An Index Number Based Evaluation of Water Industry Regulation: Just When Did Ofwat Become a Tough Regulator?
Maziotis, A., Saal, D., Thanassoulis, E., Aston University
(free)
In this study we apply an index number approach to allow for cross sectional comparisons of
relative profitability, productivity and price performance of the regulated Water and Sewerage
companies (WaSCs) in England and Wales during the years 1991-2008. In order to better
analyse the impact of regulation on WaSC performance, we decompose actual economic
profits into spatial multilateral Fisher productivity (TFP), the inverse of which is demonstrated
to be a regulatory excess cost index that measures the deviation of a firm’s actual costs from
benchmark costs, and a newly developed regulatory total price performance (TPP) index,
which measures the excess of regulated revenues relative to benchmark costs. The results
indicate that during the years 1991-2000 price caps were “weak” as prices were high enough
for the firms to achieve economic profits despite their low productivity levels. However, after
2001 prices became “catch up promoting” as they required less productive companies to
eliminate at least some excess costs in order to eliminate economic losses. When compared
to alternative methodologies such as DEA and SFA, our index number based approach has
the further advantage of allowing meaningful comparative performance measurement even if
the number of available observations is extremely limited. We therefore suggest that our
approach should be of great interest, not only to those researchers interested in evaluating
the effectiveness of regulation, but also to those researchers more focused on developing
effective comparative performance techniques, even if sample sizes are limited.
KEY WORDS
Profits, productivity, price performance, index numbers, regulation, water industry
