The impact of privatisation and regulation on the water and sewerage industry in England and Wales: a translog cost function approach

David S. Saal, David Parker

Research output: Contribution to journalArticle

Abstract

After the ten Regional Water Authorities (RWAs) of England and Wales were privatized in November 1989, the successor Water and Sewerage Companies (WASCs) faced a new regulatory regime that was designed to promote economic efficiency while simultaneously improving drinking water and environmental quality. As legally mandated quality improvements necessitated a costly capital investment programme, the industry's economic regulator, the Office of Water Services (Ofwat), implemented a retail price index (RPI)+K pricing system, which was designed to compensate the WASCs for their capital investment programme while also encouraging gains in economic efficiency. In order to analyse jointly the impact of privatization, as well as the impact of increasingly stringent economic and environmental regulation on the WASCs' economic performance, this paper estimates a translog multiple output cost function model for the period 1985–1999. Given the significant costs associated with water quality improvements, the model is augmented to include the impact of drinking water quality and environmental quality on total costs. The model is then employed to determine the extent of scale and scope economies in the water and sewerage industry, as well as the impact of privatization and economic regulation on economic efficiency.
Original languageEnglish
Pages (from-to)253-268
Number of pages16
JournalManagerial and Decision Economics
Volume21
Issue number6
DOIs
Publication statusPublished - Sep 2000

Keywords

  • Regional Water Authorities
  • RWAs
  • England
  • Wales
  • Water and Sewerage Companies
  • WASCs
  • regulatory regime
  • economic efficiency
  • drinking water
  • environmental quality
  • capital investment programme
  • economic regulator
  • Office of Water Services
  • Ofwat
  • retail price index
  • (RPI)+K pricing system
  • privatization
  • economic regulation
  • environmental regulation
  • WASCs' economic performance
  • translog multiple output cost function model

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