Guide to Establishing the Level of a Cost-Based User Fee or Regulatory Charge
The implementation of user fees is a multi-step process that begins with the formulation of a charging rationale and ministerial support and then proceeds to more applied practices that include costing, the establishment of service standards, pricing, and stakeholder consultation. In the later phase of ongoing management, departments monitor service performance, manage disputes, report, and perform reviews.
The information contained in this Guide pertains to the individual step of pricing, which is also commonly referred to as establishing the level of the fee or fee setting. It should be noted that fee setting is sometimes used to describe the entire user fee implementation process. In this Guide, fee setting refers solely to the aspect of pricing.
External charging comprises fees that are based on costs as well as on other measures, such as market value. In light of impending court decisions that may offer additional clarification related to fees based on other measures, the information in this document pertains specifically to cost-based user fees and cost-based regulatory charges.
This Guide will be updated periodically as required. Complementary guidance related to the pricing of fees that are based on measures other than cost will be developed when appropriate. Guidance that focuses on other steps of the user fee implementation process will also be developed.
A number of departments and agencies were consulted during the preparation of this Guide, and their contributions are greatly appreciated.
Inquiries concerning this Guide should be directed to the following:
Financial Management and Analysis Sector
Office of the Comptroller General
Treasury Board of Canada Secretariat
Ottawa ON K1A 0R5
Telephone: (613) 957-7233
Fax: (613) 952-9613
A — Introduction
Establishing the level of a user fee or regulatory charge is also commonly referred to as determining the amount of the charge, fee setting, or pricing.
Fee setting analysis is an integral part of the charging business case that forms the basis of consultations with stakeholders. Fee setting presupposes that the fundamental fee implementation requirements of fee setting authority, charging rationale, and ministerial support are in place. Effective fee setting requires consideration of a range of factors including costs, impact analysis, and stakeholder feedback.
The objective of this Guide is to assist departments and agencies by presenting key factors for consideration and outlining the general process that should be followed when making pricing decisions in respect of cost-based user fees and cost-based regulatory charges. This document presents broad guidelines and concepts that should be considered when setting and reviewing fee levels. This Guide seeks to foster a more administratively consistent approach to fee setting and to improve the relative fee level comparability of cost-based fees and charges.
Individual departments and agencies are responsible for establishing and revising fee levels within their respective fee environments. Fee level consistency on a government-wide basis (i.e. as might be measured as a standardized rate of cost recovery) is not an objective because every pricing exercise requires due consideration for its particular, and potentially unique, set of factors. Similarly, in light of the need for judgment in assessing such pricing factors as the mix of public and private benefit or contextual analysis, it is foreseeable for conclusions drawn from a single set of pricing factors to vary and that one pricing result could be as reasonable and defensible as another.
The information provided in this guide does not remove any conditions or obligations stemming from such governing frameworks as the User Fees Act or the Financial Administration Act.
Establishing fee levels for certain products or services may be subject to specific policies or regulations. When applicable, such provisions take precedence over the information contained in this Guide.
In this Guide, "department" refers to departments and agencies.
B — Cost-Based User Fees and Cost-Based Regulatory Charges
Cost is the fee‑setting basis for many user fees and regulatory charges. Fee setting on other bases is possible but must be approached with due consideration of the domain of taxation, which is solely the purview of Parliament. Consequently, fee setting on any other basis but cost should only be approached following comprehensive consultation with legal advisors.
Cost-based user fees and cost-based regulatory charges serve to recover an amount up to the full cost of the associated activity from users or direct-benefit recipients. The resulting revenues promote an approach of equity in the financing of government programs and facilitate the efficient allocation of resources.
Cost-based user fees are charged for services or facilities, and cost-based regulatory charges are usually imposed in relation to rights and privileges under a regulatory scheme where the charges are used to offset a portion of costs or to alter individual behaviour.
C — The Fee Setting Process
The fee setting process for cost-based user fees and cost-based regulatory charges encompasses three main steps: costing, assessing the upper limit of the fee level, and consideration of relevant pricing factors.
