Marginal Cost of Reducing Unplanned Water Supply Interruptions: Influence of Water Company Ownership
Publication: Journal of Water Resources Planning and Management
Volume 147, Issue 3
Abstract
Water companies are expected to deliver high-quality water services to their customers that include, among others, continuity of water supply. Unplanned water supply interruptions (UWSI) indicate a cost for the water companies and a deterioration in the quality of service for the customers. Thus, it is essential to quantify the cost of reducing UWSI, i.e., the cost of improving the quality of service to customers. This study aims to estimate the marginal cost of reducing UWSI using a stochastic frontier model, which also enabled us to estimate cost efficiency, economies of scale, and economies of density. The empirical approach focused on a sample of 21 Chilean water companies over the period 2007–2017, embracing full private, concessionary, and public water companies. The results indicate that the average marginal cost for reducing UWSI is . This cost is lower for concessionary water companies compared to full private and public water companies. The study’s findings can aid regulators in designing effective policies to ensure that companies are rewarded (or penalized) for better (or worse) performance and to eliminate any welfare losses due to lower levels of service quality.
Get full access to this article
View all available purchase options and get full access to this article.
Data Availability Statement
Some or all data, models, or code that support the findings of this study are available from the corresponding author upon reasonable request (inputs and outputs of water companies).
Acknowledgments
María Molinos-Senante and Alexandros Maziotis would like to thank the Centro Nacional de Investigación para la Gestión Integrada de Desastres Naturales (CIGIDEN), ANID/FONDAP/15110017 and FONDECYT 1181754.
References
Aghapoor Khameneh, P., S. M. Miri Lavasani, R. Nabizadeh Nodehi, and R. Arjmandi. 2020. “Water distribution network failure analysis under uncertainty.” Int. J. Environ. Sci. Technol. 17 (1): 421–432. https://doi.org/10.1007/s13762-019-02362-y.
Aigner, D., C. K. Lovell, and P. Schmidt. 1977. “Formulation and estimation of stochastic frontier production function models.” J. Econom. 6 (1): 21–37. https://doi.org/10.1016/0304-4076(77)90052-5.
Badunenko, O., and S. Kumbhakar. 2016. “When, where and how to estimate persistent and transient efficiency in stochastic frontier panel data models.” Eur. J. Oper. Res. 255 (1): 272–287. https://doi.org/10.1016/j.ejor.2016.04.049.
Berg, S., and C. Lin. 2008. “Consistency in performance rankings: The Peru water sector.” Appl. Econ. 40 (6): 793–805. https://doi.org/10.1080/00036840600749409.
Berg, S., and R. C. Marques. 2011. “Quantitative studies of water and sanitation utilities: A benchmarking literature survey.” Water Policy 13 (5): 591–606. https://doi.org/10.2166/wp.2011.041.
Bottasso, A., and M. Conti. 2009. “Scale economies, technology and technical change in the water industry: Evidence from the English water only sector.” Reg. Sci. Urban Econ. 39 (2): 138–147. https://doi.org/10.1016/j.regsciurbeco.2008.05.017.
Brea-Solis, H., S. Perelman, and S. D. Saal. 2017. “Regulatory incentives to water losses reduction: The case of England and Wales.” J. Productivity Anal. 47 (3): 259–276.
Carvalho, P., and R. C. Marques. 2011. “The influence of the operational environment on the efficiency of water utilities.” J. Environ. Manage. 92 (10): 2698–2707. https://doi.org/10.1016/j.jenvman.2011.06.008.
Carvalho, P., and R. C. Marques. 2014. “Computing economies of vertical integration, economies of scope and economies of scale using partial frontier nonparametric methods.” Eur. J. Oper. Res. 234 (1): 292–307. https://doi.org/10.1016/j.ejor.2013.09.022.
Carvalho, P., R. C. Marques, and S. Berg. 2012. “A meta-regression analysis of benchmarking studies on water utilities market structure.” Util. Policy 21 (1): 40–49. https://doi.org/10.1016/j.jup.2011.12.005.
Caves, D. W., L. R. Christensen, and J. A. Tretheway. 1984. “Economies of density versus economies of scale: Why trunk and local service airline cost differ.” Rand J. Econ. 15 (4): 471–489. https://doi.org/10.2307/2555519.
Cetrulo, T. B., R. C. Marques, and T. F. Malheiros. 2019. “An analytical review of the efficiency of water and sanitation utilities in developing countries.” Water Res. 161 (Sep): 372–380. https://doi.org/10.1016/j.watres.2019.05.044.
