Yardstick competition in the water industry: an econometric application and some thoughts on the English experience

Abstract

The aim of this paper is twofold. The first part provides a critical assessment of the implementation of yardstick competition schemes by OFWAT, the regulator of the English and Welsh water and sewerage industry, focusing on the critiques that the water operators have raised over the past years. In the second part we estimate the efficiency of the English and Welsh water companies using different econometric techniques in order to assess whether or not the efficiency results they produce respect the consistency conditions proposed by Bauer et al. (1998). Our results suggest that the distributions of efficiency scores generated by the various econometric techniques considered in this paper are indeed different (in terms of medians and standard deviations); however, our estimates also suggest that the efficiency rankings are instead broadly consistent across the econometric methods, which in fact tend to identify the same companies as the best and worst performers. This in turn might suggest that, in general, regulators wishing to apply yardstick competition should cross check the efficiency levels obtained with their preferred methodology while they might be more confident in the efficiency rankings.