Estimation and evaluation of productivity change and its drivers in the English and Welsh water sector: a stochastic cost frontier approach

ABSTRACT

Estimating productivity change and its determinants is of great importance when measuring the performance of a firm. A true random effect cost model was employed to measure the cost efficiency of water companies in England and Wales from 1993 to 2016. Subsequently, total factor productivity change was estimated and decomposed into cost-efficiency change, technical change, scale efficiency change, output effect and residual price effect. The results indicate that the English and Welsh water industry increased its productivity over the period examined at a rate of about 2.1%, and it was influenced primarily by technical change. The price reviews appear to have a positive impact on the productivity of water-only companies during the whole period examined. In the case of water and sewerage companies, the 1994 and 1999 price reviews had a positive impact on productivity, whereas the last two price reviews had an adverse impact.     

Changes in the total costs of the English and Welsh water and sewerage industry: The decomposed effect of price and quantity inputs on efficiency

Understanding what drives changes in regulated water companies' costs is of great relevance to water regulators. This study decomposes and estimates the change in total costs for a sample of ten water and sewerage companies in England and Wales from 1993 to 2016. The results demonstrate that companies' total costs increased over time due to increases in input prices and input quantity. Any gains obtained from the efficient allocation of resources and technical progress were lost due to mergers and technical inefficiency. Finally, we link our results with the regulatory cycle to evaluate the impact of the regulatory regime on companies' costs and discuss some policy implications.     

Assessing the influence of exogenous and quality of service variables on water companies´ performance using a true-fixed stochastic frontier approach

ABSTRACT

Improving the cost efficiency and quality of service across time corresponds to two important targets for regulated water companies. Following a pioneering approach, we have evaluated the influence of a set of exogenous and quality of service variables on the English and Welsh water companies’ costs over the period of 1996–2009. A true-fixed effects stochastic cost frontier model was applied since it also allowed computing of the productivity change of the water companies and their drivers. Results have shown that quality of service has an influence on water companies´ costs. This issue is very relevant for bursts in water mains since investments in reducing them will lead to a reduction in the water supply interruptions and water losses. Results of this study illustrate the importance of developing long-term planning investment programmes in the water industry.     

Optimal water tariffs and supply augmentation for cost-of-service regulated water utilities

We describe how a common method for regulating water utilities, cost-of-service regulation, can both in theory and practice result in the premature and economically inefficient water supply augmentation. Using a dynamic model calibrated to demand and supply conditions in Sydney, Australia we show how to optimally determine the time to supply augment using a ‘golden rule’ that minimises the average volumetric price paid by consumers. Our results show that, the greater the water scarcity and the longer the operational life of the additional supply, the sooner is the optimal time to augment. Based on our findings, we recommend that price regulators of water utilities adopt an historical cost less depreciation basis for a regulated asset base and a fully flexible and dynamically efficient volumetric pricing that accounts for the marginal opportunity cost of water supplies.     

Profit productivity change in the English and Welsh water sector: Impact of the price reviews

Profitability and productivity change over time are two key indicators to evaluate the performance of water companies. In this study, the profit inefficiency of water utilities was estimated based on the Luenberger Productivity Indicator (LPI). The empirical approach focused on the English and Welsh water industry from 2001 to 2018. It was illustrated that water companies suffered a profit inefficiency effect of 50%, mainly (44%) attributed to allocation inefficiency, whereas technical inefficiency contributed by 6%. Estimated profit LPI values revealed the impact of the price reviews on the profit productivity of the English and Welsh water companies.     

A comprehensive and well tested energy balance for water supply systems

This paper presents a novel energy balance scheme and performance indicators for assessing energy efficiency in water supply systems. This assessment consists of a three-step procedure: system characterisation and data collection, energy balance calculation and energy performance indicators assessment. The main innovation is the integrated approach between energy and water balances allowing the quantification of energy inefficiencies directly associated with water losses. Comprehensive energy performance indicators can be calculated by utilities with different maturity levels allowing a fair comparison of energy efficiency between systems with different layouts and operational schemes. This energy balance scheme has been applied by 17 water utilities in Portugal. Results have shown that systems provide more than twice the minimum energy necessary to supply their consumers and, consequently, there is a significant energy saving potential: 40% through water loss reduction, 30% for changes in network operation and layout and 30% for pump inefficiency reduction.     

