Purchase Price of Water for UEL/UBC Area

Update:

Metro Vancouver staff presented a report to the Utilities Committee meeting of June 6, 2013 regarding water rates for non-members of the Greater Vancouver Water District. The report recommended that the GVWD Board endorse the policy attached to the report which "maintains the current 20% surcharge for the supply of water to GVWD non-members who do not have a separate water supply agreement".

The Utilities Committee approved the staff recommendation and, on June 14, 2013, the GVWD Board endorsed the policy proposed by staff.

This page has not been updated to reflect the content of the staff report or the endorsement of the policy by the GVWD Board.

16th Avenue Water Mains

Water used in the University Endowment Lands and the UBC area is purchased on a wholesale basis from Metro Vancouver. For some time, concern has been expressed that Metro Vancouver charges too much for the water. As the elected representative for Electoral Area A on the Metro Vancouver Board, I have sought information to enable an informed judgment to be made regarding the reasonableness of the water charge. Metro Vancouver staff have been helpful in providing information, but more is required. I am continuing to pursue this matter.

This page sets out what I have learned so far, and includes my comments on the rationale given for the rate basis that is applied. It was last updated on January 31, 2013. While I have made every effort to ensure the accuracy of the information, I cannot guarantee that it is free of errors. If you notice any errors, I would appreciate being informed of them.

I have written an article on this topic that was published in the January 14, 2013 issue of The Campus Resident (published by the University Neighbourhoods Association). A copy of the article is available here.

To go to a specific section of this page, click on one of the following links:

Summary

The key facts are:

  • The UEL (which purchases all the water for use in the UEL/UBC area) is not a member of the Greater Vancouver Water District.
  • The legislation governing the GVWD does not permit the UEL to become a member.
  • The GVWD is required by this legislation to supply water to the UEL/UBC area at reasonable rates.
  • There is no requirement that the GVWD sell water to other non-members at reasonable rates.
  • The water rates paid by the UEL are equal to GVWD member rates plus a 20% mark-up.
  • Whether this 20% mark-up is reasonable is an issue that appears never to have been seriously considered in the past.
  • The estimated amount of the mark-up for each of 2012 and 2013 is $600,000. This is about 0.28% of the GVWD's annual revenue from the sale of water.

In response to my inquiries, Metro Vancouver staff have provided a general rationale for the 20% mark-up. They have stated that it is intended to:

  1. fund certain GVWD infrastructure costs;
  2. recognize the financial risks that GVWD members face by virtue of their joint and several liability, which risks are not shared by non-members; and
  3. recognize the additional contributions that members may be required to make to the GVWD if any of the serious risks to which the water system is exposed materialize.

A consideration of this rationale in the context of the relevant facts leads to the conclusion that, whether or not it provided adequate justification for the 20% mark-up in the past, it almost certainly doesn't now. The facts strongly support the view that the 20% mark-up is not reasonable. Given the legislated requirement that the GVWD sell water to the UEL at reasonable rates, the mark-up should be reconsidered.

A further justification that has been given for the mark-up is that it has been the GVWD's long-standing policy to charge non-members a 20% mark-up. The issue of the reasonableness of rates is specific to the UEL and reference to historical practice cannot establish that current UEL rates are reasonable.

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Provision of Water to UEL/UBC Area

Metro Vancouver, through a corporation called the Greater Vancouver Water District (GVWD), supplies water on a wholesale basis to the Province in its capacity as administrator of the University Endowment Lands (UEL). The GVWD transports the water from the source reservoirs to Blanca Street, where the water enters UEL pipes.

The UEL (that is, the Province as administrator of the UEL) sells a small portion of this water to UEL residents, and the bulk of it to UBC. Water is distributed to UEL residents through a distribution system maintained by the UEL. Water sold to UBC passes through UEL pipes into UBC pipes. UBC uses much of this water itself, and also supplies the residential neighbourhoods on campus (UBC Neighbourhoods) through its own water distribution system. Water for the UBC Neighbourhoods is sold to the stratas in the neighbourhoods.

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Water Rates

The GVWD sells water to its member municipalities at the same rate per cubic metre for all members, a rate that is higher in the peak period than in the off-peak period. It sells water to the UEL, which is not a GVWD member, at peak and off-peak rates that are 20% higher than member rates.