Every pricing exercise should be approached and undertaken with due diligence, keeping in mind that departmental fee setting efforts should reflect the materiality of a given fee or the expected reaction it may garner from stakeholders.
The fee setting process should be well documented, including all steps and contributing sub-tasks, analysis, and working assumptions. Thorough documentation can support internal consultation and approval processes as well as facilitate subsequent pricing reviews and provide for improvements to the pricing methodology. Clear documentation can also facilitate consultation efforts because transparency in pricing is critical to meaningful discussions with stakeholders.
Step 1: Costing
Estimating the activity's full cost is the first step for all fee setting exercises. A thorough assessment of costs provides for open consultations with stakeholders as well as informed decision making.
The Treasury Board of Canada Secretariat's Guide to Costing provides detailed information and a systematic approach to costing government activities and services. The Guide to Costing should be followed in every fee-related costing exercise.
For cost-based user fees and regulatory charges, full cost information is essential because it both frames the financial context and generally represents the maximum allowable level of revenue that a given fee level can generate. This principle is most commonly referred to as "full cost representing the maximum fee level or upper limit."
Step 2: Assessing the Upper Limit
The upper limit of a fee is the departure point for determining its final price. For cost-based user fees and cost-based regulatory charges, the upper limit of the fee is marked by the estimation of full cost.
The common law and some legislative provisions, such as subsection 19(2) of the Financial Administration Act (FAA), establish that an activity's estimated full cost represents the maximum allowable price for cost-based fees and charges relating to it and fixed pursuant to the FAA. Full cost may be viewed within the context of all costs to the Crown in the provision of the associated activity.
In addition to the FAA, the authority to establish fees may be granted through some departmental or enabling legislation. If instruction regarding cost-based fees and charges is not provided in those other acts, departments should abide by the provisions of subsection 19(2) of the FAA.
The principle underlying subsection 19(2) of the FAA is that fee levels should not be designed to exceed estimated full costs. It recognizes that cost and demand forecasts are estimate-based inputs to the pricing function. As such, isolated occurrences of revenues exceeding full costs may occur without constituting a breach of the cost-based principle. It is the repeated result of revenue surplus that indicates that the level of the charge should be reviewed.
In most cases, estimated full cost is derived by totalling the costs of all functions that support the primary activity. This estimate encompasses direct and indirect costs, the latter including departmental support costs and the costs of other government departments for any material services they provide.
In other cases, however, there may be additional functions that enhance the primary activity but in a less evident or straightforward manner. The costs of these additional functions may not figure into the set of indirect costs typically associated with the primary activity, although it would be permissible to do so. The Supreme Court of Canada has confirmed, for example, that the costs Parks Canada incurs in the overall operation and administration of a park contribute to the benefit of owning a business licence to operate in that park. The business licence fee, therefore, did not need to be limited to the direct and indirect costs attached to the primary licence-issuing activity. That is, it would be valid to include the costs of maintaining the park in the full cost estimation of business licensing.Footnote 1
This scenario is referred to as the cost of the regulatory scheme and represents a legitimate cost base and upper limit for fee setting purposes. Costing and fee setting on the basis of a regulatory scheme is appropriate when the recognition of the costs of additional functions is more representative of the true costs of providing the primary activity.
Step 3: Consideration of Pricing Factors
There are a number of additional factors that should be taken into account following the assessment of the maximum fee level. These pricing factors include the mix of public and private benefit, impact and contextual analysis, and stakeholder consultation. Any combination of these factors can suggest establishing the final price at a level below full cost.
It should be recognized that general taxes, through departmental appropriations, subsidize cost-based user fees and cost-based regulatory charges that do not recover the full costs of their associated activities from the users. Departmental reporting of user fee information should present both cost and revenue elements.
Departments must carefully assess the actual dollar-value impact that pricing factors will have on fee levels. Although department-wide pricing strategies may be preferable, it is reasonable that sections within a department could have charging activities that incorporate some differences in their pricing factors. This may be due to differing program mandates or regulatory requirements.
