Government of Ontario
Ministry of Finance
Ontario SuperBuild Corporation

Long Term Water and Sewer Infrastructure Investm...
Ontario SuperBuild Corporation                                                      Analysis of Asset Management, Accounti...
Ontario SuperBuild Corporation                     Analysis of Asset Management, Accounting,
Long Term Water and Wastewate...
Ontario SuperBuild Corporation                    Analysis of Asset Management, Accounting,
Long Term Water and Wastewater...
Ontario SuperBuild Corporation                    Analysis of Asset Management, Accounting,
Long Term Water and Wastewater...
Ontario SuperBuild Corporation                     Analysis of Asset Management, Accounting,
Long Term Water and Wastewate...
Ontario SuperBuild Corporation                     Analysis of Asset Management, Accounting,
Long Term Water and Wastewate...
Ontario SuperBuild Corporation                      Analysis of Asset Management, Accounting,
Long Term Water and Wastewat...
Ontario SuperBuild Corporation                     Analysis of Asset Management, Accounting,
Long Term Water and Wastewate...
Ontario SuperBuild Corporation                    Analysis of Asset Management, Accounting,
Long Term Water and Wastewater...
Ontario SuperBuild Corporation                        Analysis of Asset Management, Accounting,
Long Term Water and Wastew...
Ontario SuperBuild Corporation                     Analysis of Asset Management, Accounting,
Long Term Water and Wastewate...
Ontario SuperBuild Corporation                    Analysis of Asset Management, Accounting,
Long Term Water and Wastewater...
Ontario SuperBuild Corporation                      Analysis of Asset Management, Accounting,
Long Term Water and Wastewat...
Ontario SuperBuild Corporation                      Analysis of Asset Management, Accounting,
Long Term Water and Wastewat...
Ontario SuperBuild Corporation                       Analysis of Asset Management, Accounting,
Long Term Water and Wastewa...
Ontario SuperBuild Corporation                       Analysis of Asset Management, Accounting,
Long Term Water and Wastewa...
Ontario SuperBuild Corporation                       Analysis of Asset Management, Accounting,
Long Term Water and Wastewa...
Ontario SuperBuild Corporation                                  Analysis of Asset Management, Accounting,
Long Term Water ...
Ontario SuperBuild Corporation                             Analysis of Asset Management, Accounting,
Long Term Water and W...
Ontario SuperBuild Corporation                             Analysis of Asset Management, Accounting,
Long Term Water and W...
Ontario SuperBuild Corporation                                             Analysis of Asset Management, Accounting,
Long ...
Ontario SuperBuild Corporation                                             Analysis of Asset Management, Accounting,
Long ...
Ontario SuperBuild Corporation                             Analysis of Asset Management, Accounting,
Long Term Water and W...
Ontario SuperBuild Corporation                   Analysis of Asset Management, Accounting,
Long Term Water and Wastewater ...
Ontario SuperBuild Corporation                        Analysis of Asset Management, Accounting,
Long Term Water and Wastew...
Ontario SuperBuild Corporation                        Analysis of Asset Management, Accounting,
Long Term Water and Wastew...
Ontario SuperBuild Corporation                    Analysis of Asset Management, Accounting,
Long Term Water and Wastewater...
Ontario SuperBuild Corporation                     Analysis of Asset Management, Accounting,
Long Term Water and Wastewate...
Ontario SuperBuild Corporation                        Analysis of Asset Management, Accounting,
Long Term Water and Wastew...
Ontario SuperBuild Corporation                              Analysis of Asset Management, Accounting,
Long Term Water and ...
Ontario SuperBuild Corporation                                 Analysis of Asset Management, Accounting,
Long Term Water a...
Ontario SuperBuild Corporation                             Analysis of Asset Management, Accounting,
Long Term Water and W...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Analysis of Asset Management, Accounting, Financing and ...
Upcoming SlideShare
Loading in...5
×

Analysis of Asset Management, Accounting, Financing and ...

808

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
808
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
31
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Analysis of Asset Management, Accounting, Financing and ...

  1. 1. Government of Ontario Ministry of Finance Ontario SuperBuild Corporation Long Term Water and Sewer Infrastructure Investment and Financing Strategy Analysis of Asset Management, Accounting, Financing and Pricing Practices for Municipal Water and Wastewater Systems in Ontario June 3, 2003
  2. 2. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices Table of Contents Executive Summary..............................................................................................................................3 1 Background...................................................................................................................................16 1.1 Terms of Reference..................................................................................................................... 16 1.2 Scope of Work............................................................................................................................. 16 1.3 Limitations and Qualifications...................................................................................................... 17 1.4 Structure of the Report ................................................................................................................ 18 2 Survey Responses .......................................................................................................................19 2.1 Overview of Survey Responses .................................................................................................. 19 2.2 Geographic Region ..................................................................................................................... 20 2.3 Size of Municipality...................................................................................................................... 21 2.4 Size of Municipal Water System.................................................................................................. 21 2.5 Water Source .............................................................................................................................. 22 2.6 Correlation Between Municipal Classifications ............................................................................ 23 3 Asset Management Practices......................................................................................................26 3.1 Background ................................................................................................................................. 26 3.2 Summary of Findings .................................................................................................................. 27 3.3 Summary Analysis....................................................................................................................... 30 3.3.1 Level of information municipalities currently have available regarding water and wastewater asset condition and performance ............................................................................................... 30 3.3.2 Municipal practices relating to MRO activities ............................................................................. 35 3.3.3 Impact of current asset management practices on system investment decisions ....................... 37 4 Accounting Practices...................................................................................................................39 4.1 Background ................................................................................................................................. 39 4.2 Summary of Findings .................................................................................................................. 40 4.3 Summary Analysis....................................................................................................................... 43 4.3.1 Extent to which current municipal asset management and accounting systems can provide information about the “full cost” of water and wastewater services ............................................. 43 4.3.2 Current definitions of operating and capital costs used by municipalities for water and wastewater services .................................................................................................................... 45 5 Financing Practices .....................................................................................................................51 5.1 Background ................................................................................................................................. 51 5.2 Summary of Findings .................................................................................................................. 52 5.3 Summary Analysis....................................................................................................................... 56 5.3.1 Revenue sources currently used to finance operating and capital expenditures for water and wastewater systems .................................................................................................................... 57 5.3.2 Extent to which municipalities may be cross-subsidizing other non-water and wastewater activities and vice versa.............................................................................................................. 65 6 Pricing Practices ..........................................................................................................................68 6.1 Background ................................................................................................................................. 68 6.2 Summary of Findings .................................................................................................................. 69 6.3 Summary Analysis....................................................................................................................... 72 6.3.1 Current rate structure practices for water operations .................................................................. 72 6.3.2 Current rate structure practices for wastewater operations ......................................................... 74 6.3.3 Availability of current water consumption and revenue data........................................................ 76 Appendix A – Data Collection Process.............................................................................................78 Appendix B – Total Municipalities Sent Survey, By Geographic Region .....................................83 Appendix C – Total Municipalities Sent Survey, By Population Grouping...................................87 PwC Page 2
