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A Methodology to Propose the X-Factor in the Regulated English and Welsh Water and Sewerage Companies

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  • Alexandros Maziotis

    (Fondazione Eni Enrico Mattei and Euro-Meditarranean Centre on Climate Change)

  • David S. Saal

    (Aston University)

  • Emmanuel Thanassoulis

    (Aston University)

Abstract

The purpose of this paper is to develop a methodology which can be used to set X-factor under price cap schemes, when the number of observations is limited. We firstly apply a panel index approach across Water and Sewerage companies (WaSCs) over time to decompose unit-specific index number based productivity growth as a function of the productivity growth achieved by benchmark firms, and the catch-up to the benchmark firm achieved by less productive firms. We then calculate the potential productivity catch-up of laggard firms and an estimate of how the top performing company improved its productivity over time (technical change). Both estimates are used to propose X-factor for the industry over a particular period. The results indicated that significant gains in productivity occurred after 2000, when Ofwat set tighter price cap reviews in order to pass previous productivity benefits to consumers. However, average WaSC still needs to improve its productivity towards the benchmark firm (reduce their costs in real terms) by 2.69%, while the most productive firm needs to continue to improve its productivity by 0.95% over a period of five years. This technique is of great interest to researchers who are interested in developing comparative performance measurement under regulation and setting appropriate regulated prices when sample sizes are extremely limited.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2013.14.

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Date of creation: Feb 2013
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Handle: RePEc:fem:femwpa:2013.14

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Related research

Keywords: X-factor; Productivity Decomposition; Panel Index Numbers; Regulation; Water and Sewerage Industry;

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  1. Robert J. Hill, 2004. "Constructing Price Indexes across Space and Time: The Case of the European Union," American Economic Review, American Economic Association, vol. 94(5), pages 1379-1410, December.
  2. M C A S Portela & E Thanassoulis & A Horncastle & T Maugg, 2011. "Productivity change in the water industry in England and Wales: application of the meta-Malmquist index," Journal of the Operational Research Society, Palgrave Macmillan, vol. 62(12), pages 2173-2188, December.
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