Numerous topics have been discussed in this thesis. Presenting conclusions on the Water
Department’s benchmarking technique requires understanding of the Danish benchmarking model, Danish history in the water sector, regulation, DEA, etc. It is also important that all stakeholders’
perspectives are considered, although we mostly align with the regulator’s perspective to safeguard public interests, which influenced our choices in this thesis.
The Water Department uses incentive-based revenue caps to regulate the water sector. There are pros and cons to each regulation method, and a lot of considerations to keep in mind. Within this regulation, the use and results of benchmarking have an impact on the revenue caps for each firm.
Before the Water Sector Act was implemented in the market, a report by the Competition Authority found that 11 firms in the water industry and six firms in the sewage industry were considered efficient. However, our results using CRS, first band with the allowance of private firms on the frontier found three water firms and five sewage firms to be efficient. The report also showed total potential market savings of 1,300,000,000 DKK, whereas we found 2,031,944,215 DKK. This comparison is interesting since the amount of efficient firms has decreased and the total market savings has increased when we compare our results to the Competition Authority’s report. It is important to keep in mind the process and underlying conditions, such as number of observation, cost drivers, etc., differ substantially between the Competition Authority’s original report and our analyses.
The Water Department’s assumption of CRS was found to have a large impact on the companies’
efficiency potentials. From our data, CRS show potential saving of 2,031,944,215 DKK for the consumers from the water and sewage industry (when private water companies are allowed on the frontier). Using CRS over other RTS-assumptions (VRS) will potentially save the consumers 480,118,251 DKK in total for one year. We find the potential savings of using CRS over VRS
substantial, and with the regulator’s objective of safeguarding the consumers’ interest this approach is deemed appropriate. However, the Water Department also uses the second band of frontier companies, which we do not find to be safeguarding the consumer’s interest. By using the second band with CRS, the potential savings decreases by 232,004,732 DKK. The argument set forth by the Water Department leans towards caution, which we believe is subjective and unnecessary.
Other choices made by the Water Department also impact the firms and society. In some cases, it was found that the Water Department’s benchmarking of all firms is too encompassing, and groupings may be better. This is the case in the water industry, where the use of municipal firms only allowed on the frontier greatly influences the efficiency potentials, in favor of the firms.
Groupings may provide rational results as it is optimal to benchmark against similar firms. The scope of a firm does not have significant impact on the results. When grouping the companies based on their size, no obvious patterns in the efficiency potentials were found. However, the analysis of scale efficiency showed that only a few companies were operating at an optimal level. Thus, the size of the firms could have an influence on the efficiency potentials. The location of firms operating in the Capital region appeared to make a difference in the results. It was also discovered that the modification used by the Water Department to correct for this regional impact does not serve its purpose.
Furthermore, it was discovered that not all of the variation in the model was due to inefficiency, as the DEA states, but noise was encountered, shown by the SFA. The Water Department makes corrections based on a SFA, but whether that correction is appropriate is difficult to say since there is no final guideline to this implementation.
The Water Department recognizes that the model is not perfect, therefore it corrects the
net-volume-measure for age, density, large distributions of certain cost drivers and a general correction based on SFA results (noise). When the companies had to allocate their costs to every cost driver in the model, the companies were only able to allocate 80% of their cost directly to the cost drivers.
This could indicate lack of cost drivers in the model. Due to the model and the results from our analyses, we find some adjustments made by the Water Department acceptable.
Overall, we believe that the Water Department does focus on safeguarding the consumers’ interest with the implementation of incentive-based regulation. It is in the societal interest to have firms operate efficiently and smoothly (firms not worrying about bankruptcy, equipment not working since maintenance wasn’t performed to lower the benchmarked OPEX, etc.). That being said and taking it into consideration, occasionally we think that the Water Department makes too many concessions and adjustments from a societal point of view, especially using only municipal firms on the frontier and the second-best firms as the frontier in DEA.
Therefore, we believe that if the Water Department groups similar firms together (municipal firms or private or Capital regional firms benchmarked together), then there could be fewer concessions.
In conclusion, we understand that there are financial consequences placed on the regulated water firms based on the decisions of the Water Department’s benchmarking techniques. However, regulation and benchmarking is complicated. Different aspects produce different results, but the purpose of these is for consumer’s gain, and this is possible with the Water Department’s approach.
Since the regulation of the Danish water sector is fairly new, we have no doubt that after some years of experience, changes will be made; this could be in regard to the law (as the Water Department is limited to the law in many ways), regulation method and the benchmarking model. Overall, we hope that this thesis may provide some inspiration on the subject.