  3. 3. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices Executive Summary Background PricewaterhouseCoopers LLP (“PwC”) was retained by Ontario SuperBuild Corporation (“SuperBuild”) to study the current asset management, accounting, financing and pricing practices for all municipal water and wastewater systems in the Province of Ontario (the “Province”). The objectives of this study were to: • Collect information on current practices for all municipal water and wastewater systems in the Province through a comprehensive survey; • Develop a database (the “Ontario Municipal Water and Wastewater Database” or “Database”) to act as a repository for all information gathered through the survey process; and • Analyze and summarize the key findings with respect to current asset management, accounting, financing and pricing practices in relation to water and wastewater infrastructure and operations in Ontario. The Ontario Municipal Water and Wastewater Database, and the information contained therein, has been used as the primary source of information for the purposes of our analysis in this report. However, the information contained in the Database does not represent a complete and accurate census of all municipal water and wastewater systems in Ontario. The final survey response rate was 62%, representing 72% of the total population of municipalities responsible for such systems. In addition, while the information contained in the Database has undergone a rigorous quality inspection, we have not undertaken an independent audit or verification of any information provided to us through the survey responses or other information sources. Furthermore, our quality inspection of the survey responses received identified a large amount of missing or inconsistent data which we were not able to resolve within the scope of this study, thus impacting the nature and extent of our analysis. As a result, the analysis derived from the information contained in the Database, while meaningful, does not necessarily represent a true statistical representation. Accordingly, attempts to extrapolate the survey data across the broader population of Ontario municipalities should be made with caution. Survey Responses The survey was originally sent to all municipalities that were identified as having responsibility for the operation of water and/or wastewater systems. In total, 301 out of the total 448 municipalities in Ontario satisfied these criteria, representing 11.0 million people or 97% of Ontario’s total population. PwC Page 3
  4. 4. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices The final survey response rate totalled 187 municipalities, for a 62% response rate. These responding municipalities represent a population of 7.9 million or 72% of the total population of municipalities that received the survey. In analyzing the survey responses, municipalities were classified on the basis of four key characteristics: • Geographic region; • Municipal population size; • Municipal water system size; and • Water source. The purpose of these classifications was to confirm the extent to which the survey responses received provided a representative cross-section for each of these groupings, and to assist with comparing and identifying any trends in various practices within different categories. Based on our analysis, the survey responses received provided a representative cross-section for each of the four groupings. Municipal population size is a key factor influencing regional and municipal water system size characteristics. As a result, our findings regarding municipal asset management, accounting, financing and pricing practices related to water and wastewater systems in respect of municipal population size can be broadly applied to regional and municipal water system size characteristics. For example, our findings regarding larger municipalities can broadly be applied to the Greater Toronto Area and Golden Horseshoe regions, and similarly, to water systems with flow rates over 5,000 cubic metres per day. Likewise, findings regarding smaller municipalities can be broadly applied to the Eastern, Central Ontario, South Western and North regions (with the exception of the few large municipalities within those regions), and to water systems with smaller flow rates. Municipal water source tends to have little correlation with municipal population size characteristics, but rather, is based on characteristics unique to each municipality. Our review of survey responses regarding municipal practices identified no specific or meaningful trends based on water source. Given the above, our analysis of asset management, accounting, financing and pricing practices that follows is focused on the number of responding municipalities and their municipal population size. PwC Page 4
  5. 5. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices Asset Management Practices Asset management is a critical element of managing water and wastewater operations given the highly capital-intensive nature of water and wastewater services. The primary objectives behind asset management systems include: • Optimizing the life cycle value of the physical assets by gaining a thorough understanding of the condition, performance and risk associated with specific assets so that informed decisions can be made on when to repair or replace an asset; and • Providing key inputs into understanding the financing or investment requirements to support the sustainable operation of the assets (i.e., what investment is needed, when is it required, and how will it be financed), including the pricing of services. While asset management is a critical aspect of water and wastewater operations, it also presents numerous challenges: • Most water and wastewater assets are underground. As a result, it is often difficult to identify the assets and assess their condition since most are buried. Furthermore, the repair, upgrade and replacement of underground assets can be expensive; • Water and wastewater systems often service small communities who may not have sufficient expertise and/or resources available to effectively manage the assets; and • The health and safety issues regarding the delivery of water and wastewater services make effective asset management paramount. Summary of Findings (i) Level of information municipalities currently have available regarding water and wastewater asset condition and performance The survey responses indicate that the level of information municipalities currently have available with respect to the condition and performance of their water and wastewater assets ranges widely. This implies that there is a wide range in the ability of municipalities to effectively determine the timing of maintenance work and/or the replacement of assets to ensure optimal performance of water and wastewater systems, and to identify and plan for the timing and amount of future investment needs. For instance, while only 33% of all responding municipalities (representing 84% of the responding population base) report using computer-based management information systems (“MIS”) as an asset management tool, roughly 52% of all responding municipalities do not either perform asset inspections or record information relating to the condition and performance of their water and wastewater assets. PwC Page 5
  6. 6. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices Larger municipalities (those over 50,000 in population) indicated having a higher level of current information on their water and wastewater asset condition and performance, and that they consider a greater level of system reliability factors, than smaller municipalities. (ii) Municipal practices relating to maintenance, repair and overhaul (“MRO”) activities The key factors that municipalities use in determining their MRO budgets include the condition of the assets, the age of the assets, and the amount expended on MRO activities in prior years. Larger municipalities consider these (and other) factors to determine their MRO budgets to a greater degree than smaller municipalities, thereby suggesting that larger municipalities have a higher level of current information to make more informed decisions regarding their MRO budgets. The range of normalized MRO costs ($/m3 of water/wastewater treated) varies significantly across municipalities. Roughly half of the responding municipalities indicated MRO costs ranging between $0.10 and $0.50 per cubic metre of water and wastewater treated. However, small municipalities (those with populations less than 5,000) indicated that they spend less per cubic meter on water MRO costs, on average, compared to municipalities with populations greater than 5,000. This implies that water MRO expenditures for small municipalities may not be sufficient relative to larger municipalities, and that there may be a correlation between the current level of information on asset condition and performance available to small municipalities relative to larger municipalities and their respective water MRO expenditures. (iii) Impact of current asset management practices on system investment decisions Based upon the municipal survey responses, the single most important decision criteria in making asset investment decisions is the impact the asset investment would have on system reliability. Impact on service quality, lowest life cycle cost and lowest purchase cost were also identified as the single most important decision criteria, but to a lesser degree. While no responding municipalities greater than 50,000 in population identified overriding budget considerations as the single most decision criteria, 14% of municipalities under 5,000 identified overriding budget considerations as their single most important decision criteria. Although not necessarily identified by responding municipalities as the single most important decision criteria, overriding budget considerations, combined with the current level and quality of information available (or lack thereof) to municipalities with respect to the condition and performance of their water and wastewater assets, and their corresponding ability to effectively determine the timing of maintenance work and/or the replacement of assets to plan for their future investment needs (as discussed above), may be leading to the deferral of required water and wastewater system investments. The survey responses indicated that the deferral of required system investment is more prevalent among smaller municipalities. PwC Page 6
