Assessing capital efficiency in the water and sewerage industry in England and Wales: Ofwat's approach |
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Authors: | Gordon Allan |
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Affiliation: | aWater Services Regulation Authority (Ofwat), Centre City Tower, 7 Hill Street, Birmingham B5 4UA, UK |
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Abstract: | 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. |
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Keywords: | Capital outputs Periodic review Capital efficiency Efficiency assumptions Service to customers Service improvements Price limits Capital enhancement Capital maintenance Serviceability of assets Relative efficiency Cost base Econometric models Continuing efficiency Unit capital costs Standard capital costs Capital efficiency benchmark Efficiency incentives |
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