Assessing capital efficiency in the water and sewerage industry in England and Wales: Ofwat's approach

The Water Services Regulation Authority (Ofwat) is the economic regulator of the water and sewerage companies in England and Wales. Ofwat carries out regular annual reviews of relative capital efficiency and periodic reviews of prices charged by the companies to determine maximum price limits. In reaching these determinations, the most recent of which was in December 2004 (PR04), Ofwat assumed that the companies can, going forward, make some capital efficiencies. Ofwat assessed the scope for such efficiencies in each company by analysing their capital and operating expenditure and outputs, comparing their unit capital costs, making econometric comparisons of their capital maintenance costs and assessing the scope for continuing capital productivity improvement in the water and comparator sectors. Three separate tools used by Ofwat for assessing capital efficiency are described; the cost base (for capital unit costs), capital maintenance econometric models and ‘continuing efficiency’. The paper notes how these three tools were used in combination for price limit assumptions in 2004.     

Performance assessment of the Chilean water sector: A network data envelopment analysis approach

This study applies a two-stage network structure model to evaluate water service providers cost and operational performance embracing service quality variables. An empirical analysis of the Chilean water and wastewater industries over the 2010–2018 period is presented. Moreover, in the second stage of analysis, we analyzed the impact of a set of exogenous variables on the performance of water companies. Results revealed that the Chilean water companies had notable room to reduce costs and improve operational performance. Moreover, it was found that the public water provider performed better than fully private and concessionary water providers.     

Adoption of data-as-a-service by water and wastewater utilities

While technologies in the water sector have been advancing over the past few decades, complementary innovation in business models is needed to support the adoption of these technologies. One emerging opportunity is an outsourced approach to data collection, delivery, and analysis known as “Data-as-a-Service.” This study is the first to explore the drivers, barriers, and implementation trends for water and wastewater utilities to adopt this model. The findings provide valuable insights for utility managers looking for new ways to adopt innovative technologies and regulators and policymakers seeking to encourage utilities to make data-driven decisions.     

Model for evaluating the efficiency of Russian water utilities

The objective of this study is to assess the efficiency of Russian water utilities based on a set of characteristic indicators. The novelty of the research is in the application of tools of the theory of economic “growth points” for analyzing water utility performance. The generalized development of a water utility is defined in terms of the efficiency of external and internal resources use. Conclusions on the development of water utilities in the six regional administrative centers of Siberia (Barnaul, Chita, Irkutsk, Novosibirsk, Omsk and Tomsk) in the 2013–2016 period were made.     

Economies of scale and scope in Australian urban water utilities

This paper estimates economies of scale and scope for 55 major Australian urban utilities over the period 2005/06 to 2008/09. The models used specify operating and capital costs as a function of chemical and microbiological compliance, water losses, water quality and service, water main breaks, total connected properties, and urban water supplied. The input variables used to help determine water utility costs include the density of properties served and the sourcing of water from bulk suppliers, groundwater, recycling and surface water. In terms of economies of scale, the evidence suggests strong economies of scale at relatively low levels of output (50–75% of current mean output). In terms of product-specific economies of scale (increasing the scale of a specific output in isolation), there is substantially stronger evidence that the operating costs of urban water utilities would benefit from increasing scale with regard to chemical compliance, water quality and service complaints, and the number of connected properties. In contrast, capital costs would benefit from scale increases with regard to the management of water losses and water main breaks. For economies of scope, it is clear that there are substantial cost benefits from the joint production of treated quality water delivered across a network with minimal water losses and main breaks. The main cost advantage at all levels of output is decreasing water losses, and this would benefit both operating and capital costs.     

The use of a variable cost function in the regulation of the Italian water industry

The purpose of this study is to estimate a multivariate variable cost function in order to analyze the cost structure of a sample of Italian water distribution companies.The empirical results of this study could be used by the Italian Regulation Authority of this sector to improve the actual tariff regulation process.A variable cost function was estimated using panel data for a sample of 32 water distribution firms operating at the provincial level over the period 1991–1995. Results indicate the importance of explanatory variables such as price of labor, water loss and service area characteristics.Results also indicate the existence of economies of output and customer density and the presence of small diseconomies of scale.     

Measuring and comparing the efficiency of water utility companies: A data envelopment analysis approach

This study provides an analysis of Italian water utilities to determine the effects on their efficiency of certain relevant variables that have been broadly discussed in the existing literature. We reviewed the annual financial statements of 43 Italian water utility companies and obtained other technical data from Co.n.vi.r.i., the Italian national authority for water. Using data envelopment analysis we assessed their cost efficiencies and, using non-parametric statistic methods, we discuss the significant differences among clusters.We found that ownership structure, size and geographical location had an impact on the performance of water utilities, although with different degrees of significance.     