  7. 7. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices Accounting Practices A primary objective of accounting is to provide stakeholders with accurate and relevant information to make fully informed decisions. More specifically, effective accounting practices: • Provide a valuable tool for strategic planning and management decision making purposes; • Allow for improved tracking and monitoring of operational performance; and • Allow for increased accountability with respect to operational performance. Key factors impacting accounting and accounting practices in Ontario municipal water and wastewater operations include: • Water and wastewater operations are highly capital intensive with the assets having a very long service life; • Much of the infrastructure is underground, making it difficult to assess asset condition and the required repair, upgrade or replacement at any point in time; and • Ontario municipalities employ modified accrual accounting. Under modified accrual accounting, investments in infrastructure assets are expensed as a cash expenditure in the year in which they were incurred instead of being recognized as long-term assets. As a result, information about the capital component of providing water and wastewater services is not readily available. Summary of Findings (i) Extent to which current municipal asset management and accounting systems can provide information about the “full cost” of water and wastewater services Asset Management Systems Determining the “full cost” of water and wastewater services requires an understanding of the infrastructure or investment needed to provide those services on a long-term or life cycle basis. To determine future infrastructure investment needs, municipalities need to determine the assets they have and where they are located (i.e., an asset inventory) and the condition that they are in, together with minimum service level requirements for the water and wastewater systems and the municipalities’ growth expectations. As indicated earlier, approximately 52% of all responding municipalities do not either perform asset inspections or record information relating to the condition and performance of their water and wastewater assets. This implies that just over half of the responding municipalities do not have the necessary asset management systems and/or information available with respect to the condition and performance of their water and wastewater assets. PwC Page 7
  8. 8. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices As a result, their ability to effectively estimate their future infrastructure investment needs for the purposes of understanding their true “full costs” of providing water and wastewater services, including the cost and timing of planned future maintenance and replacement activities, would correspondingly be limited. This finding was more predominant amongst smaller municipalities as compared to larger municipalities. Accounting Systems The modified accrual accounting systems used by Ontario municipalities report capital expenditures on a cash basis and show expenditures for capital investments (and debt service) in the year that they were incurred. These systems do not, however, report the value of the fixed assets (i.e., the capital investments) or the accumulated depreciation charged against those assets. As a result, it is difficult to track the status of those assets, including their net value, over time. This information would provide municipalities with a useful tool to assess how they are managing their capital-intensive water and wastewater assets. For instance, a decline in the net value of the fixed assets may indicate that there is a growing backlog of deferred investments for necessary maintenance, repairs and replacement and that additional investments may be required. In addition, this information provides a useful management tool to determine future investment needs and therefore the true “full costs” associated with providing water and wastewater services. The survey results indicate that the majority of responding municipalities do not track the net value of their water and wastewater assets. For instance, only 10% of the responding municipalities maintain a fixed asset sub-ledger for their water and wastewater assets. For those that do not maintain a fixed asset sub-ledger, 69% do not assign or record a financial value to those assets and 68% report having no information regarding the expected useful life of their water and wastewater assets. Accordingly, current municipal accounting systems do not appear to provide sufficient information with respect to capital investments, a critical component in determining the true “full costs” of water and wastewater services. Given that water and wastewater operations are highly capital intensive with the assets having a very long service life, the movement towards a full accrual accounting approach is considered more appropriate. Under full accrual accounting, the cost to acquire a fixed asset is spread out over the life of the asset through annual depreciation charges, thereby allowing a better matching of the benefits of the asset (based upon its use) with its costs. This would help municipalities better manage the status (including the net value) of their water and wastewater assets, and facilitate the determination of their true “full costs” of providing water and wastewater services on a life cycle basis. (ii) Current definitions of operating and capital costs used by municipalities for water and wastewater services The survey results suggest that a wide range of interpretation exists amongst responding municipalities as to the definition of, and accounting for, both operating and capital costs, PwC Page 8
  9. 9. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices thereby implying that the definition of “full cost” is also not consistent between municipalities. The responding municipalities indicated that they include a wide and differing variety of cost categories in determining both operating and capital costs, although this may partly be explained by the unique nature of their respective operations. For example, 54% of responding municipalities (81% of responding municipalities over 50,000 and 45% of responding municipalities under 5,000) indicated that they include overhead costs in determining their operating costs for water and wastewater services. Given the findings above with respect to asset management and accounting systems and the wide range of interpretation amongst responding municipalities as to the definition of, and accounting for, both operating and capital costs, Ontario municipalities, particularly the smaller municipalities, will likely face significant challenges in determining their true “full costs” of providing water and wastewater services, and will likely require guidance and direction. The introduction of Bill 175 is a first step to address this issue. In addition to ensuring that Ontario municipal water and wastewater operations operate on a truly self- sustaining basis, Bill 175 is also focused on moving towards best practices (e.g., ensuring that municipalities are employing effective long-term planning and life cycle asset management practices, and that asset management practices are more closely integrated with accounting and financing practices) and improved consistency in the operation and accounting for municipal water and wastewater systems. Financing Practices Financing is one of the most critical aspects of municipal water and wastewater operations in Ontario and other jurisdictions today. This is driven by the following factors: • Water and wastewater operations are highly capital intensive, and significant costs and financing requirements are associated with same; • Much of the infrastructure is underground, making it difficult to assess not only asset condition and required repairs, upgrades and replacements, but also financing needs, at any point in time; • Capital expenditures are not typically “smooth” but rather have many peaks and valleys (i.e., larger expenditures in some years followed by smaller expenditures in other years); and • There is currently a substantial shortfall in water and wastewater infrastructure investment (an infrastructure deficit) among Ontario, and other jurisdictions’, municipal water and wastewater operations today. PwC Page 9
  10. 10. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices Summary of Findings (i) Revenue and financing sources currently used to fund operating and capital expenditures for water and wastewater systems Operating Expenditures While the survey responses indicate that a wide range of revenue sources are used to finance operating expenditures for water and wastewater systems, direct customer billings (i.e., user fees and service charges) are indicated as being the predominant source of revenue for financing both water, and to a lesser extent, wastewater operating costs. 85% of responding municipalities indicated that they use direct customer billings to fund operating costs for water systems while 64% indicated that they use direct customer billings for wastewater. It was also found that direct customer billings are used to a greater extent by larger municipalities compared to smaller municipalities. Other current direct revenue sources used to finance operating costs for both water and wastewater systems include special area tax levies, amounts added to property tax bills and charges to other municipalities for water services. Examples of other financing sources used to fund operating costs for both water and wastewater systems include transfers from both dedicated water/wastewater and general reserves, transfers from the general revenue fund, and “other revenues” designated for water/wastewater operations and from other sources. Capital Expenditures Consistent with operating expenditures, the survey responses indicate that a wide range of financing sources are used to fund capital expenditures for water and wastewater systems. The predominant financing tool indicated for both water and wastewater capital costs, particularly amongst larger municipalities, is the municipalities’ general revenue fund. 43% of responding municipalities indicated that they use their revenue fund as a financing tool to finance capital costs for water systems while 37% indicated that they did the same for their wastewater systems’ capital costs. The survey results indicate that a higher percentage of larger municipalities used their revenue fund as a financing tool to finance capital expenditures in the year 2000 compared to smaller municipalities for both water and wastewater systems. However, this may have been impacted by a higher level of capital investment activity potentially undertaken by larger municipalities in the year 2000 compared to smaller municipalities. The source composition of municipalities’ general revenue funds may comprise both direct customer charges for water and wastewater services such as user fees, and non-direct customer charges such as property taxes. Accordingly, it is difficult to determine the extent to which capital costs funded from municipalities’ revenue funds have been financed through direct customer charges or non-direct charges. PwC Page 10
