Use of data envelopment analysis in the regulation of UK water utilities:Water distribution

Abstract

Regulation is increasingly playing a major role in defence of the public interest in the UK and other economies, in the aftermath of the privatization of utilities operating in near monopoly environments. This paper gives an account of the use of data envelopment analysis (DEA) by the regulator of water companies in England and Wales in 1994 in the context of setting price limits. DEA is a general purpose linear programming-based method for assessing the productive efficiencies of operating units such as bank branches or schools. The paper details the use of DEA to estimate potential savings in the specific context of water distribution and discusses the use of the results obtained. It also highlights certain generic issues arising in the use of DEA and more generally performance measurement methods in the regulatory context.