Water Industry In England Research Articles

Reform, Not Revolution, is What is Needed Now for Yardstick Competition

Abstract Yardstick competition as a tool to set the prices of regional natural monopolies is now an established tool. After 30 years of application to the water industry in England and Wales, this article takes a critical look at how yardstick competition has been implemented in the latest Price Review 2019 (PR19). It proposes reforms to ensure that in the next Price Review 2024 (PR24) and/or beyond the efficiency challenges are appropriately set and the degree of information at the regulator’s disposal is maximised.

Estimating technical efficiency and allocative distortions of water companies: evidence from the English and Welsh water and sewerage industry.

Regulated water industries need to improve their technical efficiency and allocate their resources efficiently. This is the case of the water industry in England and Wales which was privatized in 1989, and the method of price cap regulation was implemented. This study uses an input distance function system approach to estimate the technical efficiency and distortions in the choice of input mixes for the English and Welsh water and sewerage companies (WaSCs) over the years 1991-2016. The results indicated that an average WaSC was 75.3% technically efficient which means that inputs could be reduced by 24.7% keeping the level of output constant. On average, the input mix was considered to be allocated inefficiently as there was an over-utilization of capital and other inputs relative to employment. Moreover, the low degree of substitutability among inputs implied that reducing allocative inefficiency could be costly. The findings of our study is of interest to policy makers who want to implement effective policies to improve efficiency in the water industry.

Risk‐based water resources planning in practice: a blueprint for the water industry in England

AbstractResilient water supplies in England need to be secured in the face of challenges of population growth, climate change and environmental sustainability. We propose a blueprint for water resources planning that uses system simulation modelling to estimate the frequency, duration and severity of water shortages at present and in the context of future plans and scenarios. We use multiobjective optimisation tools to explore trade‐offs between these risk metrics and cost of alternative plans, and we use sensitivity analysis to identify plans that robustly achieve targets for tolerable risk, alongside other performance objectives. The results of a case study in the Thames basin demonstrate that the proposed methodology is feasible given commonly available data sets and models. The proposed method provides evidence with which to develop water resource management plans that demonstrably balance the risks of water shortages, costs to water users and environmental constraints in an uncertain future.

Catchment management in England and Wales: the role of arguments for ecosystems and their services

This study uses document analysis and interviews to explore how the use of arguments for biodiversity and ecosystem services has evolved in recent years in the water industry in England and Wales, with a focus on investments in catchment management programmes. Changes to land management practices within catchment areas can lead to improved water quality and lower treatment costs, and also ancillary benefits to the natural environment and various stakeholders. Our analysis reveals the increasing effectiveness of arguments associated with ecosystem service values in enabling the industry regulator (Ofwat) to support water industry investments in catchment-level conservation projects. Ofwat has adopted a much more flexible approach to regulation, moving from initial resistance to ecosystem service framings and a dominant focus on financial benefits to customers, to acceptance that customers have a legitimate interest in environmental quality and a willingness to accept some ‘beneficiary pays’ solutions. Companies are now required by Ofwat to include environmental impacts in cost-benefit analysis of investments, alongside assessment of customer preferences and support. This has facilitated investments in catchment management with positive results for water companies, customers, farmers and the natural environment. The shift in arguments in this industry matches a broader shift at European and UK levels towards greater use of economic evidence and payment instruments. The challenge now is to stabilise a secure regulatory environment in which companies are encouraged to pursue innovative methods to benefit the wider interest of customers and the natural environment, today and in the future. Arguments based on the value of water quality improvements and of the wider associated ecosystem services benefits have been, and remain, a key tool for achieving the environmental improvements and economic efficiency gains associated with successful catchment management initiatives.

Totex and ISO 55000, going beyond PAS55 in the water industry

The water industry in England and Wales is going through a major change in regulation. Aside from targeting the customer’s requirements through long-term outcomes, the new model includes a total expenditure price control, customer cost to serve measures and the extension of competition in the non-household services. The industry mind-set and culture are being challenged to consider innovative operational solutions with increased focus on operational costs both direct and indirect. An accurate understanding of whole life cost and value is required at the scheme level and at the local, catchment and company levels. Some water companies are realising that the challenge takes them beyond PAS55:2008 Asset Management in aligning and optimising their organisations including the supply chain. ISO 55000:2014 is replacing PAS55 and supports aspects of the required improvements. This paper describes the industry position and the steps that one water company is taking. It reviews the capital, operational and planning processes that provide an integrated approach. It, in effect, looks for a comprehensive approach that supports the eternal business imperative to understand all the costs and to ‘do more for less’.