The review of pricing factors is recommended even when departmental charging strategy already suggests cost recovery at a pre-determined rate, being at the level of full cost or otherwise.
a) Public and Private Benefit
Government activities may support both public and private (i.e. direct user) interests. In such cases, it may be appropriate to establish fees at levels below full cost.
Evaluating or quantifying an activity's mix of public and private benefit can be challenging and subjective. As one input to the analysis, assessing whether the activity primarily benefits the general public or the direct user can help to situate a possible rate of cost recovery. Where regulatory activities are concerned, the individual or organization being regulated is considered the direct user and generally recognized as the primary beneficiary. Naturally, the act of regulating direct users may also serve the health, safety, or security interests of a larger contingent of end users or the Canadian public. These groups, however, are generally viewed as secondary beneficiaries of the regulatory activity.
Rival consumption and excludability are two considerations that are often integral to the initial determination of whether imposing user fees is appropriate. Within the current context of establishing an appropriate fee level, these characteristics can also help to estimate the placement of an activity on the public-private continuum.
Rival consumption refers to the extent that one user's consumption of a particular service affects another user's potential level of consumption. The greater the estimated effect, the more rival and private a service or activity is considered to be. A purely private activity or service is highly rival in consumption and generally suggests a higher possible rate of cost recovery. Purely public activities and services are described as being non-rival in consumption. Operationally, the marginal cost of allowing additional users to consume non-rival services is generally considered to be zero.
Excludability refers to the extent that the benefits from an activity or service may be restricted to those users that pay. Purely public activities and services are generally non-excludable in that there is no practical way of preventing additional users form benefiting from the activity or service. Purely private activities and services have high degrees of excludability and generally suggest higher possible rates of cost recovery.
Once assessed, an estimate of the public-private benefit ratio may be applied to an activity's full cost to help situate a possible recovery rate or fee level. Further examination of how sub-activity costs support public or private objectives may provide additional pricing insight.
b) Impact and Contextual Analysis
Impact analysis should estimate the effects of fees and charges on the financial or competitive positions of user groups and classes of recipients. When charging at a full cost level indicates the potential for detrimental impact, fees should normally be reduced. Departments must establish their respective risk and impact tolerances and determine how the results from analysis may translate into fee level adjustments.
Impact assessment should contain cumulative fee analysis. This means that departments should consider the effect of all material federal fees and charges that affect the user group.
Contextual analysis can contribute useful insight as to the financial and market forces that are relevant to the department and the fee level decision, including the possible effects on the demand for services. Contextual analysis demonstrates awareness and understanding of the environment within which the fees apply and should make reference to the fundamental objectives and charging rationale set by the department. Contextual analysis should examine fee levels charged by other jurisdictions or entities for similar activities and services. Benchmarking of this sort should always pay due regard to such relevant factors as differing resource levels, service levels, user profiles, and regulatory objectives.
The achievement of in-depth analysis may require the development of sophisticated methodologies or the input of consulting expertise. In such instances, departments should seek the concurrence of stakeholders with the approach and methodologies to be used. Stakeholder agreement may also be required to ensure the availability of verifiable data at the appropriate level of detail.
In many cases, tools and approaches that are readily available to departments can produce reasonable and reliable impact information. The Treasury Board of Canada Secretariat's Canadian Cost-Benefit Analysis Guide presents an analytical framework and approach for conducting impact analysis of regulatory policy. Information contained in the Guide may also assist impact assessment in relation to fees. The business impact test is a survey-based tool that has been used effectively to collect fee impact information from stakeholders.
c) Other Public Policy Objectives
Departments should consider how proposed fee levels may affect the achievement of broader public policy objectives, such as innovation and market accessibility.
Broad public policy objectives are those that are generally communicated through such key vehicles as speeches from the Throne, budgets, and Cabinet directives.
d) Stakeholder Consultation
Stakeholders should be provided with appropriate documentation describing the department's undertaking of the fee setting steps. Documentation should include a summation of the pricing factor analysis and any methodologies that lead to the proposed fee level. A well-planned communication strategy can facilitate stakeholder consultations regarding the fee level and other fee-related topics, such as service performance and dispute management.
