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Why BC's New Water Prices Don't Violate NAFTA

Will charging Nestle irreversibly turn on taps? Enviro law expert weighs in.

By Andrew Gage 21 Jul 2015 |

Andrew Gage is a West Coast Environmental Law staff lawyer.

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West Coast Environmental Law staff lawyer Andrew Gage: 'Our government knows that higher rates are possible.'

When the B.C. government unveiled its new water pricing scheme, we wrote that while a major increase, the amounts being charged seemed very low. It turns out that hundreds of thousands of British Columbians share that concern -- as demonstrated by a petition signed by 225,000 people, which has now resulted in a B.C. government commitment to review its water rates.

But former MLA Judy Tyabji is claiming that increasing the water rates could cause B.C. to lose control over water under NAFTA, and is citing a 1999 West Coast Environmental Law legal opinion in support of her view. Consequently, we think it's important to clarify that we agree with that there is room to increase water rates dramatically without running afoul of NAFTA or other trade agreements.

As we've noted before, the new pricing for B.C. water was undertaken after extensive public consultations in which the government noted "a consistent message from British Columbians... that water is undervalued." 

Despite this strong message -- that the public wants higher value placed on our invaluable water resources -- the new pricing regime for B.C. water is still among the lowest in the country. 

A false dichotomy is born

In February, we noted several examples of low rates that industrial users might pay, including Nestle, and suggested that conservation interests could be better served with higher rates.

Since then, 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," she told the CBC. "If you create water as a commodity for government -- as a revenue stream -- imagine what that does to conservation."

Judy 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," she wrote. "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... Do not sign the petition, do not ask that our water become a commodity."

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 concern that water might be turned into a commodity gave rise to considerable concern when, in 2011, the BC government floated the idea of water markets being included in the Water Sustainability Act, which might have allowed the licensees to sell water (a proposal which was abandoned). Similarly, the fact that the Water Sustainability Act guarantees early groundwater users priority in water allocation raises concerns that licensees may argue that their rights are like private property rights (despite the clear statements in the Act of public ownership of the water). 

By contrast, there is nothing in the petition that calls for water to be sold or for the strengthening of private rights over water. It does call for "a fair price" -- but there is no reason to assume that the 225,000 people signing the petition meant a market price. The drafters of the petition have been clear that they did not mean the term to refer to market price, but rather a price that "will pay for a strong water management and conservation program."

What is meant by "fair price" really depends upon what B.C. is trying to achieve with a price. In our view, a fair price does not mean a market price, but rather 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. This may mean that prices should be higher in drought-vulnerable regions, or where the water use will pollute water (fracking) or remove it from the system (water bottling).

Even if the government wants to use new revenues from water pricing solely to run the water allocation system, that should be a system that has all the necessary information and tools to properly manage the water resources, including full mapping of all B.C. aquifers, measuring  water flows and establishing environmental flow thresholds for water bodies, as well as staff on the ground to enforce the Water Act and the Environmental Management Act and other legislation intended to protect water quality and quantity. We are deeply skeptical that the current proposed rates, intended to raise $8 million per year, will meet such a standard.

That's why the government review of the rates is a welcome announcement. It can use more revenue to fully implement the new Act for sustainability. Our government knows that higher rates are possible -- as evidenced by the fact that the rates are significantly higher in many other provinces, as high as $179 per million litres in Nova Scotia. 

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, at least at this stage and at the rates we're talking about, it's premature to say that an increase in water rates would pose a problem under NAFTA. Our 1999 opinion, written by then executive director Steven Shrybman for the Council of Canadians (which, by the way supports higher water rates for industry), was focused on a different issue: whether NAFTA prevents Canada from stopping bulk water exports after they start. It did not focus on the issue of water pricing, and certainly did not have these water rates in mind.

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. In the words of the report, NAFTA "cannot... be used to force the export of water where there is no pre-existing export." That is the main conclusion of the Shrybman opinion as well. 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 water pricing is generally allowed under NAFTA, although it does acknowledge that there is 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," reads the report. "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."

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

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.  [Tyee]

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