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Water utility network loss reduction and service quality under price cap and rate of return regulation

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  • Thanacoody, Selvin

Abstract

Water utilities in Eastern Europe are regulated under different schemes and achieve different water utility network loss reductions and service quality levels. Through a theoretical model, we analyse a water utility’s response to price-cap or rate-of-return regulation when setting their levels of water loss reduction and service quality. Lower price caps induce the firm to reduce water losses when demand is inelastic, while higher rates of return lead the firm to reduce water losses only from low levels of the ROR model. Service quality increases in the price cap but shrinks in the ROR model. We show that PC regulation is a superior policy when the cost of capital is not too high, as the firm can efficiently supply at a low price and provide some level of quality.

Suggested Citation

  • Thanacoody, Selvin, 2025. "Water utility network loss reduction and service quality under price cap and rate of return regulation," Utilities Policy, Elsevier, vol. 92(C).
    • Handle: RePEc:eee:juipol:v:92:y:2025:i:c:s0957178724001516
    DOI: 10.1016/j.jup.2024.101857
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    More about this item

    Keywords

    Water utilities; Water loss reduction; Service quality; Price cap; ROR; Endogenous sunk cost; Network expansion; Universal access;
    All these keywords.

    JEL classification:

    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly

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