policy contains a second cap based on debt servicing costs
not to exceed 35% of operating revenue for each of the three
services provided (water, wastewater and stormwater)." 24
There was a substantial debate during the course of the 2010 hearing as the appropriateness of
this methodology, the optimal ratio of debt to equity, and other related issues. This question
was ultimately resolved by the Board directing that Halifax Water develop an Integrated
Resource Plan together with a "long term debt policy".
In respect of an Integrated Resource Plan, the Board stated:
"[253] Mr. Goldstein recommended that HRWC should lead the
IRP process in collaboration with Board Staff and consultants, with
input from stakeholders.
[254] This is similar to the manner in which an IRP was
undertaken by NSPI. In fact, Mr. Goldstein is familiar with that
process and recommended the NSPI approach for HRWC.
[255] HRWC agreed with Mr. Goldstein that an IRP process
should be undertaken. However, HRWC submitted that the
commencement of the IRP should be deferred until the final
version of the CCME regulations is available.
[256] Mr. Goldstein noted that uncertainties are common in most
planning exercises and went on to say, "They do not, however,
negate the need or usefulness of doing long term planning. In fact,
long term planning helps clarify what the key uncertainties are and
explore the potential impacts of alternative plans vis-à-vis the
uncertainties". (Exhibit H-11, p. 22)
Findings
[257] The Board is of the view that HRWC is in immediate need
of a rigorous IRP process. The Board does not agree that such a
process needs to await final regulations associated with the
CCME strategy.
[258] The Board intends to engage the services of Mr. Goldstein
to act, along with Board Staff, in overseeing the preparation of the
IRP. That process is to begin forthwith." 25
24
HRWC Rate Application, March 25, 2010, at page 9 and 10.
25
Supra, note 20, at page 86.
env11_macpherson_paper- 19 -
In respect of HRWC's debt policy, the NSUARB found as follows:
"Findings
[269] The Board is not prepared to approve HRWC's debt policy.
The Board does not accept that the 30/70 debt to equity ratio is an
efficient one. The Board agrees with Mr. Drazen that the question
to be answered is "what overall financing is least expensive or
most efficient?"
...
[270] Mr. Drazen indicated that the range of splits for typical
utilities range from 65/35 debt to equity to 50/50 debt to equity. To
test this he produced, in his evidence, a "cash needs" model to
determine the effect of a debt policy on rate increases.
[271] The Board approved capital structure for NSPI (an investor
owned utility) is a 60/40 debt to equity ratio.
[272] It is clear that if this Utility is required to raise funds
exceeding $1 billion over the course of the next 20 to 30 years, it
needs a comprehensive debt policy with an efficient capital
structure. The Board orders HRWC to undertake a complete study
which examines an efficient capital structure, policies of other
utilities, its longer term capital needs, and options which would
result in an efficient funding mechanism which is fair to
present and future ratepayers. The terms of the reference for
the study and the timeline are to be submitted to the Board within
60 days of the Compliance Order for approval by the Board.
[273] In the meantime, for future ratemaking purposes, until the
study is completed and approved, the Board will assume a debt to
equity ratio of 50/50." 26 (emphasis added)
As noted in the Board's decision, one of the difficult issues which will be addressed during this
process is the development of a debt policy which does not create inter-generational inequities.
There will be ongoing Board oversight of both of these processes together with the possibility of
further public input in that regard. The final decisions in respect of HRWC's debt policy will have
significant implications for the magnitude of rate increases which may be required both in the
short and long term.
26
Ibid at pages 90-91.
env11_macpherson_paper- 20 -
Stormwater Service
The appropriate manner in which to charge for the provision of stormwater services is highly
contentious. The first hearing in Nova Scotia to deal with this question was the 2008 decision in
regard to the Airport/Aerotech System. In that proceeding, the Board approved, on an interim
basis, a stormwater charge based on the "impermeable" area of the property in question.
The Board addressed this issue at pages 46-47:
"5.2.1.1 Findings
[136] The Board notes that this is the first application for
approval of stormwater rates by a utility. It appears that HRWC
has reviewed the methodologies used in other jurisdictions and
chosen a methodology which it believes best satisfies the criteria
of equity, feasibility, simplicity, sufficiency in generating required
revenue and ability to segregate costs between the wastewater
and stormwater system.
[137] The Board agrees that the chosen methodology best
satisfies the above noted criteria. Basing the calculation on
equivalent impervious area, which creates runoff, provides a
better relationship between cost causation and rate charged,
than a charge based upon the volume of water consumed,
which is currently the case with the wastewater/stormwater
charge.
[138] Based upon the information provided, the Board accepts
the methodology used in the determination of stormwater rates in
this case. The Board understands that as the Utility gains
experience in operating the system, it may propose changes in its
methodology to calculate stormwater rates in the future. The
Board again notes that this is the first rate study filed by a utility for
approval of stormwater rates and the Board's decision should not
be used for future applications which will be reviewed on a case
by case basis." 27 (emphasis added)
During the 2010 Application, various intervenors advanced proposals for exemptions from this
charge. In the end result, no final decision was reached concerning this issue. The appropriate
calculation of a stormwater charge will be one of the issues addressed in HRWC's next rate
application.
27
HRWC Rate Application, Airport/Aerotech System, 2008 NSUARB 149.
env11_macpherson_paper- 21 - Policy Considerations Halifax Water is a highly regulated integrated water, wastewater and stormwater utility. That regulation has, to this point, served the utility well in its water experience. Emerging from the dire situation previously described in 1945, Halifax Water has consistently striven to become "world class" in the provision of its water service. It is engaged in a continual process of infrastructure renewal and has been successful in maintaining a reasonably stable rate structure. With its recent assumption of responsibility for wastewater and stormwater, Halifax Water was faced with the situation of "déjà vue all over again". It has become the operator of a system with a chronic infrastructure deficit. The rates which had previously been set through the municipal government structure were inadequate to provide the funds necessary for the infrastructure renewal which the system requires. The municipal accounting policy had not made an allowance for depreciation which could provide a source of funding for infrastructure renewal. In addition, the Canadian Council of Ministers of the Environment are in the process of developing new guidelines for wastewater discharge in Canada. There will be significant costs implications for all municipalities to meet those new standards. Within that context, while the vigorous oversight of a public utilities board brings with it a certain amount of "regulatory burden", it also imposes discipline on a utility in respect of both cost causation and the rates which it charges. This has the positive public policy outcome of producing rates for the provision of a commodity and service which closely align with to the costs incurred by the utility to provide the service. The Halifax Water situation in respect of all three services, but in particular the wastewater and stormwater, is perhaps unique in Canada at this point. While not without its early "growing pains", it does appear that a regulatory regime for wastewater and stormwater, similar to that which has long been placed in Nova Scotia for water, may serve well the interests of the utility, its customers, and the greater public. env11_macpherson_paper
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