  11. 11. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices The survey responses also indicate that discretionary reserves (both general and designated) are a major source of financing for both water and wastewater capital expenditures, particularly amongst the larger municipalities. While 92% of responding municipalities reported that they use dedicated reserves and 73% indicated that they use general reserves for water and wastewater purposes, only 25% of responding municipalities indicated that they used discretionary reserves to fund capital costs for both water and wastewater in the year 2000. Other financing tools used, but to a much lesser extent (less than 15% of responding municipalities), to fund capital expenditures, based on the year 2000, include: • Senior government grants; • Long-term debt; • Obligatory reserve funds, primarily related to development charges; and • Other various sources of financing including public-private partnerships. (ii) Extent to which municipalities may be cross-subsidizing other non-water and wastewater activities and vice versa While it is difficult to assess the extent to which municipalities may be cross-subsidizing other non-water and wastewater activities, and vice versa, several observations can be made based upon the survey results: • Many municipalities, in structuring their water and wastewater rates, are not structuring them to fully recover their costs of providing water and wastewater services, implying that water and wastewater costs are being cross-subsidized by other activities; • The predominant use of the municipalities’ revenue fund, general discretionary reserves and other non-dedicated sources of revenue to finance capital expenditures, together with the use of non-current or non-direct sources of revenue for operating costs (e.g., transfers from general revenue fund, etc.) suggests that water and wastewater costs, particularly as they relate to capital costs, may be cross-subsidized by other municipal activities; • A number of responding municipalities indicated that they transfer water and wastewater revenues to the general revenue fund. While these funds may ultimately be used to finance water and wastewater operating and capital costs in the future, they could also potentially be used to subsidize other municipal activities; and • The allocation of general municipal overhead charges to water and wastewater operations may also be a form of indirect cross-subsidization. For instance, 54% of responding municipalities indicated that they include overhead costs in determining their operating costs for water and wastewater systems, while only 35% and 27% of all responding municipalities indicated that they allocated overhead charges to their water and wastewater operations, respectively, in the year 2000. This implies that other PwC Page 11
  12. 12. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices municipal activities are subsidizing the water and wastewater operations since these charges are not being included in determining water and wastewater operating costs. (iii) Trends and opportunities for improvement in financing practices Based upon the above survey findings, many Ontario municipalities are not directly matching their revenue or financing sources specifically attributable to water and wastewater to their true full costs of water and wastewater operations. As a result, other municipal activities maybe cross-subsidizing water and wastewater activities, and vice versa. In aiming to ensure that municipal water and wastewater systems are properly financed so that they operate on a self-sustaining basis (a primary objective of Bill 175), municipalities should establish and maintain separate dedicated reserve accounts for water and wastewater in order to segregate water and wastewater revenue and related financing sources from general revenues. The use of separate dedicated reserves will assist municipalities to more effectively determine and plan for their water and wastewater financing requirements, including assessing the sources of financing they have available and should be accessing, and ensuring that necessary investments in capital improvements and replacement are made on a timely basis. This will become increasingly important given the diminishing availability of senior government funding that has traditionally been a major source of financing for capital projects. Additional sources of financing municipalities could access include: • Increase in user fees or direct customer charges. User fees or direct customer charges do not appear to be covering the true full cost of providing water and wastewater services, particularly as they relate to capital expenditures. Accordingly, given the relatively inexpensive cost of water and wastewater to users, there should be scope to increase revenues by increasing direct customer charges to more properly reflect the true cost of water and wastewater services; • Municipal debt. Just over half of responding municipalities reported issuing long-term debt to finance water and wastewater capital expenditures. Recent studies have shown that municipalities generally have excess debt capacity available to them for financing purposes; and • Public-private partnerships. Municipalities are increasingly considering public-private partnerships as an alternative method of financing and delivering their water and wastewater services. Pricing Practices User fees are the primary source of revenue and financing for water and wastewater operating and infrastructure costs. While a wide range of user fee rate structures exists, all structures, with the exception of flat rates, require the use of meters to measure water consumption. Examples of common rate structures include: PwC Page 12
  13. 13. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices • Flat rates, which are fixed regardless of water usage or consumption; • Constant per unit or metered rates (primarily related to water consumption services only), which are based on usage (i.e., a constant unit charge based on water consumption); • A combination of flat and constant per unit rates (i.e., fixed and variable rates); • Declining block rates, which decrease as usage increases (reflecting economies of scale); and • Increasing block rates, which increase as usage decreases (reflecting conservation principles). In addition, rates may vary to reflect peaks in demand and may also be designed to reflect the characteristics of specific groups of users (e.g., social housing users). Summary of Findings (i) Current rate structure practices for water operations The survey responses indicate that a wide range of water rate structures are used by municipalities for pricing purposes, both for residential and industrial, commercial and/or institutional (“ICI”) customers. The use of different rate structures varies between larger and smaller municipalities and whether the customer is residential or ICI. For residential customers, smaller municipalities indicated that they predominantly use flat rates whereas larger municipalities indicated that they use a constant per unit charge or a combination of a constant per unit charge plus a flat rate for certain services or areas. For ICI customers, smaller municipalities indicated that they primarily use flat rates, whereas larger municipalities indicated that they use constant per unit charges or multiple versions of metered rates, and to a lesser extent, declining block rates. To gain an understanding of the extent that municipalities use water meters, the survey asked municipalities to indicate the percentage of their water accounts that were metered. Unfortunately, a significant number of municipalities did not complete the question making any meaningful analysis difficult. However, the rate structures used by municipalities (i.e., flat rate vs. some form of constant per unit charge or metered rate) provide a leading indication of the extent to which municipalities use water meters. For example, since smaller municipalities predominantly use flat rates, they likely do not use water meters to the same extent as larger municipalities that apply a constant per unit charge. Fire protection charges are typically not included in water rate charges but instead are predominantly levied through municipal assessment and property taxes, particularly in the case of smaller municipalities. PwC Page 13
  14. 14. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices (ii) Current rate structure practices for wastewater operations Municipalities primarily recover wastewater costs by applying a sewer surcharge on the municipalities’ water bill, and to a lesser extent, through property taxes. The survey responses indicate that sewer surcharges on the water bill are the predominant practice for larger municipalities, whereas smaller municipalities tend to recover their wastewater costs through property taxes or some other means. For those municipalities that apply a surcharge to the water bill, the surcharge is primarily determined by applying either a defined percentage of the total water bill, or a defined rate in terms of dollars per unit of water sold. Sewage strength is not frequently used as a basis for determining wastewater collection charges by the responding municipalities. The use of sewage strength is more prevalent with larger municipalities than smaller municipalities. (iii) Availability of current water consumption and revenue data Many of the municipalities that responded to our survey did not provide requested information regarding their total number of customer accounts, the total volume of water sold, and/or the total revenues received from customers for the year 2000, key information in assessing and understanding municipal water operations (e.g., revenue per customer account, revenue per unit of water sold, etc.). A greater number of smaller municipalities did not provide this information compared to the larger municipalities. This lack of response suggests that many municipalities either do not track this type information or have difficulty in compiling it (i.e., it is not readily available). Furthermore, it implies that many municipalities are not effectively tracking or managing some key business performance measures (e.g., revenue per customer account and unit of water sold). This type of information provides municipalities with important data necessary to make informed decisions around their water and wastewater operations, including analysis and planning around pricing decisions, future sources of financing to meet investment needs, and the development and tracking of the cost recovery plans contemplated under Bill 175. Summary The survey responses indicate that asset management, accounting, financing and pricing practices currently followed by Ontario municipal water and wastewater operations range widely across all Ontario municipalities. In addition to this lack of consistency in practices amongst Ontario municipalities, the survey results suggest that many Ontario municipalities do not currently: PwC Page 14
