Abstract
The Swedish Water and Wastewater (WW) utilities are subject to a cost-of-service regulation with no regulatory incentives to reduce costs. An estimation of firm-level inefficiency using stochastic frontier models on a cross-sectional sample of 148 utilities from 2006 suggests that overall the sector has at least a 15% cost reduction potential. Utilities can increase efficiency by reducing network losses. The cost frontier shifts to a higher level when (1) two or more municipalities merge their WW operations and when (2) utilities receive tax subsidies.
Notes
1The economic regulatory principles are laid out in the Law on Public Water Services (SFS Citation2006:412, §30).
2 vi is also assumed to be uncorrelated with all regressors in every equation.
3Amount of treated WW was evaluated as an additional output but multi-collinearity problems inflated SEs dramatically and hence it was left out of the final estimations.
4The 12 smallest municipalities are unrepresented, which makes the conclusions not necessarily valid for them.
5The maximum likelihood estimator and Limdep 9.0 are used for all estimations.
6Bhattacharyya et al. (Citation1995) suggested that size and ownership in combination have an influence on efficiency.