Martin CAVE
University of Warwick

Abstract: The aim of this paper is to assess the impact of the regulatory policy on both technical and allocative efficiency for the England and Wales water and sewerage industry after privatisation. Previous empirical results suggest that the regulatory system introduced at privatisation was too lax (Saal and Parker, 2000) and the evidence that the first price review in 1994 produced efficiency gains is still quite ambiguous (Saal and Parker, 2001 and 2004). The 1999 price review signalled a change in the regulatory policy by imposing a price reduction, which might be expected to lead to a faster increase in efficiency. This paper evaluates the impact of the tightening in the regulatory regime and of other operational factors on efficiency through a two-stage approach derived from Fried et al. (2002). The 1999 price setting is shown to have a significant impact on the reduction of technical inefficiency.
Furthermore the new economic environment set by price-cap regulation, along with the need for capital renewals and investments, acted to bring inputs closer to their cost-minimising optimal levels.