A fair deal?

Source: https://www.lboro.ac.uk/research/spotlights/fair-deal/ Parent: https://www.lboro.ac.uk/research/spotlights/

Influencing water price caps using efficiency benchmarking

Ofwat – the UK Water Services Regulation Authority – protects customers by setting price caps on water companies in England and Wales.

However, balancing a fair deal for consumers with enough company revenue to support public service responsibilities – including flood defence and leak prevention – is a complex task.

Our research has made a significant contribution to the pricing process for the latest five-year business cycle for water companies (PR19, 2020-25) – guiding the modelling conducted by Economic Insight, Ofwat and five water companies, Affinity, Bristol, Thames, Wessex and Yorkshire.

Our impact

Benefits for Economic Insight

We provided training on econometric measures of efficiency, putting the organisation in a stronger position to secure further work with water companies.
We also advised on accurately measuring retail efficiencies, a new element in the price determination.

Guiding Ofwat

We commented on Ofwat’s Cost assessment for PR19: a consultation on econometric cost modelling.
We also provided technical advice on how to model a company’s dual service customers.

Supporting water companies

We helped to produce the retail cost models for Affinity, Bristol, Wessex and Thames water companies.
We similarly supported Yorkshire Water around cost efficiency modelling.

The research

Drawing on our knowledge of econometric efficiency measurement, we contributed to the use of two approaches – time invariant efficiency (persistent cost performance) and time-varying efficiency (transient cost performance).

Our research spanned several areas including the calculation of persistent productive efficiencies of decision-making units such as countries and companies, and the calculation of transient retail cost efficiencies of water companies.

We also expanded and successfully applied a method for calculating persistent efficiency spillovers between decision-making units.

Our research underpinned the efficiency measurement of five regulated water companies.

More than 10.7 million households across the country will benefit from our work.

Development partners

Affinity Water
Bristol Water
Economic Insight
Ofwat
Thames Water
Wessex Water
Yorkshire Water