The UEL sells water to UEL residents at rates that are further marked up on account of the cost of transporting the water to the UEL neighbourhoods and distributing it to homes. It sells water to UBC at the GVWD rates increased by a 10% mark-up. This mark-up is for transporting the water from Blanca Street (where it leaves GVWD pipes) to UBC's pipes.

UBC sells water to the stratas in the UBC Neighbourhoods at rates equal to the rates paid by Vancouver residents (as required by residents' leases with UBC).

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Concern about GVWD Mark-Up

Concern has been expressed from time to time in the last 15 years or more about the 20% mark-up included in the rates charged to the UEL by the GVWD. In the absence of adequate information justifying this additional charge for water beyond what GVWD members pay, it appears arbitrary and possibly unreasonable.

The estimated annual amount of the mark-up for 2012 and 2013 is $600,000. Of this amount, roughly $500,000 is borne by UBC and $100,000 by UEL residents (and hence reflected in the water rates they pay).

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Rates Paid by Other Non-Members

With one very minor exception, the UEL is the only non-member to which water is currently sold by the GVWD at rates that are higher than member rates.

According to the 2012 GVWD Budget's Estimate of Water Sales, the GVWD supplies water to four non-members. In addition to the UEL, these are the Capilano Hatchery, Riverview Hospital and Point Roberts. Riverview and Point Roberts pay the member rates for water. The arrangement with Point Roberts is unique, in that it must pay for a fixed amount of water each year, even though its consumption is lower. Also, Point Roberts paid all the GVWD's costs in constructing a main and reservoir to serve the area. (Information on the GVWD arrangement with Point Roberts is available from the Point Roberts Water District website and on page 8 of a paper on transborder water agreements by Patrick Forest. A personal history of the arrangement appeared in the Point Roberts community newspaper.)

The Capilano Hatchery pays the same rates as the UEL. However, the amount of water that it purchases is insignificant. The cost of its water for 2012 is estimated to be $1,052, and hence the mark-up is only $175.

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Rate History

The Vancouver Archives contain an extensive collection of GVWD documents for the period from the GVWD's formation in the 1920s to the 1960s. The following information was obtained from that source.

UEL Rates

The GVWD commenced supplying water to the UEL in 1930 (it was previously supplied by the City of Vancouver and, before that, by the Municipality of Point Grey). In a letter dated May 15, 1930, the GVWD set the rate at 6-2/3 cents per 1,000 gallons, less a 10% discount for prompt payment, giving a net rate of 6 cents per 1,000 gallons. The member rate in 1930 was 4.5 cents per 1,000 gallons.

The fixed UEL rate continued until 1949. In February of that year, the GVWD sent a letter to the UEL stating that the rate charged to it would be the member rate plus 20%. The reason given for the rate change was that the fixed net rate of 6 cents that the UEL had been paying would have been lower than the rate paid by the City of Vancouver. The letter explained that "the rate to all areas not within the District to which water is supplied is the rate currently charged to the City of Vancouver plus 20%." This rate basis has continued in effect since 1949.

20% Mark-Up

The first agreement that provided for rates equal to member rates plus 20% was with the District of Fraser Mills (now part of Coquitlam) in 1931. A draft agreement presented to the GVWD Board provided for a schedule of decreasing rates, with the final rate to apply for 1935 and subsequent years. The Board changed this final rate to the Vancouver rate plus 20% (the Vancouver rate was used for all members). A GVWD letter described this change as follows: "The suggestion made at the Board meeting, and approved, was that the rate specified in this paragraph be" the Vancouver rate plus 20%.

The next agreement with a 20% mark-up seems to have been that with the Connaught Heights Waterworks District (before Connaught Heights became a part of New Westminster). The letter sent by the GVWD to the Waterworks District in 1939 stated that the terms would be the same as those for Fraser Mills, namely the Vancouver rate plus 20%.

Prior to 1970, there appear to been only about a half dozen non-members who paid the 20% mark-up, some for only a few years. The UEL has paid the mark-up for 64 years, which is far longer than any other non-member.

Research in the Vancouver Archives has not turned up any document giving a rationale for the use of the 20% mark-up in setting non-member rates.

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Legislation Requires Rates to be Reasonable

The governing legislation for the GVWD is the Greater Vancouver Water District Act the (GVWD Act). Section 83 of this Act requires the GVWD to supply water to the UEL/UBC area and provides that the GVWD is to charge "such reasonable rates as may be agreed on" having regard to the rates charged to other water users.

This requirement that rates be reasonable is applicable only to the sale of water to the UEL/UBC area. There is no comparable provision in the GVWD Act for the sale of water to other non-members.

