Profit change and its drivers in the English and Welsh water industry: Is output quality important?

The assessment of profit change over time and its drivers is essential to analyse firms' financial performance. This paper investigates profit change and its components for the 10 English and Welsh water and sewerage water companies over the period 1991-2008 and for three regulatory sub-periods. Profit changes and their drivers are computed following two approaches, namely: without controlling for water and sewerage quality issues, and after decomposing the output effect into high quality and low quality output effect. In both cases, profit change is decomposed into various factors such as quantity and price effect, technical change, efficiency change, resource mix, product mix, and scale effect. Profit change over the whole period was negative, with the substantial negative price effect being the main driver, which outstripped the positive quantity effect. This negative profit change was significantly marked from 2000 to 2005 while in the sub-period 1994-2000, which covers the 1994 price review, the profit change was positive. A further decomposition illustrated the significant negative impact of the input price and scale effects on profit changes. The methodology and conclusions of this paper are of great interest for both regulators and water utilities managers to improve future performance.