Enforcement of Yardstick Contracts & Consistency in Performance Rankings : An Application to the Water Industry in England and Wales
Aude Le Lannier (IAE Paris, Chaire EPPP & GREGOR)
Abstract: This paper aims to determine the extent to which enforcement difficulties of yardstick competition implemented by the regulator of the UK water and sewerage sector (Ofwat) may come from a lack of reliability of the benchmarking results established by Ofwat.
Regulators can use a number of alternative methodologies and data for comparing firms’ efficiency. These approaches need to be robust to be accepted by stakeholders. If different benchmarking methods lead to significantly different rankings, this may create tensions and disputes between the regulator and the regulated companies. In order to determine whether the firms-led renegotiations and the enforcement difficulties may be explained by a lack of reliability of the benchmarking results calculated by Ofwat, we analyze the consistency between the performances rankings published by this regulator and those produced by a SFAbased benchmarking. For that purpose, we use an original dataset that consists of an unbalanced panel of 22 water and sewerage regulated companies’ observations in England and Wales, observed over the period 2002-2008. We find important consistency problems between the Ofwat’s benchmarking and the SFA results. These results suggest that, despite the extensive information collected by Ofwat, the unreliability of the method used in this country can justify the firms-led renegotiations.