The Luenberger productivity indicator in the water industry: An empirical analysis for England and Wales

We innovate in the field of water companies' performance with an application of the directional distance function and the Luenberger productivity indicator (LPI) to the assessment of water companies' productivity growth. The advantage of our approach is that it takes into account both input contractions and output expansions. The analysis covered 22 water companies from England and Wales using data over the period 2001–2008. To the best of our knowledge, there are no prior studies applying the Luenberger productivity indicator to the water industry in England and Wales or other countries. For the sake of comparison, the traditional Malmquist productivity index (MPI) was also estimated. The results indicate that on average, a declining trend for the productivity change was evident in the English and Welsh water sector based on both the LPI and the MPI approach. However, the latter approach overestimated the productivity changes as its measures were higher than those obtained by the LPI approach. Unlike the assessment based on the average LPI values, an analysis at the company level allowed us to identify that the primary driver of the decline in water companies' productivity was the negative shift in the production frontier. Taking into account that new water prices were introduced in England and Wales in 2000 and 2005, our study also provides some insights into the relationship between productivity change and the regulatory cycle.

Productivity change in the water industry in England and Wales: application of the meta-Malmquist index

This paper uses a meta-Malmquist index for measuring productivity change of the water industry in England and Wales and compares this to the traditional Malmquist index. The meta-Malmquist index computes productivity change with reference to a meta-frontier, it is computationally simpler and it is circular. The analysis covers all 22 UK water companies in existence in 2007, using data over the period 1993–2007. We focus on operating expenditure in line with assessments in this field, which treat operating and capital expenditure as lacking substitutability. We find important improvements in productivity between 1993 and 2005, most of which were due to frontier shifts rather than catch up to the frontier by companies. After 2005, the productivity shows a declining trend. We further use the meta-Malmquist index to compare the productivities of companies at the same and at different points in time. This shows some interesting results relating to the productivity of each company relative to that of other companies over time, and also how the performance of each company relative to itself over 1993–2007 has evolved. The paper is grounded in the broad theory of methods for measuring productivity change, and more specifically on the use of circular Malmquist indices for that purpose. In this context, the contribution of the paper is methodological and applied. From the methodology perspective, the paper demonstrates the use of circular meta-Malmquist indices in a comparative context not only across companies but also within company across time. This type of within-company assessment using Malmquist indices has not been applied extensively and to the authors’ knowledge not to the UK water industry. From the application perspective, the paper throws light on the performance of UK water companies and assesses the potential impact of regulation on their performance. In this context, it updates the relevant literature using more recent data.

A strategy for introducing competition in the water sector

The authors took part in an independent review of competition and innovation in the water industry in England and Wales, undertaken for United Kingdom and Welsh government ministers. Privatised twenty years ago, subject to a price control regime which has permitted high levels of investment, and unchanged as a set of vertically integrated regional monopolies, the sector now faces fresh challenges associated in particular with the consequences of climate change. The review identified a programme for the introduction of competition and use of market-type instruments into the sector, beginning with opening up retailing to business customers and reforms of the arrangements for abstraction and discharge which are intended to achieve a more rational use of water resources and to stimulate trading across company boundaries. Then, subject to an appropriate governance structure, competition would be introduced into upstream treatment activities, either by the creation of a single buyer of wholesale water or through a common carriage regime. At the same time, the balance of risk of and return to companies’ remaining regulated activities would be changed to encourage more innovative approaches, especially those which avoid heavy capital investment. Heightened stimuli to investment would also flow from relaxing restrictions on mergers and takeovers, and measures to enhance the innovative capabilities of companies. The paper explains the logic of the proposed measures and of their sequencing.

Water industry asset management in England and Wales: successes and challenges

This paper considers the structure, regulation and performance of the water industry in England and Wales in the postprivatisation period from 1989. The paper examines the improvements achieved in drinking water and wastewater effluent quality and in the overall performance. The challenges facing the industry in the areas of water resource planning, energy efficiency and chemical consumption, arising from climate change, are also considered. The paper considers how the industry's current approach and attitude towards research and development (R&D) will influence its ability to meet the latest challenges laid down by the regulators. The paper calls for increased emphasis on, and incentive for, R&D in the water industry to ensure sustainable solutions in both water and sewage treatment.