If the UEL were charged the same rates for water as GVWD members, there would be no question that the rates would be considered reasonable. Thus, the issue is whether it is reasonable to include the 20% mark-up. Just because other non-members have paid a 20% mark-up in the past does not mean that the mark-up is reasonable for the UEL today. The reasonableness of the mark-up depends on what is obtained in return for this additional charge. If nothing of comparable value is obtained, then the mark-up must be considered unreasonable.

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Is the Mark-Up Reasonable?

No document has been found in the Vancouver Archives indicating that the reasonableness of the mark-up has ever been considered. Nor have Metro Vancouver staff drawn my attention to any consideration of the mark-up.

In the year 2000, Metro Vancouver staff were requested to "research water and sewer services to the University Endowment Lands (UEL), Capilano Hatchery, and Point Roberts, the history of GVRD billing procedure for those non-members, and the equitability of the current billing system". The staff report prepared in response to this request, titled "Current Arrangements for Provision of Water and Sewer Services to Non-Members", is mostly a recitation of facts. Regarding equitability, all it says is that the 20% mark-up "is equitable in the sense that it is a recognition of the risk and liability issues that non-members do not face".

In 2012 I began to pursue, through the Electoral Area Committee of the Metro Vancouver Board, the issue of the reasonableness of the 20% mark-up included in UEL water rates. In response to my questions, Metro Vancouver staff have stated that the mark-up is intended in part to fund certain GVWD infrastructure costs and in part to pay what can be considered as risk or insurance charges (see the Manager's Report prepared for the November 8, 2012 Electoral Area Committee meeting). I'll briefly describe these reasons for the mark-up and comment on them.

Infrastructure Costs

According to Metro Vancouver staff, a portion of the 20% mark-up (presumably most of it) is intended to cover the infrastructure costs that the UEL would have been required to pay in addition to the cost of water if it had been a municipal member of the GVWD. In this regard, the UEL has not made capital contributions to pay for any expansion of infrastructure required to increase the supply capacity of the GVWD water system to the UEL/UBC area.

Comments

Given the magnitude of the mark-up and the fact that it has been paid for over 60 years, it seems intuitively clear that the mark-up must have been more than adequate to cover any infrastructure costs that the UEL would have been required to bear directly had it been a municipal member of the GVWD. Metro Vancouver staff have been asked to provide information on GVWD infrastructure improvements made in the past specifically for the UEL/UBC area. This information should help in determining whether the intuitive view is correct.

The 20% mark-up does not seem to be required to fund infrastructure improvements in the foreseeable future. My understanding is that the existing infrastructure is adequate to serve the current and projected needs of the area.

Regarding the recent upgrade to the GVWD's water infrastructure along 16th Avenue, this upgrade was undertaken for the benefit of both Vancouver and the UEL/UBC area. Because the upgrade was made to ensure adequate excess capacity across the system and thereby prevent supply interruptions, I understand that Vancouver has not been required to pay any portion of the costs. The costs of such upgrades to the GVWD water system are covered by GVWD's revenues from the sale of water rather than being borne by the individual members who specifically benefit from the upgrades. In other words, the UEL and member municipalities jointly bear such costs through the water rates they pay. For this reason, even if the UEL were to be charged for infrastructure improvements on the same basis as member municipalities, it would not have been required to make any payments in respect of the costs of the 16th Avenue upgrade.

The following examples provide an indication of the sorts of financial arrangements that the GVWD has entered into with at least some members in connection with the construction of infrastructure to provide an adequate water supply to them. In these examples, members (including the UEL, if it had become a member) were not required to pay the costs of the new infrastructure in addition to the cost of water purchased.

Shortly before the 16th Avenue water main was extended to Blanca in the early 1950s so as to provide an increased supply of water to the UEL/UBC area, the GVWD sought to have the UEL become a member. The financial terms for joining the GVWD would have only required the UEL to commit to pay a minimum amount for water purchases each year sufficient to cover annual carrying costs (see below under UEL Membership in GVWD).

That proposed financial arrangement was similar to the arrangement that appears to have been made with Delta in the early 1960s in connection with a new water main from the south end of the Oak Street bridge to Delta. The arrangement that was apparently entered into called for Delta to guarantee minimum purchases of water. The purpose of the guarantee was to offset the annual capital charges.