With proper information, stakeholders will be positioned to make constructive enquiries about the price proposal. Stakeholders may also provide input or identify factors or other material federal fees that did not form part of the original fee setting analysis. Departments should be open to reviewing their fee setting analysis on the basis of stakeholder feedback and revising fee levels, as necessary.
Stakeholder consultation should include other government departments, as appropriate. Relevant departments could include those that also provide key services to the user group — with or without the element of fees — or those that provide services that materially support the charging activity of the delivering department.
The parliamentary consultation process provided for under the User Fees Act and departmental fee approval processes are likely to favour pricing decisions that have gained the support of stakeholders. Consensus stakeholder support of the pricing decision is not prerequisite to moving forward with the fee initiative. However, as unresolved stakeholder concerns can garner additional attention from parliamentarians or the media, departments should expect that the depth of their positions and analysis will receive added scrutiny.
D — Additional Fee Structure Features
Formulas and differentiated pricing are two possible fee structure features that can support the effective management of the fee activity or facilitate the achievement of program objectives.
On the basis of prior stakeholder consultation, fee formulas allow for the possible adjustment of fees and charges in a predetermined fashion. Under fee formulas, fee level adjustments are automatic and generally remove the need for consultation and other analytical efforts typically associated with fee level changes. Formula-based adjustments may be activated on the basis of time or on the basis of changes to costs or demand or other factors.
The use of fee formulas can benefit both departments and users by reducing the amount of time and administrative process required to effect fee level changes. Greater fee level responsiveness in certain environments, for example, can help maintain service performance levels in the face of increasing activity costs or other production factor changes.
Section 19.2 of the FAA gives standing to fee formulas by providing authority for the automatic adjustment of certain fees and charges on the basis of predetermined amounts and ratios. The FAA requires prior public notification of the revised fee level and the manner in which it was determined. Stakeholder notification should be considered standard management practice whenever the fee implementation process provides allowances in relation to consultations.
In light of their intrinsic uncertainties, it is recommended that fee formulas contain provisions that can safeguard stakeholders from unanticipated fee level outcomes. One possible safeguard could be to reflect the mandatory review of the fee level and fee formula after a specified period of time. Another form of safeguard could reinstate the comprehensive fee setting process if application of the formula would result in a fee increase beyond a given threshold.
Departments should be aware that, depending on their construction, fee formulas can result in fee level reductions.
Departments considering the use of fee formulas should always consult with legal advisors.
Departments may establish pricing regimes that recognize the varying service needs or profiles of users. For example, the level of a cost-based user fee or cost-based regulatory charge may reflect the desire for expedited service or the differing financial circumstances of citizens or within industry user groups.
When supported by relevant analysis and stakeholder consultation, differentiated pricing upholds the fairness and equity principles of user charging. Differential charges demonstrate added recognition of the issues affecting specific members of a user group.
Differential charges should not be simply read as cross-subsidization among paying stakeholders. Differentiated pricing may indicate, for example, varying levels of general taxpayer subsidy. Clear definition of user groups and understanding of the concept of the regulatory scheme will assist departments that contemplate differential charges. Consultation with legal advisors is recommended.
E — Fee Level Reviews
Periodic fee level review will help ensure that departments have reasonably current information regarding the factors supporting previous pricing decisions. Such awareness can improve departmental responsiveness and planning. Regular fee level reviews can inform departments as to how fee levels and associated revenues may be keeping pace with costs.
It is generally recommended that review of the components of the pricing decision occurs every three to five years. Environmental factors affecting the government, the department, or users may suggest review routines of greater or lesser frequency. Departmental requirements and priorities may also focus the scope of a review on particular elements of the pricing decision. Documented fee level reviews should confirm or update existing fee setting information. Departments should also assess whether a given fee level review warrants stakeholder consultation.
It should be noted that fee level reviews do not compel fee level changes. Fee level reviews aim to renew departmental information and awareness of relevant pricing factors. The results of fee level reviews may be a key input to a department's deliberation on possible fee changes, but a range of broader environmental factors will also influence any decision to actually proceed. Departments should nonetheless establish guidelines by which appropriate senior management ranks are made aware of the results of fee level reviews.
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