Decomposition of Cost Efficiency Into Persistent and Transient Efficiency in the Provision of Water Services: Evidence from England and Wales

Performance assessments of water utilities are essential to protect the interests of citizens, because utilities operate under natural monopolies and their costs are recovered from customers through water tariffs. In this study, a four-error component model was applied to estimate cost efficiency (CE), persistent efficiency (PE) and transient efficiency (TE) for a sample of English and Welsh water utilities over 25 years (1993-2018). This approach economies of scale and technical change of the water utilities to be estimated. The average estimated CE was 0.703, indicating that water utilities could reduce costs by almost 30% for the same production. Average PE and TE were 0.875 and 0.805, respectively, indicating that the privatization of the water industry positively impacted the efficiency of water utilities. The analysis also showed that the UK industry exhibited decreasing economies of scale, whereby mergers did not cause lower production costs. Technical regression was present, but minimal. Through linking, CE, TE and PE with the regulatory cycle, the impact of the different regulatory policies on the performance of water utilities in England and Wales was shown.