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.

Our impact

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.

Guiding Ofwat

  • 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.

The research

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.

Development partners

  • Affinity Water
  • Bristol Water
  • Economic Insight
  • Ofwat
  • Thames Water
  • Wessex Water
  • Yorkshire Water

Meet the experts

Photograph of Anthony Glass

Professor Anthony Glass

Professor of Managerial Economics at the University of Sheffield