Vortrag
Cost Efficiency and Economies of Scale and Density in German Water Distribution

Michael Zschille, Matthias Walter


Dynamics and Risk, Virtue of Directional Distance Functions : 3rd Halle Workshop on Efficiency and Productivity Analysis - HAWEPA 2010
Halle a. d. Saale, 28.06.2010 - 29.06.2010



Abstract:
This paper studies the cost structure of water distribution utilities in Germany. Stochastic cost frontier models are applied to an unbalanced panel of 371 observations of 72 companies in the period from 1998 to 2007. The results suggest that some utilities could reduce their costs by more than 20%. Water losses and elevation differences in a service area turn out to be significant cost drivers. Moreover, there is evidence for unexploited economies of scale and substantial economies of density. With the German water distribution sector being a natural monopoly, the analysis supports the introduction of an incentive-based ex-ante yardstick regulation and merger initiatives.

Abstract

This paper studies the cost structure of water distribution utilities in Germany. Stochastic cost frontier models are applied to an unbalanced panel of 371 observations of 72 companies in the period from 1998 to 2007. The results suggest that some utilities could reduce their costs by more than 20%. Water losses and elevation differences in a service area turn out to be significant cost drivers. Moreover, there is evidence for unexploited economies of scale and substantial economies of density. With the German water distribution sector being a natural monopoly, the analysis supports the introduction of an incentive-based ex-ante yardstick regulation and merger initiatives.



JEL-Classification: L25;L43;L95;C1
Keywords: Cost Efficiency, Economies of Scale, Economies of Density, Water Distribution, Stochastic Frontier Analysis
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