  15. 15. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices • Have sufficient quality information with respect to their water and wastewater operations, including their asset condition and performance, to make fully informed business (i.e., operating and investment) decisions; • Have the necessary tools (e.g., asset management and accounting systems) to provide them with sufficient quality information to make these fully informed business decisions; • Have an adequate understanding of their true “full costs” of operating their water and wastewater systems; and • Match their revenue or financing sources specifically attributable to water and wastewater to the true full costs of their water and wastewater operations. These findings are generally more prevalent among smaller municipalities than larger municipalities. However, this is not to conclude that all small municipal water and wastewater systems are poorly operated or that all large municipal water and wastewater systems are well operated. To ensure that water and wastewater systems provide Ontario residents with clean, safe water and operate on a self-sustaining basis (i.e., generate sufficient revenue to fully recover all of the long-term operating and capital costs), improvements in these practices are required. For example, municipalities should consider looking at their water and wastewater operations as separate, standalone businesses, identifying the critical drivers of the business, whether they be asset, operating or financial-related, and ensuring that they are monitored, analyzed and planned for on an integrated “business model” basis. The introduction of Bill 175 is an important first step to address this issue as it focuses on moving towards best practices and providing improved consistency in asset management, accounting, financing and pricing practices across all Ontario municipalities. PwC Page 15
  16. 16. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices 1 Background 1.1 Terms of Reference PricewaterhouseCoopers LLP (“PwC”) was retained by Ontario SuperBuild Corporation (“SuperBuild”) to study the current asset management, accounting, financing and pricing practices for all municipal water and wastewater systems in the Province of Ontario (the “Province”). This study is one of a series of consulting studies that SuperBuild is undertaking to help develop a long-term water and wastewater infrastructure investment and financing strategy. The objectives of this study were to: • Collect information on current asset management, accounting, financing and pricing practices for all municipal water and wastewater systems in Ontario through a comprehensive survey, with the goal of obtaining as complete, up-to-date and accurate information as possible; • Develop a comprehensive and flexible database to act as a repository of all information gathered through the survey process; and • Based on the information collected, analyze and summarize the key findings with respect to current asset management, accounting, financing and pricing practices in relation to water and wastewater infrastructure and operations in Ontario. 1.2 Scope of Work The scope of work for this study included the following: • Designing a comprehensive survey document through a consultative process involving government and industry officials and selected municipalities, balancing the need for comprehensive and up-to-date information with the identified constraints impacting the ability of Ontario municipalities to provide the information required; • Distributing the survey to all municipalities in Ontario that were identified as having responsibility for the operation of water and/or wastewater systems; • For those Ontario municipalities that contracted out some or all of their operations to the Ontario Clean Water Agency (“OCWA”), distributing a separate survey containing selected survey questions to OCWA so that OCWA could send the completed OCWA survey to the relevant municipalities, thereby easing the municipal survey response burden; • Administering the survey responses through: o Establishing a survey help line to assist municipalities having questions or experiencing difficulties with the survey; PwC Page 16
  17. 17. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices o Initiating a significant number of follow-up telephone calls to address survey completion status and other related matters; and o Undertaking a rigorous quality inspection of all survey responses received; • Developing a comprehensive database (the “Ontario Municipal Water and Wastewater Database” or the “Database”) to capture the information contained in the survey responses; • Inputting the data from the survey responses received into the Database and testing the information for input accuracy; • Performing a summary analysis of the information contained within the Database, based upon key criteria developed in conjunction with SuperBuild, around current asset management, accounting, financing and pricing practices relating to municipal water and wastewater operations in Ontario; and • Summarizing our analysis and findings in this report. A more detailed description of the data collection process is summarized in Appendix A. 1.3 Limitations and Qualifications The Ontario Municipal Water and Wastewater Database, and the information contained therein, has been used as the primary source of analysis for the purposes of this report. Other information sources that have helped supplement the information contained in the Database include: • Municipal population data provided by SuperBuild based upon the year 2001 census; • Municipal water source and 1999 average daily water flow rate data sourced from the Communal Drinking Water Inspection Report, 2000, prepared by the Ministry of the Environment; and • Municipal water rates provided from the Superbuild Water Rate Database, which data was compiled using the following sources: municipal water rate cards, Municipal Water Use and Pricing Report 1999 (prepared by Environment Canada), and information published on municipal websites. While the information contained in the Database has undergone a rigorous quality inspection, we have not undertaken an independent audit or verification of any information provided to us through the survey responses or other information sources. Furthermore, our quality inspection of the survey responses received identified a large amount of missing or inconsistent data which we were not able to resolve within the scope of this study, thus impacting the nature and extent of our analysis. As a result, the analysis derived from the information contained in the Database, while meaningful, does not necessarily represent a true statistical representation. Accordingly, attempts to extrapolate the survey data across the broader population of Ontario municipalities should be made with caution. PwC Page 17
  18. 18. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices Nevertheless, the survey results and resulting analysis contained in this report provide valuable insight into the characteristics and trends related to current asset management, accounting, financing and pricing practices for municipal water and wastewater systems in Ontario. 1.4 Structure of the Report The structure of the report is as follows: • Section 2 provides a breakdown of the municipalities that participated in the survey, according to geographic region, municipal population, size of municipal water/wastewater system, and water source; • Sections 3 through 6 comprise the summary analysis of the information contained in the Database, based upon key criteria for each of asset management, accounting, financing and pricing practices; • Appendix A provides a more detailed description of the data collection process; • Appendix B provides a breakdown of the municipalities that were sent the survey, by geographic region; and • Appendix C provides a breakdown of the municipalities that were sent the survey, by population grouping. The framework for each of Sections 3 through 6, inclusive, is based on the following layout: • Background; • Summary of findings, which provides a summary of the issues addressed and the related findings; and • Summary analysis, which includes a detailed analysis of the factors considered. PwC Page 18