Regulation and systematic risk: the case of the water industry in England and Wales

This article examines whether regulatory announcements relating to competition, pricing policy and the quality of service in the water industry in England and Wales have an impact on the industry's systematic risk. The results indicate that, although the long-run overall effect of regulation on systematic risk appears to be negligible, competition and quality announcements can have a significant impact upon the industry's systematic risk. Further analysis of individual announcements and companies suggests that price announcements also significantly affect individual companies’ systematic risk, although not in a uniform manner. This indicates that regulators need to be aware that, while some of their policy decisions tend to affect the industry as a whole, others have a diverse impact on individual companies.

Development and drought drive a holistic national stakeholder approach to water efficiency in the UK

The prospect of the population increasing by 10% by 2021 in the relatively dry southeast of England and the current drought have galvanised the government into establishing a Water Saving Group (WSG). The WSG is structured to build on and exploit a strong foundation of knowledge and experience of water efficiency developed over the last fifteen years. The paper expands on how the WSG is driving water efficiency and the part each stakeholder is taking in promoting water efficiency. The paper examines the importance of collaborations between the numerous organisations with a stake in the water industry of England and Wales and how different water efficiency challenges have been or might be resolved. To describe how the complex institutional structures in the UK interact to an international audience and highlight progress has lead the authors to consider actions by Leaders, Activists and Society.

The benefits of drinking water quality regulation – England and Wales

This paper aims to demonstrate that the regulation of drinking water quality in England and Wales has been successful in securing the improvements to drinking water quality resulting in better performance against EU and national standards. The water industry in England and Wales went through a major change in 1989 when suppliers were privatised and the government set up a robust regulatory regime. The regime was necessary as the industry was, as a result of privatisation, a monopoly with customers having no choice of supplier, unlike what was later available with other utilities such as gas or electricity. The regime would protect the interests of the consumer, the environment and public health through the quality of the product. The Drinking Water Inspectorate (DWI), as established in 1990, had to ensure the implementation of the European Drinking Water Directive (DWD) that had been transposed into national legislation. The aim of the DWD is to ensure that all EU Member States provide drinking water of a prescribed quality. In England and Wales, a body was required to oversee the performance of the industry against those standards, reporting to the Government and the European Commission. Through acts and legislation, the set up of the industry, the duties of the suppliers and regulators and the powers available to the regulators were established. The improvements to drinking water quality since privatisation were achieved by massive investment of the privatised water industry overseen by an independent regulator with clear duties and the powers to inspect, enforce and prosecute. The DWI's achievements show that to improve quality performance with the ability to report in detail how the improvements were made with extensive data evidence, a special regulator is required. The DWI advises policy departments and Ministers and when there are serious concerns regarding a threat to human health through drinking water, the highest level of regulatory power is the creation of new legislation, for example, the Cryptosporidium regulations that are unique to the UK. The DWI is more than what is traditionally thought of as a regulator because it has a single remit--drinking water quality--and its style of regulation has been key to improved drinking water quality in England and Wales.

Water industry asset management: a proposed service‐performance model for investment

AbstractThe water industry in England and Wales has developed over the last century, from small organisations serving local communities to large integrated companies in private ownership, overseen by a government regulator. Asset management practice has developed greatly in the 17 years since privatisation, with companies able to plan their operations and investment as they believe appropriate for the provision of customer services, subject to justifying their plans to the economic, quality and environmental regulators. Investment has flowed into the industry to replace deteriorated assets and to improve the quality of drinking water and rivers. The asset base is complex and, with a replacement value of approximately £231 billion at the 2002–2003 price base index suitable approaches are required to ensure that both the water service and the sewerage service are delivered at the most appropriate long‐term cost. The 2004 UK water industry price review was supported by the introduction of a Capital Maintenance Planning Common Framework to help companies understand and explain their maintenance investment requirement. In this paper, a service‐performance model is proposed to improve managers' understanding of the way in which businesses and the environment change over time, taking account of maintenance and other strategic requirements. Although developed with the water industry in mind, the model is equally applicable to other asset‐intensive industries.