Coelli, T., A. Gautier, S. Perelman, and R. Saplacan-Pop. 2013. “Estimating the cost of improving quality in electric distribution: A parametric distance function approach.” Energy Policy 53 (Feb): 287–297. https://doi.org/10.1016/j.enpol.2012.10.060.
Coelli, T. J., D. S. Prasada Rao, C. J. O’Donnell, and G. E. Battese. 2005. An introduction to efficiency and productivity analysis. 2nd ed. New York: Springer.
De Witte, K., and R. C. Marques. 2009. “Capturing the environment, a meta frontier approach to the drinking water sector.” Int. Tran. Oper. Res. 16 (2): 257–271. https://doi.org/10.1111/j.1475-3995.2009.00675.x.
De Witte, K., and R. C. Marques. 2011. “Incorporating heterogeneity in non-parametric models: A methodological comparison.” Int. J. Oper. Res. 9 (2): 188–204. https://doi.org/10.1504/IJOR.2010.035044.
Ferro, G., and A. C. Mercadier. 2016. “Technical efficiency in Chile´s water and sanitation provides.” Util. Policy 43 (Dec): 97–106. https://doi.org/10.1016/j.jup.2016.04.016.
Greene, W. H. 2005. “Reconsidering heterogeneity in panel data estimators of the stochastic frontier model.” J. Econom. 126 (2): 269–303. https://doi.org/10.1016/j.jeconom.2004.05.003.
Greene, W. H. 2018. Econometric analysis. 8th ed. New York: Pearson.
Guerrini, A., G. Romano, and C. Leardini. 2018. “Economies of scale and density in the Italian water industry: A stochastic frontier approach.” Util. Policy 52 (Jun): 103–111. https://doi.org/10.1016/j.jup.2018.04.003.
Jamasb, T., L. Orea, and M. Pollitt. 2012. “Estimating the marginal cost of quality improvements: The case of the UK electricity distribution companies.” Energy Econ. 34 (5): 1498–1506. https://doi.org/10.1016/j.eneco.2012.06.022.
Jondrow, J., C. A. K. Lovell, I. S. Materov, and P. Schmidt. 1982. “On the estimation of technical inefficiency in the stochastic frontier production function model.” J. Econom. 19 (2–3): 233–238. https://doi.org/10.1016/0304-4076(82)90004-5.
Kumar, S., and S. Managi. 2010. “Service quality and performance measurement: Evidence from the Indian water sector.” Int. J. Water Resour. Dev. 26 (2): 173–191. https://doi.org/10.1080/07900621003655726.
Kumbhakar, S. C., H. J. Wang, and A. Horncastle. 2015. A practitioner’s guide to stochastic frontier analysis using STATA. Cambridge, UK: Cambridge University Press.
Kuosmanen, T. 2012. “Stochastic semi-nonparametric frontier estimation of electricity distribution networks: Application of the StoNED method in the Finnish regulatory model.” Energy Econ. 34 (6): 2189–2199. https://doi.org/10.1016/j.eneco.2012.03.005.
Latinopoulos, D. 2014. “Using a choice experiment to estimate the social benefits from improved water supply services.” J. Integr. Environ. Sci. 11 (1): 187–204.
Lee, S., M. Choi, H.-S. Lee, and M. Park. 2020. “Bayesian network-based seismic damage estimation for power and potable water supply systems.” Reliab. Eng. Syst. Saf. 197 (May): 106796. https://doi.org/10.1016/j.ress.2020.106796.
Marques, R. C. 2010. Regulation on water and wastewater services. London: IWA Publishing.
Marques, R. C., S. Berg, and S. Yane. 2014. “Nonparametric benchmarking of Japanese water utilities: Institutional and environmental factors affecting efficiency.” J. Water Resour. Plann. Manage. 140 (5): 562–571. https://doi.org/10.1061/(ASCE)WR.1943-5452.0000366.
Martínez García, D., J. Lee, J. Keck, J. Kooy, P. Yang, and B. Wilfley. 2020. “Pressure based analysis of water main failures in California.” J. Water Resour. Plann. Manage. 146 (9): 05020016. https://doi.org/10.1061/(ASCE)WR.1943-5452.0001255.
Meeusen, W., and J. van den Broeck. 1977. “Efficiency estimation from Cobb–Douglas production functions with composed error.” Int. Econ. Rev. 18 (2): 435–444. https://doi.org/10.2307/2525757.
Molinos-Senante, M., G. Donoso, and R. Sala-Garrido. 2016. Assessing the efficiency of Chilean water and sewerage companies accounting for uncertainty.” Environ. Sci. Policy 61 (Jul): 116–123.
