Estimating Opex and Capex Efficiency: A Final Report for Water UK

Thu Jul 01 16:24:38 EDT 2004
By Dr. Bill Baker and James Grayburn, et al.

In 2004, Ofwat conducted a price review in order to set allowed prices for water and sewerage companies in the UK for the next five-year price control period, 2005-2010. One key aspect of setting allowed prices is to estimate expected changes in operating cost and capital cost efficiencies over this period. In this report, a team led by NERA Director Dr. Bill Baker estimates the scope for future opex and capex efficiencies in the UK water industry.

NERA's analysis of anticipated improvements in opex and capex efficiencies was based on a review of a large body of existing empirical research on efficiency improvements in the UK water industry and other comparable sectors. Drawing a consensus from the various existing studies, this report explicitly addresses the contentious issues related to interpreting historic data on efficiency improvements in the water sector. NERA's approach also followed the check-list of best practice for setting efficiency targets in an index-linked price-capped regime, as developed by Water UK. In particular, this report differentiates between expected changes in productivity and changes in input prices, and attempts to reconcile "top-down" estimates of efficiency with "bottom-up" estimates.