Impact of external costs of unplanned supply interruptions on water company efficiency: Evidence from Chile

Conventional performance assessments of water companies ignore the external costs due to water supply outages. To overcome this gap, we evaluate the impact of external costs of unplanned supply interruptions on the efficiency of water companies. Two efficiency metrics, internal technical efficiency (ITE), and total technical efficiency (TTE), were estimated based on data envelopment analysis (DEA). The results evidence that the external costs of unplanned water supply interruptions impact, on average, 7.9% of the efficiency of water companies. We also explored the impact of a set of environmental variables on water company efficiency.     

The impact of coordination on wholesale market participation: The case of the U.S. electricity industry

Coordination costs in a wholesale electricity market are a relevant public policy consideration. The mitigation of coordination costs, all else equal, should increase participation in the marketplace. Since Federal Energy Regulatory Commission (FERC) Order 888 was issued in 1996, the level of trading activity in bulk electricity markets has increased significantly. In 1999, FERC issued Order 2000 to advance the role of regional transmission organizations (RTOs) in the restructured marketplace for wholesale electricity. RTOs have the potential to reduce the coordination costs, while also having the countervailing effect of causing market participants to incur compliance costs. This paper utilizes the diversity of the United States electricity market and a panel data set representing electric utilities for the period 1990–2009 to study the effects that RTOs have had on wholesale electricity exchange. The paper finds that the presence of a transparent wholesale marketplace for electricity has the effect of increasing participation, but this participation is uneven across types of electric utilities. Greater participation is seen for investor-owned and larger utilities. The results have important implications for policy aimed at wholesale markets and the transmission organizations, as the opportunities afforded by transparency may not be uniformly distributed across all market participants.     

Water company productivity change: A disaggregated approach accounting for changes in inputs and outputs

The assessment of the productivity change of water utilities provides essential information to sector managers and regulators. This study uses the Luenberger-Hicks-Moorsteen Productivity Indicator (LHMPI) to evaluate productivity change as it can be further decomposed into three components namely technical change (TC), technical efficiency change (TEC), and scale efficiency change (SEC). This study evaluates the productivity of several water companies in England and Wales from 2001 to 2018. We found that productivity declined 1.2% per year due to the use of inputs that increased by 1.4% per year relative to outputs that increased by 0.2% per year.     

Urban water demand for industrial uses in Spain

ABSTRACT

This study estimates the demand for urban water in Spanish industry, with particular attention to differences between sectors. A panel dataset for the Spanish Autonomous Communities in the period 1993–2013, broken down into 11 sectors, was used. The results indicate that water pricing policy can be used effectively as a mechanism to encourage reduced water use (elasticity of ?0.66), but there is a strong sectoral heterogeneity that recommends the additional use of other types of instruments. In general, sectors where water represents a larger proportion of total costs present greater elasticity.     

Do ESG factors improve utilities corporate efficiency and reduce the risk perceived by credit lending institutions? An empirical analysis

In a changed scenario, characterized by great attention to environmental, social, and governance (ESG) factors, few industries feel the pressure more than utilities. The paper investigates, by employing a Data Envelopment Analysis (DEA) model, whether including ESG factors increases the efficiency of utilities companies and whether banks, by considering ESG ratings when selecting utilities companies, succeed in optimizing their portfolio. Our findings signal that ESG factors neither improve utilities efficiency nor constitute a useful complementary criterion for credit lending managers, provide useful suggestions for managers, regulators and academics.     

Is the price of water for residential use related to provider ownership? Empirical evidence from Spain

This paper assesses the relationship between provider ownership and the price of water for residential use set by 386 Southern Spanish municipalities. Our main contribution to the previous literature is that we go much further than merely distinguishing between private and public ownership. First, we find that prices are lower when the urban water service is directly provided by town councils. Second, when water services are contracted out to external companies, the prices set by public utilities are higher than the prices of private utilities due to larger fixed quotas. Finally, water prices are also higher when the provision of the service has been privatised to an institutionalised public-private partnership compared to contractual public-private partnerships.     

Dynamic goal programming synthetic indicator: an application for water companies sustainability assessment

ABSTRACT

This study proposes to evaluate the sustainability of water companies through time by using a new approach, one that involves a dynamic synthetic indicator derived from goal programming techniques. This dynamic indicator approach incorporates catch-up and innovation indices, which enables one to identify the main factors that drive changes in sustainability through time. We used a case study approach to clarify this dynamic approach by evaluating indicator values from a sample of 129 Portuguese water companies over the 2012 to 2015 time period. For most of the water companies we evaluated, sustainability values changed over time, which illustrates the importance of evaluating dynamic sustainability. For each examined water company, we quantified whether changes in sustainability were due to external and/or internal factors. The indicator approach we proposed should be useful for water regulators evaluating the effectiveness of policies aimed at improving a water company’s sustainability.