Efficiency in the water industry

This paper considers the use of efficiency measurement in the regulation of the water industry in England, Wales, and Scotland. Ofwat employs econometric models; some examples of these are provided together with an explanation of the way Ofwat applies them to the financial model for each company. Finally we consider the question of the accuracy of these models and conclude that, while the models probably do contain information about companies' scope for cost reductions, Ofwat probably overestimates the quality of its models. Specifically Ofwat's estimate that 90% of the water model residuals and 80% of the sewerages models can be attributed to efficiency has not been given an explicit justification and probably overstates the case.

Balanced scorecard investment appraisal in the water industry of England and wales

Previous work has shown that while most conventional investment appraisal techniques appear ill‐suited for use in the water industry of England and Wales, the Balanced Scorecard (BSC) offers considerable potential as an investment decision making tool. This study accounts for much of the criticism of the BSC technique, proposing methodological changes to overcome these difficulties. A more comprehensive treatment of the modified methodology, illustrated by BSC development and application flowcharts, demonstrates how this technique might operate in practice.

The Nature of Regulatory Contracts The Case of the Water Industry in England & Wales

The Nature of Regulatory Contracts <i>The Case of the Water Industry in England &amp; Wales</i>

Cost of compliance assessments and the water industry in England and Wales

AbstractEnvironmental compliance cost assessments (CCAs) are being increasingly demanded and used in the water industry, in order to allow regulators to balance conflicting objectives. The 1999 periodic review of water company price limits concerned massive environmental expenditures, and consequently major use of CCAs. There were major differences between Ofwat (the economic regulator) and the water companies relating to the compliance costs submitted. The assumptions used by Ofwat vis‐à‐vis future efficiency savings and the cost of capital are notable causes of the differentials. There are a number of other reasons why this differential might have arisen, including gaming. However, the principal cause might be more a real lack of knowledge on the part of companies of future efficiencies and the actual costs of projects. The CCAs produced in the water industry have had massive impact on policy design. A number of specific improvements to CCA are identified. These changes relate to increased collaboration between industry and regulators in working groups to design/approve, inter alia, regulatory methodologies for use in the periodic review. More detailed guidance is required for preparation of a CCA. Further use of compliance cost databases is recommended. The entire process would be facilitated by increased training and awareness raising of economics for the engineers largely responsible for preparation of CCAs. Copyright © 2002 John Wiley &amp; Sons, Ltd. and ERP Environment.

Investment Appraisal in the Water Industry of England and Wales

AbstractSince privatisation in 1989, the changing nature of the water industry in England and Wales has increased the need for effective investment appraisal. Previous research highlighted many aspects of the industry that could detract from the efficacy of conventional discounted cash‐flow techniques, and found that an investment‐appraisal technique must fulfil a number of criteria in order to overcome these difficulties. This paper examines a number of financial and strategic management techniques for investment appraisal, and assesses their suitability with reference to these criteria. It shows that, of the studied techniques, the ‘balanced scorecard’appears to be most suited for use in the water industry of England and Wales.

Regulation in an Episodic Policy‐Making Environment: The Water Industry in England and Wales

This article describes and analyses the evolving regulatory game in the post‐privatized water industry. It highlights a regulatory environment that is more complex than that which existed under public ownership, and an industry which is subject to heavier regulation in the private sector than it was in the public sector. There has been erosion of the strict public/private divide following privatization. The article highlights an episodic and seemingly incongruous policy‐making environment that defies consistent characterization: sometimes private consensus is the main feature and sometimes it is public conflict. It also illustrates that while there are two broad‐based constituencies of interest active in the water sector — cost and environmental — the composition of these coalitions mutates depending on the issue being considered. Indeed, there are occasions when core constituency participants ‘defect’ and join the ‘opposing side’.

Environmental Performance Indicators: The Water Industry of England and Wales

AbstractWater companies in England and Wales produce reports using environmental performance indicators which have been developed in‐house. However, there is no recognised methodology for the development of these indicators, and an analysis of available guidance led to the proposal of an appropriate model. This model was tested by semi‐structured interviews of water‐company managers, and a questionnaire was completed by managers from other industries. The responses from the interviews supported the inclusive, quality‐driven approach advocated by the model, and indicated a need to examine (a) the style of management, (b) the staffing structure in water companies, (c) the connection between environmental management systems and indicator development, (d) types of objectives and targets, and (e) the use of indicators as public‐relations tools. The result is a methodology for indicator development which can be applied by managers in industry.