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

36 Pages Posted: 26 Feb 2013

See all articles by Alexandros Maziotis

Alexandros Maziotis

Fondazione Eni Enrico Mattei

David S. Saal

Aston University - Aston Business School

E. Thanassoulis

Aston University

Date Written: February 26, 2013

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.

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

JEL Classification: Q5

Suggested Citation

Maziotis, Alexandros and Saal, David S. and Thanassoulis, E., A Methodology to Propose the X-Factor in the Regulated English and Welsh Water and Sewerage Companies (February 26, 2013). FEEM Working Paper No. 14.2013. Available at SSRN: https://ssrn.com/abstract=2225281 or http://dx.doi.org/10.2139/ssrn.2225281

Alexandros Maziotis (Contact Author)

Fondazione Eni Enrico Mattei ( email )

C.so Magenta 63
Milano, 20123
Italy

David S. Saal

Aston University - Aston Business School ( email )

Aston Triangle
Birmingham, B47ET
United Kingdom

E. Thanassoulis

Aston University ( email )

Aston Triangle
Birmingham, B4 7ET
United Kingdom

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