Are Frontier Efficiency Methods Adequate to Compare the Efficiency of Water Utilities for Regulatory Purposes?

Frontier efficiency methods have been recurrently used in the water sector to assess the performance of water utilities. These methods are also used for yardstick regulation, with greater efficiency being sought by creating competition between the utilities, which can have an impact on decision-maki...

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Bibliographic Details
Published in:Water (Basel) 2020-04, Vol.12 (4), p.1046
Main Authors: Estruch-Juan, Elvira, Cabrera, Enrique, Molinos-Senante, María, Maziotis, Alexandros
Format: Article
Language:English
Subjects:
Data envelopment analysis
Decision making
Econometrics
Efficiency
Laws, regulations and rules
Linear programming
Methods
Operations research
Quality of service
Regulation
Stochasticity
Tariffs
Variables
Water utilities
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Summary:Frontier efficiency methods have been recurrently used in the water sector to assess the performance of water utilities. These methods are also used for yardstick regulation, with greater efficiency being sought by creating competition between the utilities, which can have an impact on decision-making processes, such as tariff setting. This study analyzes the adequacy and limitations of these methods for regulatory purposes, particularly how they deal with data uncertainty and their capacity to manage large number of variables. In order to achieve this, two representative methods—a nonparametric technique (data envelopment analysis) and an econometric one (stochastic frontier analysis)—are applied to an audited sample of 194 water utilities. Results will show that the results from the methods may not be considered conclusive in the water sector and their application should be carried out with considerable reservations.
ISSN:2073-4441
2073-4441
DOI:10.3390/w12041046