Creating a Water Utility Can Help Prevent Drowning in Rate Increases

From: A.J. Goulding

To: Toronto water users

Date: October 22, 2026

Re: Creating a water utility can help prevent drowning in rate increases

Balancing affordability against the need to finance continuing essential investment in infrastructure is one of the biggest challenges facing Toronto.

Part of the solution is to change the city’s approach to managing its water system by making Toronto Water, which operates the city’s water and sewer systems, a city-owned public utility. Since the mid-1990s, Ontario municipalities have made a successful transition from providing electricity delivery through municipal departments to using local distribution companies; Toronto Hydro is one example. These entities have largely remained under municipal control but are run at arm’s length. In contrast, water, wastewater, and sewerage continue to be largely the responsibility of municipal departments.

The evolution of municipal departments into utilities has several advantages. It frees municipal staff to focus on emerging issues while leaving management of the utility to skilled managers, including, ideally, to a skills-based board. It fosters transparency through regular reporting processes. It clearly separates the function of service provision from that of regulating service quality and rates, even if city council serves as the regulator. Finally, it provides greater scope for the use of long-term debt, rather than pre-funded reserves, to finance future capital expenditures.

Moving to utility-style financing is important for moderating rate increases. Currently, many water, wastewater, and sewerage departments in Ontario fund capital expenditures largely from reserves, inducing municipalities to collect and hold large amounts of cash on their balance sheets well in advance of large capital needs. This means current customers are paying for new infrastructure that will benefit future customers for many decades. Aligning financing so customers pay for infrastructure as they use it instead of far in advance promotes the objective of fairness while making current rates more affordable. 

Use of debt is not imprudent; utilities use it to meet investment needs while maintaining financial flexibility in the same way people deploy car loans and home mortgages. While costs don’t disappear, they are spread more evenly over future periods. Because capital needs for water systems are immense, efficient financing is critical to keeping bills down.

Migrating water-related activities to a city-owned corporation can help increase focus on efficiency and capital budgeting choices that provide benefits to customers. This is not to suggest that current management is not well-intentioned.  They are, however, constrained within a larger municipal bureaucracy. Toronto Water makes up only about 3 percent of the city’s operating budget, even though as a stand-alone utility it would be relatively large, with revenues of more than $1.6 billion. 

An arm’s length Toronto water utility would be more focused, with the opportunity to pursue initiatives best suited to long-term growth and optimization. The cry to “get the politics out of the pipes” has become increasingly common in the water sector; creating a municipal utility is a step towards achieving that goal. Establishing a utility structure does not mean privatization is inevitable thereafter. Singapore and Sydney (Australia) both provide useful examples of water, wastewater, and sewerage entities which are autonomous from the cities they serve but not privatized.

The last serious review of Toronto Water governance came in the wake of the 1998 creation of the megacity, and ended with city council rejecting a proposed public utility model. But the provincial government is now promoting a the concept for water and wastewater, which enables municipal governments to, either by themselves or jointly with other municipalities, create entities which have the benefits of a separate public utility entity while still maintaining a social mandate.

While these entities can return a dividend to municipal taxpayers, profit is not their primary purpose. Instead, creating a utility enables separation of accounts, better liability protections, the potential for employment arrangements to evolve, and clear oversight by an independent board. Separation does not mean the loss of coordination; the city currently works closely with a range of public and private utilities in scheduling work along shared rights-of-way.

While Ontario currently lacks an economic regulator for water (the Ontario Energy Board focuses on electricity and gas), it would be straightforward for Toronto city council to establish a lean city body focused on appropriate oversight of water, wastewater, and sewage rates and performance. Such a body need not have more than three members, and its mandate would be to assure that rates reflect full cost recovery, efficient operations, appropriate long term capital planning, and efficient financing. Creation of a city-owned water utility does not make provincial rate regulation inevitable, and a proactive approach can help to retain local control.

Creation of city-owned utilities does not necessarily mean that privatization follows, nor would it necessarily make ratepayers worse off if it did. Toronto Hydro has been a corporation since 1999 and hasn’t been privatized. Furthermore, appropriately regulated semi-private utilities can both mobilize capital for massive future investment needs and provide utility services at reasonable rates.

Toronto residents deserve to have a water utility focused on their needs, including the provision of water, wastewater, and sewerage services at full, but fair, cost. A prudently financed water utility model would moderate affordability pressure on Torontonians while continuing to improve the system for coming decades.

A.J. Goulding serves as President of London Economics International and an Adjunct Professor at Columbia University.

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 The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.