Water regulation: the periodic review
Since the privatisation of the water industry in 1989, issues relating to the pricing of water, charging structures and the conduct of the water regulators have rarely been out of public attention. Water prices have increased ahead of inflation, in some cases by more than 10 per cent per annum, profits have been high, construction costs have fallen dramatically in the recession and the investment requirements to meet EC Directives have been revised upwards. In the first years following privatisation, the Director General (DG) of the Office of Water Services (OFWAT), the economic regulator of the industry, has, in the face of major shocks, used his discretion to intervene in the pricing and investment arrangements repeatedly. Indeed, the shocks have been so large that the DG has brought forward the review of the regulatory formula governing prices from 1999-2000 to 1994-95. It is this review of the price limits (called the Periodic Review) which is the subject of this paper. The review will be far reaching, involving decisions about the appropriate cost of capital for the industry, the valuation of existing assets, the capital expenditures required to meet environmental quality targets, and the level of operating costs and efficiency. To date, the DG has issued a series of consultation papers, culminating in Setting Price Limits for Water and Sewerage Services: The Framework and Approach to the 1994 Periodic Review, published in November 1993, which details his approach to the Periodic Review. The aim of this paper is to examine the economic principles underlying the DG’s approach and to consider the implications for the future of water regulation. The structure of the paper is as follows. Section II provides an overview of the current regulatory regime, which was set up at privatisation. Section III considers how the regulatory framework has developed since 1989, with particular focus on the capital expenditure out-turn, shareholder returns and the revisions to the process instigated by the DG. Section IV analyses the DG’s approach to the Periodic Review and describes the ways in which pressure has been brought to bear on the various components of the capital expenditure, cost of capital, asset valuation and operating expenditure to reduce the rate of increase in prices. Section V provides an assessment of the prospects for the success of the DG’s approach. Finally, in Section VI, we summarise our main conclusions.
Volume (Year): 15 (1994)
Issue (Month): 2 (May)
|Contact details of provider:|| Postal: The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE|
Phone: (+44) 020 7291 4800
Fax: (+44) 020 7323 4780
Web page: http://www.ifs.org.uk
More information through EDIRC
|Order Information:|| Postal: The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cowan, Simon, 1993. "Regulation of Several Market Failures: The Water Industry in England and Wales," Oxford Review of Economic Policy, Oxford University Press, vol. 9(4), pages 14-23, Winter.
- Dieter Helm, 1992. "Environmental regulation: the Environment Agency proposal," Fiscal Studies, Institute for Fiscal Studies, vol. 13(2), pages 66-83, May.
- Crocker, Keith J & Masten, Scott E, 1991.
"Pretia ex Machina? Prices and Process in Long-Term Contracts,"
Journal of Law and Economics,
University of Chicago Press, vol. 34(1), pages 69-99, April.
- Crocker, K.J. & Masten, S.E., 1988. "Pretia Ex Machina?: Prices And Process In Long-Term Contracts," Papers 10-88-2, Pennsylvania State - Department of Economics.
- Pearce, David & Brisson, Inger, 1993. "BATNEEC: The Economics of Technology-Based Environmental Standards with a UK Case Illustration," Oxford Review of Economic Policy, Oxford University Press, vol. 9(4), pages 24-40, Winter.
- Priest, George L, 1993. "The Origins of Utility Regulation and the "Theories of Regulation" Debate," Journal of Law and Economics, University of Chicago Press, vol. 36(1), pages 289-323, April.
- David P. Baron & David Besanko, 1987. "Commitment and Fairness in a Dynamic Regulatory Relationship," Review of Economic Studies, Oxford University Press, vol. 54(3), pages 413-436.
When requesting a correction, please mention this item's handle: RePEc:ifs:fistud:v:15:y:1994:i:2:p:74-94. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Emma Hyman)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.