The cost of reducing unplanned water supply interruptions: A parametric shadow price approach

Abstract

Water companies are responsible for supplying water to customers 24 h per day. However, due to extreme natural events and/or anthropogenic actions, water companies suffer from unplanned water supply interruptions, which directly impact customers and incur expenses by the companies. In this study, for the first time, we estimated the shadow price (or implicit cost) of unplanned water supply interruptions using stochastic frontier techniques for a sample of 21 Chilean water companies over the period of 2007–2017. The results indicate that, on average, the Chilean water company needed to spend an extra 2.547€ in operating expenditures to avoid 1 h of interruption. Average shadow price of unplanned water supply interruptions was higher for concessionary and full private companies than public ones. These findings demonstrate that the regulatory agency may need to promote effective policies and incentives to ensure and improve the continuity of the water supply. This is very relevant to the Chilean water industry, where there is an ongoing policy debate regarding the use of penalties and compensations as an incentive to avoid unplanned water supply interruptions.