Driving forces for consolidation or fragmentation of the US water utility industry: A cost function approach with endogenous output

Abstract

This paper empirically analyzes the structure of the US water industry, using a multiproduct flexible cost function model with the amount of water delivered to final consumers recognized as endogenous. The cross-sectional econometric analysis focuses on measures of cost economies in water production, and their variation with network characteristics. The estimates reveal considerable scale economies in terms of volume, particularly for small utilities that tend to have less output density. These economies are, however, counteracted by simultaneous increases in customers and service area size, especially for large utilities. Overall, our results indicate that consolidation of small utilities might generate cost efficiencies, depending on the concurrent expansion of the network, but consolidation of already large utilities without corresponding increases in output density is not likely to be cost effective.