Determining the optimal investment plan for water utilities: the case of Veolia Water Central

Abstract

Water utilities face difficult choices in how most efficiently to plan for investments that best meet the needs of their customer base. An obvious interest of water utilities is thus to optimise their investment planning to obtain the maximum possible benefits for the costs accrued by the investments. The objective of this article is to demonstrate an approach for a water utility to determine the benefits of investments in different possible service areas. We used a stated preference choice experiment approach to estimate the willingness-to-pay of customers of a utility company in Southeast England for various water services that are both private and public in nature. Using state-of-the-art econometric methods, we demonstrate how customer preferences can be estimated at the individual level, as opposed to more standard modelling approaches that assume that tastes are homogeneous among the customer population. Willingness-to-pay results were mostly statistically significant for the various private and public services presented to customers, and results conformed to the expectations of economic theory. We demonstrate how individual-level customer preferences can be used to forecast the preferred alternatives of customers when faced with different possible investment programmes. Lastly, we outline how various benefits and costs, including those captured by willingness-to-pay, are used to optimise the water utility's investment planning.