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21st April 2015
Tide of outrage over Nestle's rental rate of $2.25 per million litres misses the point.

By John Janmaat, Yesterday,

Given that we pay about the same for a litre of the chilled stuff at the gas station, it is easy to be outraged that corporations like Nestle pay just $2.25 to use a million litres of water in British Columbia. That's the rental rate proposed by the B.C. government for water bottlers and many other industrial users, as well as for water utilities that supply domestic water.

The outrage is focused on Nestle, which operates a bottled water plant in Hope. Nestle bottles many millions of litres of water every year, a portion of which is exported. Before the new pricing rules were brought in, Nestle and other similar users of groundwater paid nothing, a fact that raised hackles during discussions leading up to the passage of B.C.'s Water Sustainability Act last May.

Some Canadian provinces charge a higher water rental (or royalty) rate. For example, Quebec charges $70 and Nova Scotia $140 per thousand cubic metres. But other provinces don't charge anything comparable to an annual rental for water use. So, while B.C. rates are clearly the lowest among those that do charge, at least it charges something.

What should B.C.'s rates be? It's not an easy question to answer. A quick look at the licence rental rates that B.C. has adopted shows a range of different use categories, each with its own application fee, minimum annual rent and volume-based annual rent. It seems complicated, but compared to other natural resources, water rental rates are pretty simple.

Water is not the only thing that B.C. collects a royalty for. We also collect royalties on "trees and rocks." These are even more complicated. The B.C. Ministry of Forests calculates a unique royalty rate called stumpage for each block logged. Turning to rocks, things are no simpler. Mines pay a Net Revenue Tax and a Net Current Proceeds Tax, with the former based on profits and the latter on the value of sales. For oil and gas, royalty rates are specific to each well. These are not simple rates.

The government balances several goals when setting royalty rates. These include maximizing long-term revenues to the Crown, treating large and small producers equitably, and picking a rate that is simple to administer and verify. The government regularly reviews the performance of its royalty program, with results available to the public. In general, resource companies get to cover their costs before paying anything for using the resource. If the rates are too low, then the people of B.C. don't get a fair return for their natural resources. If they are too high, then companies won't invest, and the people of B.C. won't get a fair return either. The challenge is to find the sweet spot, where the province earns as much as possible.

Far from perfect rates
Finding the sweet spot for water is a bigger challenge. Most trees and rocks are harvested, processed and sold by industry. But we all use water, and need it to survive. If pressured, we would pay a lot for it. We probably feel the same way about the water used in hospitals, in schools, and for other public functions. For uses like these, we don't want the government to set rates that generate the most revenues. In fact, we expect water to be treated as a basic human right, and are scared that if it is treated like any other commodity, we'll be forced to pay a lot more for it.

The government charges different rates for different uses, in part because of the way we value these uses. But when we get past the basic uses household and public we're still faced with difficult choices. Farms, family run campgrounds, etc. need water for their businesses. We want to encourage these small enterprises, not charge them a high price. The campaign against the new water rates has ignored these subtleties, and just trained its sights on Nestle. Sadly, this doesn't help raise the debate.

Clearly, one provincial water rental rate schedule can't possibly serve this province alone. Hope, where Nestle's plant is located, gets more than two metres of rain per year. If that water isn't bottled and sold, it will quickly flow into the Fraser and out to sea. No jobs, no tax revenues, and no royalties. Osoyoos, in the south Okanagan, gets a bit more than one-quarter metre of precipitation per year. Using more water in the south Okanagan means someone else gets less or the environment suffers. One price applied to the whole province can't possibly deal with the real value of water, when that value changes so much from place to place.

Most of the water Nestle bottles is sold right here in B.C. Should those of us who drink bottled water pay more? If we do charge industrial users more, are we then treating water like a commodity? This would seem to be why the water rental rates are not just about making money for the province. Instead, they are about raising enough money to pay for things promised in the new Water Sustainability Act, such as the auditing of water use to ensure efficiency, and much more detailed monitoring of stream flows to ensure that environmental needs are protected. Are the rates high enough to pay for these things? My guess is no. The government will need to review these rates, and I expect raise them, once the true implementation costs are known.

The new rates are far from perfect, but are at least better than what we had. A periodic review of the rates, a commitment to full cost recovery, and a commitment to reinvesting all royalties into water stewardship something the government has not, at this point, committed to would help ensure there is enough money to administer and fully implement the act and manage water into the future. [Tyee]

John Janmaat is associate professor of Economics and RIC Chair in Water Resources and Ecosystem Sustainability at the University of British Columbia.