Adequacy of DEA as a regulatory tool in the water sector. The impact of data uncertainty

[EN] The regulation of water services shares many similarities with that of other utilities such as electricity or telecommunications. As a result, similar methods are often used by regulators to assess the efficiency of companies in those sectors. Data Envelopment Analysis (DEA) is one of those widely applied methods. This paper aims to determine the adequacy of DEA as a regulatory tool for urban water services, with a special focus on the quality of the available data. In order to obtain useful conclusions, two DEA simulations were performed with audited data from 194 water utilities, officially made available by the Portuguese water regulatory authority (ERSAR). Both simulations will demonstrate that the inherent inaccuracies found in some of the key data provided by water utilities represent a significant obstacle to obtain meaningful results with the DEA technique. This could represent a paradigm shift for some of the regulatory authorities currently using DEA or similar techniques, as the complexity of the method does not seem to be justified by a better analysis of the comparative performance of the different services.Cabrera Rochera, E.; Estruch-Juan, ME.; Molinos-Senante, M. (2018). Adequacy of DEA as a regulatory tool in the water sector. The impact of data uncertainty. Environmental Science & Policy. 85:155-162. https://doi.org/10.1016/j.envsci.2018.03.028S1551628

Water utility efficiency and stated choice responses: status quo effects, effects of presentation format and response time

Water regulators and policymakers around the world are increasingly influencing water systems towards efficiency and sustainable consumption. In pursuit of these, most regulators mainly use traditional economic-analysis methods to benchmark water utilities and elicit water-service preferences. There have been discussions of several other techniques that extend the commonly used traditional economic analysis tools in the literature. Regardless of these discussions, the practical application of new economic analysis tools in the water sector remains relatively low. This study intends to extend the existing literature by providing more robust methods that could be useful to water regulators. The study asks four research questions to shed light on whether more robust methods are the way forward in water regulation. More precisely, the study investigates the consistency of efficiency scores obtained from the data envelopment analysis (DEA), stochastic frontier analysis (SFA) and stochastic non-parametric envelopment of data (StoNED) techniques on a sample of South African water utilities. Additionally, the study examines the impact of status quo bias, presentation format and response time on results from discrete choice experiments conducted using a case of the South African water sector. The study reports four main findings. First, we find that the StoNED method (based on the methods of moments estimator) outperformed both SFA and DEA. However, SFA outperformed StoNED, when the latter was based on the pseudolikelihood estimator. Second, we find that including a partially relevant status quo reduced status quo bias but did not significantly affect empirical estimates. Major differences are noted in the marginal willingness to pay (MWTP) estimates reported for one of the sub-samples. Third, we find that presenting attributes and levels using the visuals format generated more statistically significant coefficients than presenting them as text or text-and-visuals. Generally, we find that the presentation format significantly affects choice. Finally, we find that removing fast or slow responses from the sample did not significantly affect both utility function and MWTP results. Based on these findings, the study makes four main recommendations. Firstly, the study argues that StoNED (method of moments estimator) and SFA are more appropriate for estimating efficiency in heterogenous water sectors. The study makes recommendations for future studies that seek to do a methodological cross-checking of the three efficiency analysis techniques in the water sector. Secondly, the study argues that a text-and-visuals experiment improves choice task clarity and yields more robust estimates. Thus, more research on the effects of presentation formats is required in environmental economics so that guidelines on developing valid presentation formats for choice tasks can be established. Finally, the study argues against the exclusion of fast and slow responses from the dataset; and recommends approaches for future studies that investigate the impact of response time on choice