  19. 19. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices 2 Survey Responses 2.1 Overview of Survey Responses The survey was originally sent to all municipalities in the Province that were identified as having responsibility for the operation of water and/or wastewater systems. In total, 301 out of the total 448 municipalities in Ontario satisfied these criteria, representing 11.0 million people or 97% of Ontario’s total population. Appendices B and C provide a listing of the municipalities that were sent the survey, sorted by geographic region and population grouping, respectively. Of the 147 municipalities excluded from the survey: • 121 municipalities have no municipal water or wastewater systems; and • 26 lower tier municipalities have no water or wastewater system involvement. (In determining the total population base of those municipalities receiving surveys, to avoid double counting for two-tier municipal organizations, only the upper tier municipality population base has been reflected). After taking steps to improve survey response rates (outlined in more detail in Appendix A), the final number of responses totalled 187, or a 62% response rate. In addition, the 187 survey responses returned represented a population of 7.9 million or 72% of the total population of municipalities that received the survey, as outlined in Figure 1 below. Figure 1: Survey Response Rate % of total 1 Number of Population municipalities % sent survey municipalities 000s (by population) (by population) Total municipalities in Ontario 448 11,332.4 100.0% n/a Total municipalities sent survey 301 10,992.7 97.0% 100.0% Total municipalities responded2 187 7,946.4 70.1% 72.3% 1 Total population, based on 2001 census 2 Number of responding municipalities (187) includes upper and lower tier municipalities. Population base (7.9 million) for those responding municipalities only reflects the responding lower tier populations to avoid double counting. Under the analytic plan, municipalities were classified on the basis of four key characteristics: • Geographic region; • Size of municipality based upon municipal population; • Size of municipal system based upon the volume of water produced; and • Water source (i.e., surface water, groundwater or both). PwC Page 19
  20. 20. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices The purpose of these classifications was to confirm the extent to which the survey responses received provided a representative cross-section for each of these groupings and to assist with comparing and identifying any trends in various practices within the different categories. The following sections provide further information on the four classifications outlined above, namely geographic region, size of municipality by population, size of municipal system by volume of water produced, and water source. 2.2 Geographic Region The municipalities responding to the survey were grouped into the following six regions: • Eastern; • Central Ontario; • Greater Toronto Area (“GTA”); • Golden Horseshoe; • South Western; and • North. The percentage of municipal survey responses received for each region was fairly consistent, ranging from a response rate of 59% in both the Golden Horseshoe and South Western regions to 65% in Central Ontario, and suggesting that survey responses were received from a broad cross-section of municipalities throughout Ontario. However, this consistent regional- municipal response rate is impacted by the size of the municipality’s population that either responded or did not submit responses to the survey. For instance, the Eastern region’s response rate represents only 28% of its population base that received surveys (while having a 64% municipal response rate, reflecting the fact that larger municipalities in this region did not submit a survey response) compared to 95% for GTA (which had a 62% municipal response rate). Figure 2 below provides further detail on the regional analysis. Figure 2: Regional Analysis Number of Municipalities Population Base Total surveys Total surveys sent Total Region Total Municipality Population sent 000s responses responses response rate response rate # % # % 000s Eastern 50 17% 32 64% 1,412.5 13% 401.5 28% Central Ontario 49 16% 32 65% 877.8 8% 598.3 68% GTA 13 4% 8 62% 4,706.3 43% 4,455.7 95% Golden Horseshoe 22 7% 13 59% 1,708.3 16% 1,027.1 60% South Western 73 24% 43 59% 1,567.1 14% 851.9 54% North 94 31% 59 63% 720.6 7% 611.9 85% Total 301 100% 187 62% 10,992.7 100% 7,946.4 72% PwC Page 20
  21. 21. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices 2.3 Size of Municipality The municipalities responding to the survey were grouped into four classes depending on the population size of the municipality, which were as follows: • Less than 5,000; • 5,000 to 9,999; • 10,000 to 49,999; and • 50,000 and over. In terms of municipality size representation, the percentage of municipal survey responses received for each population grouping was also somewhat consistent, both in terms of the number of municipalities responding and the population base of those municipalities. Municipalities with populations greater than 50,000 had the highest response rate (77% by number of municipalities responding and 75% by population), while municipalities with populations between 10,000 and 49,999 had the lowest response rate (53% by number of municipalities and 58% by population). This suggests that survey responses were received from a broad cross-section of municipal population sizes throughout Ontario. Further detail on the population analysis is provided in Figure 3 below. Figure 3: Population Analysis Number of Municipalities Population Base Total surveys Total surveys sent Total Population Size Total Municipality Population sent 000s responses responses response rate response rate # % # % 000s Less than 5,000 112 37% 69 62% 242.3 2% 161.6 67% 5,000 to 9,999 65 22% 44 68% 476.8 4% 322.9 68% 10,000 to 49,999 89 30% 47 53% 1,594.1 15% 920.9 58% 50,000 and over 35 12% 27 77% 8,679.5 79% 6,541.0 75% Total 301 100% 187 62% 10,992.7 100% 7,946.4 72% 2.4 Size of Municipal Water System In terms of municipal water system size, municipalities responding to the survey were grouped into the following four system size categories (measured by average daily water flow for 1999, in cubic metres): • 500 cubic meters per day and under; • 500 to 1,499 cubic meters per day; • 1,500 to 4,999 cubic meters per day; and, • 5,000 cubic meters per day and over. PwC Page 21
  22. 22. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices A fifth category, where the size of the municipal water system was not available from SuperBuild, was also recorded. Similar to the findings for municipality population size, the percentage of municipal survey responses received for each municipal water system size grouping was also somewhat consistent, both in terms of the number of municipalities responding and the population base of those municipalities. The response rate ranged from 55% (by number of municipalities responding or 57% by population base) for those municipalities with an average daily water flow of 500 cubic metres or less, to 70% (by number of municipalities responding or 78% by population base) for those municipalities with an average daily water flow of 5,000 cubic metres or more. The size of the municipal water system was unavailable for a total of 37 responding municipalities, representing a responding population base of 887,563 (or 11 % of the total responding population base). Overall, our findings suggest that survey responses were received from a broad cross-section of municipal water system sizes throughout Ontario. Further detail on the municipal water system size analysis is provided in Figure 4 below. Figure 4: Size of Municipal System Analysis Number of Municipalities Population Base Average Daily Total surveys Total surveys sent Total 3 Total Municipality Population Flowrate (m /day) sent 000s responses responses response rate response rate # % # % 000s 500 and under 62 21% 34 55% 290.4 3% 166.8 57% 500 to 1,499 55 18% 32 58% 362.0 3% 193.5 53% 1,500 to 4,999 57 19% 38 67% 501.3 5% 319.1 64% 5,000 and over 66 22% 46 70% 8,157.2 74% 6,379.5 78% Subtotal 240 80% 150 63% 9,310.9 85% 7,058.9 76% Not Available1 61 20% 37 61% 1,681.8 15% 887.6 53% Total 301 100% 187 62% 10,992.7 100% 7,946.4 72% 1 Some municipalities did not respond to Communal Drinking Water Inspection Report and/or did not have information available 2.5 Water Source The fourth characteristic that responding municipalities were grouped into was water source, specifically: • Groundwater only; • Surface water only; and • Both. A fourth category, where the water source was unknown, was also recorded. PwC Page 22
  23. 23. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices The percentage of municipal survey responses received for each water source grouping was fairly consistent, ranging from a response rate of 61% for municipalities with groundwater sources to 64% for municipalities with surface water sources, suggesting that survey responses were received from a broad cross-section of municipalities with all types of water sources. However, the response rate is impacted by the size of a municipality’s population that either responded or did not submit responses to the survey. For instance, the surface water response rate represents 91% of its population base that received surveys (while having a 64% municipal response rate), compared to 54% for groundwater (which had a 61% municipal response rate). The water source for seven responding municipalities, representing 16,681 people or 0.2% of the total responding population, was unknown. Further detail is provided in Figure 5 below. Figure 5: Water Source Analysis Number of Municipalities Population Base Total surveys Total surveys sent Total Water Source Total Municipality Population sent 000s responses responses response rate response rate # % # % 000s Surface Water 118 39% 76 64% 4,563.9 42% 4,161.3 91% Groundwater 113 38% 69 61% 1,479.4 13% 802.1 54% Both 56 19% 35 63% 4,866.9 44% 2,966.3 61% Subtotal 287 95% 180 63% 10,910.3 99% 7,929.7 73% Not Available1 14 5% 7 50% 82.5 1% 16.7 20% Total 301 100% 187 62% 10,992.7 100% 7,946.4 72% 1 Some municipalities did not respond to Communal Drinking Water Inspection Report and/or did not have information available 2.6 Correlation Between Municipal Classifications Our analysis of survey responses identified municipal population size as a key factor influencing trends in asset management, accounting, financing and pricing practices. In addition, municipal population size is also a key factor influencing: • Regional characteristics; and • Municipal water system size characteristics. For example, Figure 6 provides a breakdown of municipalities by population segment and region. Overall, certain regions tend to have higher concentrations of municipalities in the larger population groupings, and vice versa. Figure 6: Region Versus Municipal Population Analysis Municipalities sent survey: Region versus Population Total Sent Region Less than 5,000 5,000 to 9,999 10,000 to 49,999 50,000 and over # % # % # % # % # Eastern 14 28% 14 28% 20 40% 2 4% 50 Central Ontario 9 18% 13 27% 23 47% 4 8% 49 GTA 0 0% 0 0% 5 38% 8 62% 13 Golden Horseshoe 0 0% 2 9% 11 50% 9 41% 22 South Western 16 22% 24 33% 26 36% 7 10% 73 North 73 78% 12 13% 4 4% 5 5% 94 Total 112 65 89 35 301 PwC Page 23
