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Monday, July 26, 2010

London's advantage: fairness or subsidies?

When I ran for Board of Control in 2006, one of the issues that I considered to be an important part of my platform was fair charges, taxes and user fees. I had already become aware of the disparity in water rates between the residential ratepayer and the industrial, commercial and institutional (ICI) sectors through attending council meetings at city hall, and I was anxious to take part in redressing that unfairness.

I got my chance to be involved very early on. Staff had already been examining the issue and was undertaking consultations with the various stakeholders. In May of 2008, Board of Control and Council adopted the following principles for allocating the water and sewer rates among the various parties:
• Fair and equitable
• Promote conservation
• Affordable/sustainable
• Stabilize revenue
• Support economic development
• Be consistent
• Respect history
• Simple to understand/maintain
• Be defensible
• Support job retention and growth

In line with the above principles, staff proceeded to bring forward a recommendation which would have phased in new rates which would have reduced the burden on the residential ratepayer and required the non-residential sector to pay more of the actual costs of water consumption and sewer usage. Despite this recommendation, I was the only one on Board of Control to support this; the remainder voted to defer the issue for a year because of concerns that requiring industry to pay their fair share might result in job losses as the economy was looking iffy. Council followed suit.

The following year, the same thing happened. And this year, it is happening again. The time is “not right”.

There are two themes in this year’s mantra. The first is that requiring industry to gradually start paying for what it uses is seen as resulting in job losses or not attracting new industries to London. Cheap water for business, in this context, is seen as “London’s Advantage”. And yet, there is no evidence to back this up. The industries that are the heaviest water users are not the biggest employers. In fact, most are focussed on improving efficiency by reducing the payroll wherever possible. Similarly, the view that these industries make up for their lower water rates through high tax rates is not supported either as evidenced by the graph below.

The second theme is that by not offering subsidies to the ICI sectors, we are being anti-business. This is nonsense. Business is essential to a healthy economy and a healthy municipality. But business flourishes when consumers have enough money in their pockets to voluntarily purchase their products. Business is not in the business of job creation; it is in the business of ensuring a healthy bottom line. To do that, it will take advantage of any opportunity to reduce its costs, whether they be utility costs or labour costs. Costs that cannot be reduced will be passed on to the consumer in the pricing of the product or service and written off as the cost of doing business. By ensuring that bills are paid and the product price reasonable, businesses thrive.

Residential ratepayers, on the other hand, cannot pass their utility bills to someone else. No one else can be tapped to subsidize them. So whether you are a worker whose wage increases have been frozen or a pensioner on a fixed but inadequate income, you have to keep paying not only your own rate increases but also $4 million of industry and business increases. And it doesn’t matter whether you are filling your swimming pool or watering trees, you pay the full amount and the more you use, the higher the rate.

Staff has made the same recommendation three years in a row. Our staff has no interest in killing jobs or deterring industry from locating here. Staff is simply recommending what we asked them to do: offer a fairer allocation to pay for the services that are essential to all of us, residents and businesses alike.

The implementation would not be for another year. Thereafter it would be phased in over 3 to 5 years, plenty of time for planning ahead. Fully phased in, our rates would still be highly competitive with surrounding municipalities.

Let’s make fairness, not subsidies, London’s Advantage.

Update: The issue was debated earlier this evening. Fairness for the residential ratepayer was put off again. Supporting the deferral were the Mayor, Controllers Gosnell, Polhill and Hume, Councillors Baechler, Branscombe, Bryant, Miller, Hubert, VanMeerbergen, Caranci, Usher, and MacDonald. Opposing deferral were Controller Barber and Councillors Armstrong, Lonc, Orser and Winninger. Councillor Eagle was absent. You can read the Free Press report here.


Evan Harper said...

It is not necessarily true that businesses will always be able to pass increased water costs off to consumers. For example, if Labatt's water costs go way up, and they are forced to raise prices on Labatt beer, consumers would likely reduce their purchases of Labatt beer -- perhaps they will buy another brand of beer instead. This could conceivably result in job losses at Labatt. In economic terms, businesses can only pass on 100% of costs if there is zero price elasticity of demand for their products, which is almost never true.

However, there is another side to the coin here. By raising water rates for businesses, you can afford to lower rates for households. Householders will then have more money to spend on whatever they choose -- which will surely include spending on products and services provided by local businesses.

So, you would expect that this proposed policy change would harm water-intensive businesses like Labatt and Casco -- potentially even harm their employees -- but benefit everyone else. Mainstream economic theory would predict that the welfare gain to everyone else would be larger than the welfare loss to Labatt and Casco and their employees. In other words: you are right, staff is right, and the rest of the Board is wrong.

Ask your colleagues why, in this town, it takes a left-wing social activist and NDP member to stand up for a freer and fairer market in water, while the self-proclaimed economic conservatives stand for cronyism and central economic planning.

PS: I'm going to e-mail this post to Mike Moffat at the popular Canadian economics blog WCI. I'm just some guy who reads economics books, but he's a real economist, and not the kind of guy to be written off as a left-wing advocate. And I bet he'll want to blog about this, and I bet he'll agree with you. Let's gin up some free publicity for our side here! :-)

dougsamu said...

Evidence has never overcome ideology.