Molinos-Senante, M., G. Donoso, R. Sala-Garrido, and A. Villegas. 2018a. “Benchmarking the efficiency of the Chilean water and sewerage companies: A double-bootstrap approach.” Environ. Sci. Pollut. Res. 25 (9): 8432–8440. https://doi.org/10.1007/s11356-017-1149-x.
Molinos-Senante, M., A. Maziotis, M. Mocholi-Arce, and R. Sala-Garrido. 2015. “Accounting for service quality to customers in the efficiency of water companies: Evidence from England and Wales.” Water Policy 18 (2): 513–532. https://doi.org/10.2166/wp.2015.062.
Molinos-Senante, M., S. Porcher, and A. Maziotis. 2017. “Impact of regulation on English and Welsh water-only companies: An input distance function approach.” Environ. Sci. Pollut. Res. 24 (20): 16994–17005. https://doi.org/10.1007/s11356-017-9345-2.
Molinos-Senante, M., S. Porcher, and A. Maziotis. 2018b. “Productivity change and its drivers for the Chilean water companies: A comparison of full private and concessionary companies.” J. Cleaner Prod. 183 (May): 908–916. https://doi.org/10.1016/j.jclepro.2018.02.227.
Molinos-Senante, M., and R. Sala-Garrido. 2017. “How much should customers be compensated for interruptions in the drinking water supply?” Sci. Total Environ. 586 (May): 642–649. https://doi.org/10.1016/j.scitotenv.2017.02.036.
Mydland, O., S. C. Kumbhakar, G. Lien, R. Amundsveen, and H. Marit Kvile. 2019. “Economies of scope and scale in the Norwegian electricity industry.” Econ. Modell. 88 (Jun): 39–46. https://doi.org/10.1016/j.econmod.2019.09.008.
Ofwat (Water Services Regulation Authority). 2019. Service and delivery report. Birmingham, UK: Ofwat.
Picazo-Tadeo, A. J., F. J. Saez-Fernandez, and F. Gonzalez-Gomez. 2009. “The role of environmental factors in water utilities’ technical efficiency: Empirical evidence from Spanish companies.” Appl. Econ. 41 (5): 615–628. https://doi.org/10.1080/00036840601007310.
Pinto, F. S., P. Simoes, and R. C. Marques. 2017. “Water services performance: Do operational environment and quality factors count?” Urban Water J. 14 (8): 773–781. https://doi.org/10.1080/1573062X.2016.1254254.
Saal, D. S., D. Parker, and T. Weyman-Jones. 2007. “Determining the contribution of technical change, efficiency change and scale change to productivity growth in the privatized English and Welsh water and sewerage industry: 1985–2000.” J. Productivity Anal. 28 (1–2): 127–139. https://doi.org/10.1007/s11123-007-0040-z.
Sala-Garrido, R., M. Molinos-Senante, and M. Mocholi-Arche. 2018. “Assessing productivity changes in water companies: A comparison of the Luenberger and Luenberger-Hicks-Moorsteen productivity indicators.” Urban Water J. 15 (7): 626–635. https://doi.org/10.1080/1573062X.2018.1529807.
SISS (Superintendencia de Servicios Sanitarios). 2018. “Annual report about water and sanitation services in Chile.” Accessed November 26, 2018. https://www.siss.gob.cl/586/w3-channel.html.
SISS (Superintendencia de Servicios Sanitarios). 2020. “Water and sanitation services in Chile.” Accessed December 11, 2020. https://www.siss.gob.cl/586/w3-propertyvalue-6415.html.
Thanassoulis, E. 2000. “DEA and its use in the regulation of water companies” Eur. J. Oper. Res. 127 (1): 1–13. https://doi.org/10.1016/S0377-2217(99)00436-1.
Thanassoulis, E. 2002. “Comparative performance measurement in regulation: The case of English and Welsh sewerage services.” J. Oper. Res. Soc. 53 (3): 292–302. https://doi.org/10.1057/palgrave.jors.2601160.
Zhuang, Y., and Q. Zhang. 2014. “Evaluating municipal water management options with the incorporation of water quality and energy consumption.” Water Resour. Manage. 29 (1): 35–61. https://doi.org/10.1007/s11269-014-0825-6.
Information & Authors
Information
Published In
Journal of Water Resources Planning and Management
Volume 147 • Issue 3 • March 2021
Copyright
© 2020 American Society of Civil Engineers.
History
Received: Mar 25, 2020
Accepted: Sep 4, 2020
Published online: Dec 24, 2020
Published in print: Mar 1, 2021
Discussion open until: May 24, 2021
Authors
Metrics & Citations
Metrics
Citations
Download citation
If you have the appropriate software installed, you can download article citation data to the citation manager of your choice. Simply select your manager software from the list below and click Download.