A fair deal?
Influencing water price caps using efficiency benchmarking
Ofwat – the UK Water Services Regulation Authority – protects customers by setting price caps on water companies in England and Wales.
However, balancing a fair deal for consumers with enough company revenue to support public service responsibilities – including flood defence and leak prevention – is a complex task.
Our research has made a significant contribution to the pricing process for the latest five-year business cycle for water companies (PR19, 2020-25) – guiding the modelling conducted by Economic Insight, Ofwat and five water companies, Affinity, Bristol, Thames, Wessex and Yorkshire.
Benefits for Economic Insight
- We provided training on econometric measures of efficiency, putting the organisation in a stronger position to secure further work with water companies.
- We also advised on accurately measuring retail efficiencies, a new element in the price determination.
- We commented on Ofwat’s Cost assessment for PR19: a consultation on econometric cost modelling.
- We also provided technical advice on how to model a company’s dual service customers.
Supporting water companies
- We helped to produce the retail cost models for Affinity, Bristol, Wessex and Thames water companies.
- We similarly supported Yorkshire Water around cost efficiency modelling.
Drawing on our knowledge of econometric efficiency measurement, we contributed to the use of two approaches – time invariant efficiency (persistent cost performance) and time-varying efficiency (transient cost performance).
Our research spanned several areas including the calculation of persistent productive efficiencies of decision-making units such as countries and companies, and the calculation of transient retail cost efficiencies of water companies.
We also expanded and successfully applied a method for calculating persistent efficiency spillovers between decision-making units.
Our research underpinned the efficiency measurement of five regulated water companies.
More than 10.7 million households across the country will benefit from our work.
- Affinity Water
- Bristol Water
- Economic Insight
- Thames Water
- Wessex Water
- Yorkshire Water
Meet the experts
Professor of Financial Economics
Professor of Managerial Economics at the University of Sheffield