The welfare costs of non-marginal water pricing: evidence from the water only companies in England and Wales

Abstract

The evaluation of the economic efficiency of regulatory schemes is essential for regulators and utilities. In this study it is analysed for the first time the welfare costs of non-marginal cost pricing in the water supply in England and Wales, by computing the deadweight loss of the water only companies (WoCs) that existed over the period of 1993–2009. The results indicate that the current price schemes can have substantial efficiency costs. Our estimates show that the loss of efficiency for the WoCs lies between 15 and 60 million GBP over the period 1993–2009. These amounts could have been redistributed either to the companies in terms of profits or to the consumers via price reductions. The methodology and results of this study are of great interest for both regulators and water utilities managers to evaluate the effectiveness of price regulation and make informed decisions.

Keywords:

• Profits
• deadweight loss
• water industry

Notes

1. Note that cost of production does not consider environmental and resource costs but focused on investment and operational costs.

2. Borenstein and Davis (2011) and Davis and Muehlegger (2010) studied the deadweight loss resulting from non-marginal cost pricing for natural gas in the US. Porcher (2014) applied a similar framework in the French water public service and Davis (2014) discussed the welfare effects of fuel subsidies worldwide.

3. In this study, information on marginal cost and price was not available in the data-set. Hence, additional steps to compute these variables are needed. They are specified in the sample data section.