Also in the early 1960s, the GVWD built a new main to supply water to Maple Ridge. The main was made larger than required for the GVWD to fulfil its obligation to supply water to Maple Ridge so as to assist Maple Ridge in the distribution of water to its residents. Maple Ridge was only required to pay the additional cost attributable to the larger size of the main.

Joint and Several Liability for Debt

Municipalities that are members of the GVWD are jointly and severally liable for all GVWD debts, pursuant to subsection 60(2) of the GVWD Act. This means that if the GVWD defaults on a debt, creditors can look to individual municipalities for payment. As a non-member, the UEL does not share in this joint and several liability. Metro Vancouver staff have stated that a portion of the 20% mark-up could be viewed as compensating GVWD members for not sharing this financial risk with them. It is analogous to payments to a third party to take on credit risks, i.e., the purchase of credit insurance.

Comments

A scenario in which the GVWD is unable to pay its debts and one or more member municipalities are called on to do so is almost unimaginable given the GVWD's conservative fiscal practices. Thus, the risk to a municipality because of its joint and several liability may be more theoretical than real. Therefore, only a tiny portion of the mark-up can be justified on this ground.

Physical Risks

The water system is exposed to a number of risks. One is the possibility of a catastrophic event such as an earthquake that causes major damage to the infrastructure. Another is a change in legislation that requires expensive capital upgrades. A third risk is the discovery of a source of contamination that is costly to resolve. There may be further risks.

If any of these risks were to materialize, the GVWD could be faced with substantial expenditures and might have to turn to its members for capital contributions. The UEL as a non-member would not have to make a contribution. A portion of the 20% mark-up has been justified as being in lieu of any liability for such contingent capital contributions. This portion can be viewed as a form of insurance premium.

Comments

The UEL is paying this portion of the mark-up for an eventuality that is highly unlikely to occur. As an alternative to having the UEL pay such "insurance premiums", the water rates charged to the UEL could be marked up if and when members are required to make capital contributions. The mark-up would be set at a level that would result in the UEL paying its share of the extraordinary costs over time (with interest).

Alternatively, if the UEL continues to be required to pay a mark-up on account of the risks to which the water system is exposed, then there should be an accounting for the amounts paid. Once the total paid reaches a specified level, the UEL should be relieved from having to make any further payments towards the risks unless a risk actually materializes.

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Amending UEL Water Rates

If it is ultimately determined that the mark-up of 20% is not reasonable, it would be a simple matter to reduce or eliminate it. This change would have to be approved by the GVWD Board. I am not aware of any other approvals that would have to be obtained or formalities that would have to be complied with.

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UEL Membership in GVWD

The question of UEL membership in the GVWD has been raised in the past, presumably as a route to paying member rates. In particular, in 1996 the UEL sought to become a member. This request was turned down on the ground that the GVWD Act only permits municipalities to be members.

Interestingly, in 1950 the GVWD Board itself proposed that the UEL become a member. This was at the time when plans were being made to extend the 16th Avenue water main to Blanca Street, from where water would be provided to the UEL/UBC area. A draft agreement was prepared setting out the terms on which the UEL would become a GVWD member and was sent to the Province for approval. After extended consideration and discussion, it was decided to "leave the situation as it is with respect to the statutory relation of University Endowment Lands and the University" to the GVWD. The reason was that in order for the UEL to become a member, extensive amendments would be required to the GVWD Act.

If the UEL had become a member of the GVWD in 1951, it would have commenced to pay member rates. However, it would have been required to pay a minimum amount each year equal to a portion of the annual carrying charges for the water main along 16th Avenue from Arbutus to Crown. There is no information on how the minimum amounts compared to the amounts that the UEL actually paid.

The fact that the UEL cannot become a member because it is not a municipality is not a valid ground for charging it higher rates or for declining to review the rates that it is charged. The GVWD Act requires that water be supplied to the UEL/UBC area at reasonable rates. The reasonableness of the rates is a question of whether value is provided for the 20% mark-up.

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Further Information

The topic of water rates for the UEL was discussed briefly at the April 5, 2012 meeting of the Electoral Area Committee of the Metro Vancouver Board. Information was provided at the June 7 meeting. The topic was discussed again at the November 8, 2012 meeting. The Manager's Reports prepared for those meetings include comments on water rates (April Report; June Report; November Report).

Metro Vancouver has prepared FAQs that provide further information on the supply of water to the UEL/UBC area. The FAQs are accessible from the Electoral Area pages of the Metro Vancouver website. This link will take you directly to them.

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