Forecasts of Non-Residential Water Demand, 2004

The Situation

Northumbrian Water Ltd (NWL), a UK water and sewerage company, commissioned NERA to forecast non-residential water demand for each resource zone in their area over a 10-year period. These forecasts were to be used for water resource planning and as part of the company’s business plan submission to the Office of Water Services (OFWAT), the industry regulator, for the forthcoming price control period.

NERA's Role

Using an advanced econometric technique specifically suited to achieve efficient estimates, NERA developed and estimated a dynamic econometric model of demand despite the short time period available. The model took account of regional economic prospects by industry group, measured by employment, the price elasticity of demand for water by non-residential users, and trends in the patterns of water use by industry, region, and firm size.

The forecasts were derived using the dynamic econometric model inputted with external forecasts for prices and employment. Where a large proportion of total water demand was accounted for by a small number of customers, demand by these customers was identified separately and forecasts were refined using NWL’s customer-specific knowledge.

The Result

The forecasts formed the basis of NWL’s water resource plan and strategic business plan for the 2004 Periodic Review. The forecasts were accepted by OFWAT in full.