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B.C.'s New Water Prices Don't Violate NAFTA

07/18/2015 02:10 EDT | Updated 07/17/2016 05:59 EDT

When the B.C. government unveiled its new water pricing scheme, we wrote that while it was an increase, the amounts being charged seemed very low. Apparently, hundreds of thousands of British Columbians share that concern -- a SumofUs.org petition signed by 225,000 people, has now resulted in the government committing to review the water rates.

But former MLA Judi Tyabji claims that increased rates could cause B.C. to lose control over water under the North American Free Trade Agreement, citing one of our 1999 legal opinions.

However, we'd like to agree with SumOfUs: water rates could increase dramatically without running afoul of international trade agreements.

Access v. sale price?

As noted in our post titled "Is this glass half full, and what should it cost?":

The new pricing for B.C. water was undertaken after extensive public consultations, in which, the government reports, "a consistent message from British Columbians was that water is undervalued."... Despite the strong message that the public wants higher value placed on our invaluable water resources, the new pricing regime for B.C. water still clocks in as among the lowest in the country.

We gave several examples of the low rates that industrial users might pay, including Nestlé, and suggested that conservation interests could be better served with higher rates.

Since then, B.C. Environment Minister Mary Polak, has suggested that higher rates are equivalent to the sale or "commodification" of water:

We don't sell the water. We never have in British Columbia. If you create

water as a commodity for government -- as a revenue stream -- imagine what that

does to conservation.

Tyabji has picked up on this concern, and linked it to her concerns on NAFTA:

Understand this as you sign the petition DEMANDING that the province charge Nestle for water: you are lobbying our government to turn our water into a commodity for sale. ... You will make Nestle VERY happy if you succeed, because then we can NEVER turn off the taps due to the international trade deals in place. ...

Both Polak and Tyabji propose a false dichotomy, suggesting that either water is (subject to an administrative fee) free, or it is a commodity (that can be bought and sold). This is not correct. There are all kinds of reasons that government might charge for water use -- a tax to raise funds, to encourage conservation, to reflect the ecological costs caused by the use of water -- that have nothing to with the sale of water, and do not make the water a commodity.

The question of whether water is a commodity has less to do with price and more to do with the legal rights granted by the legislation and whether they resemble private property rights. Can the water be bought and sold? Does the licensee have an ongoing right to receive the water?

The SumofUs.org petition does not call for privatization of water, but for "a fair price." A fair price need not mean a market price. In our view, it's a price that reflects full cost recovery -- not just the costs of administering a program, but also addressing the environmental costs associated with the water

use. SumOfUs characterizes

a fair price as one that "will pay for a strong water management and conservation program."

The government rates review is a welcome announcement, and could result in more revenue to fully implement water-related laws for sustainability. Our government knows that higher rates are possible -- the rates are significantly higher in many other provinces, as high as $179/million litres in Nova Scotia, compared to the $2.25/million litres proposed in B.C.

So what about NAFTA?

We've been pioneers in sounding the alarm about free trade agreements, and there are many legitimate concerns about how NAFTA addresses water. However, our 1999 opinion, written by then-executive director Steven Shrybman, did not focus on water pricing, but on whether NAFTA prevents Canada from stopping bulk water exports after they start.

A 2011 report by the Canada West Foundation (CWF) specifically looks at water pricing and whether it could pose difficulties under NAFTA.

The report concludes -- correctly in our view -- that the mere act of pricing water cannot force a government to allow bulk water exports. B.C. has long banned bulk exports of water, although an exception is made for bottled water, and NAFTA does not undo that ban.

The CWF report concludes that water pricing is generally allowed under NAFTA, subject to some potential for individual U.S. investors to claim an "expropriation" if new fees are imposed on water that the investor had a previous right to access:

[A] water pricing regime that continues to be in government hands would have the least risk of offending NAFTA obligations .... Under the environmental provisions of NAFTA Chapter 11, such a measure could stand provided, again, that the environmental intent was both clear and justifiable. Compensation to investors might, however, still be an issue.

This risk of possible compensation is a reason to set fair prices now. While the new Water Sustainability Act will apply an application fee and charge an annual water rent to ground-water extraction for the first time when the law comes into force in 2016 (and the application fee is even waived for existing groundwater users), Nestlé and other groundwater users are also gaining new enforceable rights, and it is reasonable to expect them to pay new fees. Arguably it is only once the water pricing structure is legally enshrined that future changes might amount to an "expropriation" worthy of compensation.

Conclusion

There are a lot of questions about how NAFTA relates to water, and few NAFTA decisions to provide guidance. However, in our opinion, B.C. needs a robust, fair and credible water pricing system that encourages conservation and accounts for all environmental costs, and the risk that such a system would run afoul of NAFTA is minimal and should not stand in the way of increasing water rates to levels consistent with, or even higher than, other provinces.

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