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.

KEYWORDS:

• Environmental variables
• water industry
• cost efficiency

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Efficiency estimation is based on a benchmarking approach which compares the performance of water companies regarding their inputs use (capital and operational costs) to produce a set of outputs (water supply services).

2. Carvalho and Marques (2011) defined environmental variables as all exogenous variables that interfere, to a greater or lesser extent, in the performance of observations (water utilities) and that do not directly depend on their managerial practices.

3. Costs and prices are expressed in 2009 prices by using the United Kingdom Retail Prices Indexes.