Use of panel and sub-company data in water benchmarking

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Client Ofwat
Dates 2011
Service(s)Policy & Economics, Regulation & Competition

A CEPA-led consortium was engaged by Ofwat to investigate the viability of using sub-company and panel data for comparative efficiency assessment as part of the ‘Future Price Limits’ project. Examples of sub-company data include data on water resources by zone or sewerage treatment by plant.

The work included:

  • reviewing plausible methodologies to undertake the comparative analysis, including a review of academic and regulatory uses;
  • determining potential requirements for performance measurement for vertical segments of specific activities of a company; and
  • assessing data requirements for performance measurement at different levels of disaggregation.

At the time of the project there was significant uncertainty over the future structure of the water and sewerage industry. Given this uncertainty we developed a flexible decision tree that could be used by Ofwat for different industry structures (e.g. accounting separation) to determine its need for performance measures i.e. to enable efficient competition or as a consistency check. We provided a recommendation that panel data would be beneficial for setting price limits from the next price review, PR14, and beyond. We also looked into the consistency of results and robustness of approach in comparison with Ofwat’s modelling approach.

Our report was published by Ofwat and is available here.