The impact of regulation on cost efficiency: An empirical analysis of Wisconsin Water Utilities

The impact of regulation of efforts to minimize costs has been widely discussed, but remains difficult to measure. The sophisticated regulation of water utilities in Wisconsin allows us to attempt such an assessment since different firms can be under different regulatory regimes (price cap or rate-of-return) in the same geographical area at the same time. To measure the impact of regulation on efficiency, we use a stochastic cost frontier approach defining the unobservable efficiency of a water utility as a function of exogeneous variables. Using a panel of 211 water utilities observed from 1998 to 2000, we show that their efficiency scores can be partly explained by the regulatory framework.