  24. 24. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices Based upon the above: • All municipalities in the GTA region, and 20 of 22, or 91% of municipalities in the Golden Horseshoe region, have a population base greater than 10,000; • More specifically, 62% and 41% of municipalities in the GTA and Golden Horseshoe regions, respectively, have a population greater than 50,000. These two regions have the highest concentrations of larger municipalities; • Municipalities with a population base less than 50,000 are predominantly located in the Eastern, Central Ontario, South Western and North regions (248 out of 266 municipalities, or 93%). More specifically: o 48 of 50, or 96% of municipalities in the Eastern region have a population less than 50,000; o 45 of 49, or 92% of municipalities in the Central Ontario region have a population less than 50,000; o 66 of 73, or 90% of municipalities in the South Western region have a population less than 50,000; o 89 of 94, or 95% of municipalities in the North region have a population less than 50,000; • In particular, the North region has a high concentration of municipalities with a population base of less than 5,000 (73 of 94 municipalities, or 78%); and • The Eastern, Central Ontario and South Western regions tend to have a more even distribution of municipalities in the three population groupings below 50,000 people (i.e., less than 5,000, 5,000 to 9,999, and 10,000 to 49,999). Figure 7 provides a breakdown of municipalities by population segment and municipal water system size. There is a significant correlation between the population of the municipality and the size of the water system. Figure 7: System Size Versus Municipal Population Analysis Municipalities sent survey: System Size versus Population Total Sent Daily Water Flow Less than 5,000 5,000 to 9,999 10,000 to 49,999 50,000 and over # % # % # % # % # Less than 500 42 68% 11 18% 9 15% 0 0% 62 500 to 1,499 27 49% 15 27% 13 24% 0 0% 55 1,500 to 4,999 14 25% 26 46% 17 30% 0 0% 57 5,000 and over 3 5% 2 3% 37 56% 24 36% 66 Total 86 36% 54 23% 76 32% 24 10% 240 Based upon the above: • Municipalities with a larger population base have larger water systems, and vice versa; • Specifically, 61 of 66, or 92% of municipalities with system flow rates over 5,000 cubic metres per day have a population base greater than 10,000; • Similarly, 135 of 174, or 78% of municipalities with system flow rates under 5,000 cubic metres per day have a population base less than 10,000; PwC Page 24
  25. 25. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices • More specifically, 53 of 62, or 85% of municipalities with system flow rates under 500 cubic metres per day have populations less than 10,000; • 42 of 55, or 76% of municipalities with system flow rates between 500 and 1,499 cubic metres per day have populations less than 10,000 and • 43 of 57, or 75% of municipalities with mid-size system flow rates (between 1,500 and 4,999 cubic metres per day) have populations between 5,000 and 50,000. Based on the above analysis, and our review of survey responses, our findings regarding asset management, accounting, financing and pricing practices as they relate to population size can be broadly applied to regional and municipal water system size characteristics. Specifically, our survey findings regarding larger municipalities can be broadly applied to the GTA and Golden Horseshoe regions, and similarly, to water systems with flow rates over 5,000 cubic metres per day. Likewise, findings regarding smaller municipalities can be broadly applied to the Eastern, Central Ontario, South Western and North regions (with the exception of the few large municipalities within those regions), and to water systems with smaller flow rates. The fourth grouping, municipal water source, tends to have little correlation with municipal population, regional or municipal water system characteristics. Instead, water source is based upon characteristics unique to each municipality. Furthermore, our review of survey responses regarding asset management, accounting, financing and pricing practices identified no specific or meaningful trends based on water source. Accordingly, in the following sections of this report, our analysis will focus on asset management, accounting, financing and pricing practices, and any trends identified based on the number of municipalities and municipal population size. PwC Page 25
  26. 26. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices 3 Asset Management Practices 3.1 Background Asset management is a critical element of managing water and wastewater operations given the highly capital-intensive nature of water and wastewater services. The primary objectives behind asset management systems include: • Optimizing the life cycle value of the physical assets by gaining a thorough understanding of the condition, performance and risk associated with specific assets so that informed decisions can be made on when to repair or replace an asset; and • Providing key inputs into understanding the financing or investment requirements to support the sustainable operation of the assets (i.e., what investment is needed, when is it required, and how will it be financed), including the pricing of services. The key components of asset management systems include: • Asset inventory, which identifies current assets, including their location, age, maintenance record and expected useful life; • Asset condition and performance assessments, which addresses what condition the assets are currently in, the assets’ condition and performance over time, and what investments will need to be made in the assets and when; • Asset valuation, which addresses what the assets are worth to assist in financial reporting and financing matters; • Investment decision making, to ensure that investments are made on a basis that minimizes the life cycle costs associated with the assets (i.e., should the assets be replaced or refurbished); • Implementation, to ensure that asset refurbishment, upgrade or replacement is implemented effectively, in terms of timing, costs, and meeting stakeholder needs; and • Monitoring, the ongoing process of tracking asset condition and performance focused on preventing asset failure and identifying and planning future investment requirements. Monitoring requires significant data collection and analysis (it is difficult to effectively manage what you cannot monitor), particularly around asset inventory, asset condition and performance and specific plans for capital investment. While asset management is a critical aspect of water and wastewater operations, it also presents numerous challenges: • Most water and wastewater assets are underground. As a result, it is often difficult to identify the assets and assess their condition since most are buried. Furthermore, the repair, upgrade and replacement of underground assets can be expensive; PwC Page 26
  27. 27. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices • Water and wastewater systems often service small communities who may not have sufficient expertise and/or resources available to effectively manage the assets; and • The health and safety issues regarding the delivery of water and wastewater services make effective asset management paramount. The focus of our analysis was to better understand current asset management practices with respect to municipal water and wastewater operations in Ontario, including: • The level of information Ontario municipalities have available with respect to their water and wastewater asset condition and performance; • Differences across municipalities with respect to maintenance, repair and overhaul (“MRO”) activities; and • The impact of current asset management practices on system investment and maintenance decisions. 3.2 Summary of Findings The following highlights the key issues that were considered under asset management practices, and the related findings based on our analysis of the Database results: Level of information municipalities currently have available regarding water and wastewater asset condition and performance The survey responses indicate that the level of information municipalities currently have available with respect to the condition and performance of their water and wastewater assets ranges widely. This implies that there is a wide range in the ability of municipalities to effectively determine the timing of maintenance work and/or the replacement of assets to ensure optimal performance of water and wastewater systems, and to identify and plan for the timing and amount of future investment needs. For instance: • Roughly 27% of all responding municipalities (representing 17% of the responding municipal population base) indicated that they do not perform inspections for asset condition and/or performance; • For those responding municipalities that perform asset inspections, only 67% (representing 73% of the responding municipal population base) actually record the results of the asset inspections, thus suggesting that 52% of all responding municipalities do not either perform asset inspections or record information relating to the condition and performance of their water and wastewater assets; • Only 24% of all responding municipalities (representing 69% of the responding population base) undertake comprehensive leak detection surveys, most of such municipalities being larger municipalities with populations greater than 10,000; and • Only 33% of all responding municipalities (representing 84% of the responding population base) report using computer-based management information systems PwC Page 27
  28. 28. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices (“MIS”) as an asset management tool, the vast majority of such users being larger municipalities with populations over 50,000. The key measures used to determine water and wastewater system reliability include the number of system breaks or major leaks per year, the number of customer complaints per year, system pressure and system downtime. Larger municipalities consider these (and other) factors to assess system reliability to a greater degree than smaller municipalities. The survey responses indicate that larger municipalities (those over 50,000 in population) have a higher level of current information on their water and wastewater assets’ condition and performance, and consider a greater level of system reliability factors than smaller municipalities. Municipal practices relating to MRO activities The key factors that municipalities use in determining their MRO budgets include the condition of the assets, the age of the assets, and the amount expended on MRO activities in prior years. Larger municipalities consider these (and other) factors to determine their MRO budgets to a greater degree than smaller municipalities, thereby suggesting that larger municipalities have a higher level of current information to make more informed decisions regarding their MRO budgets. The range of normalized MRO costs dollar per cubic metre of water/wastewater treated) varies significantly across municipalities, regardless of population size. Roughly half of the responding municipalities indicated MRO costs, in the year 2000, ranging between $0.10 and $0.50 per cubic metre of water and wastewater treated, as summarized below: Figure 8: Normalized MRO costs ($/cubic metre) in 2000 % of Responding Municipalities MRO ($/m3) Water Wastewater <0.10 32% 38% 0.10-0.50 53% 45% >0.50 15% 17% However, the survey responses indicate that small municipalities (those with populations less than 5,000) spend less per cubic meter on water MRO costs, on average, compared to municipalities with populations greater than 5,000 (see Figure 15). For instance: • Only 4% of responding municipalities under 5,000 had water MRO costs exceeding $0.50 per cubic metre, whereas between 15% and 25% of responding municipalities in the other three population groups (i.e. greater than 5,000) indicated their water MRO costs exceeded $0.50 per cubic metre; and PwC Page 28
  29. 29. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices • 41% of responding municipalities under 5,000 had water MRO costs less than $0.10 per cubic metre, whereas between 26% and 31% of responding municipalities in the other three population groups (i.e. greater than 5,000) indicated their water MRO costs were less than $0.10 per cubic metre. While this suggests that water MRO expenditures for small municipalities may not be sufficient relative to larger municipalities with populations over 5,000, and that there may be a correlation between the current level of information on asset condition and performance available to small municipalities relative to larger municipalities and their respective water MRO expenditures, there may be other influencing factors unique to each of these municipalities. The survey responses indicate that there is limited correlation among municipal population groups with respect to their spending per cubic metre on wastewater MRO costs. For instance, the 5,000 to 9,999 population group had the highest percentage (84%) of responding municipalities with wastewater MRO costs greater then $0.10 per cubic metre than municipalities in the other population groups (i.e. less than 5,000 -.59%; 10,000 to 49,999 – 50%; greater than 50,000 – 55%). Impact of current asset management practices on system investment decisions Based upon the municipal survey responses, the single most important decision criteria in making asset investment decisions is the impact the asset investment would have on system reliability. Impact on service quality, lowest lifecycle cost and lowest purchase cost were also identified as the single most important decision criteria, but to a lesser degree. While no responding municipalities greater than 50,000 in population identified overriding budget considerations as the single most important decision criteria, 14% of municipalities under 5,000 identified overriding budget considerations as their single most important decision criteria. Although not necessarily identified by responding municipalities as the single most important decision criteria, overriding budget considerations, combined with the current level and quality of information available (or lack thereof) to municipalities with respect to the condition and performance of their water and wastewater assets, and their corresponding ability to effectively determine the timing of maintenance work and/or the replacement of assets to plan for their future investment needs (as discussed above), may be leading to the deferral of required water and wastewater system investments. The deferral of required system investment may be more prevalent amongst smaller municipalities given that smaller municipalities: • Appear to have a lower level of current information on their water and wastewater asset condition and performance; • Consider a lower level of factors in assessing system reliability than larger municipalities; and PwC Page 29
  30. 30. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices • Identified overriding budget considerations as an important factor influencing their system investment decisions. 3.3 Summary Analysis The following sections provide a more detailed analysis of the supporting findings to the key issues outlined above. 3.3.1 Level of information municipalities currently have available regarding water and wastewater asset condition and performance To address this issue, the following four factors were assessed: (i) The extent to which inspections for asset condition and/or asset performance are undertaken and whether those results are recorded; (ii) The extent to which comprehensive leak detection surveys are undertaken; (iii) The use of computer-based MIS to facilitate asset management programs; and (iv) The measures used to determine water and wastewater system reliability. (i) Asset condition and/or asset performance inspections, and documentation of such results Routine inspections of water and wastewater assets, and related documentation of the results, are an integral part of any asset management program. Tracking of inspection data over time is an important factor in determining trends in asset condition and/or asset performance, and should assist in determining maintenance or replacement activities, and better managing the life cycle of the assets. Figures 9 and 10 below depict the percentage of responding municipalities that perform inspections for asset condition and/or performance, and the percentage of municipalities that record asset condition and performance indicators at the time of inspection, respectively. PwC Page 30
  31. 31. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices Figure 9: Percentage of Responding Municipalities Performing Asset Inspections 100% 92% 77% 80% 67% 66% 73% 60% 40% 20% 0% <5,000 5,000 to 9,999 10,000 to 49,999 >50,000 All Respondents Municipality Population Size Figure 10: Percentage of Responding Municipalities Recording Asset Indicators at Time of Inspection 100% 78% 80% 68% 66% 67% 57% 60% 40% 20% 0% <5,000 5,000 to 9,999 10,000 to 49,999 >50,000 All Respondents Municipality Population Size Based upon the above: • 73% of all responding municipalities (representing 83% of the municipal population base) indicated that they perform inspections for asset condition and/or asset performance; • However, only 82 of 123, or 67% of responding municipalities that perform asset inspections (representing 73% of the municipal population base) actually record the results of the asset inspections at the time of the inspections, thereby suggesting that only 48% of all responding municipalities perform asset inspections and record their results; PwC Page 31
  32. 32. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices • For those responding municipalities with a population over 50,000, 23 of 25, or 92% indicated that they perform asset inspections but only 18 of 23, or 78% of those record the results at the time of the inspections, thus suggesting that only 72% of all responding municipalities with a population greater than 50,000 perform asset inspections and record their results; and • On the other hand, for those responding municipalities with a population under 50,000, 100 of 144, or 69% indicated that they perform asset inspections but only 64 of 100, or 64% of those record the results at the time of the inspections, thus suggesting that only 44% of all responding municipalities with a population of less than 50,000 perform asset inspections and record their results. The distribution of results for responding municipalities under 50,000 was fairly consistent between the under 5,000, 5,000 to 9,999, and 10,000 to 49,999 municipal population groups. (ii) Leak detection surveys Leak detection surveys are an important component in assessing asset condition and asset performance, since leaks in water systems result in lost treated water and may result in the entry of contaminants to the system, thus jeopardizing the integrity of a municipality’s water system. Figure 11 shows the percentage of responding municipalities that undertake comprehensive leak detection surveys. Figure 11: Percentage of Responding Municipalities That Undertake Leak Detection Surveys 100% 80% 56% 60% 40% 40% 24% 20% 10% 8% 0% <5,000 5,000 to 9,999 10,000 to 49,999 >50,000 All Respondents Municipality Population Size Based upon the above: • Only 42 of 178, or 24% of all responding municipalities (representing 69% of the responding population base) perform leak detection surveys; • For those responding municipalities with a population over 50,000, 15 of 27, or 56% indicated they perform leak detection surveys, while for responding municipalities PwC Page 32
  33. 33. Ontario SuperBuild Corporation Analysis of Asset Management, Accounting, Long Term Water and Wastewater Strategy Financing and Pricing Practices with populations between 10,000 and 49,999, 18 of 45, or 40% indicated they perform leak detection surveys; and • On the other hand, for those responding municipalities with a population under 10,000, only 9 of 106, or 8% indicated that they perform leak inspection surveys. The distribution of results for responding municipalities under 10,000 was fairly consistent between the under 5,000 and 5,000 to 9,999 municipal population groups. (iii) Use of computer-based MIS The use of computer-based MIS as a tool for asset management allows users to readily access and analyse asset condition and asset performance. This information is critical in determining the timing of maintenance work and/or replacement of assets to ensure the optimal performance of water and wastewater systems and the identification of investment needs. Figure 12 below outlines the percentage of municipalities that use computer-based MIS to manage their water and wastewater systems. Figure 12: Percentage of Responding Municipalities Using Computer-Based MIS 100% 85% 80% 60% 36% 40% 33% 21% 16% 20% 0% <5,000 5,000 to 9,999 10,000 to 49,999 >50,000 All Respondents Municipality Population Size Based upon the above: • 122 of 182, or 67% of all responding municipalities (representing 16% of the responding municipal population base) do not use computer-based MIS to track the condition and performance of their water and wastewater assets. This would suggest that the ability of those municipalities to effectively monitor and manage their asset condition and performance and make informed investment decisions may be limited; and • While 23 of 27, or 85% of all responding municipalities with a population greater than 50,000 use computer-based asset MIS, only 37 of 155, or 24% of municipalities with a population under 50,000 use computer-based asset MIS. The distribution of results for PwC Page 33

×