Regulatory incentives to water losses reduction: the case of England and Wales

In recent years, England and Wales have suffered droughts. This unusual situation defies the common belief that the British climate provides abundant water resources and has prompted the regulatory authorities to impose bans on superfluous uses of water. Furthermore, a large percentage of households in England consume unmetered water which is detrimental to water saving efforts. Given this context, we estimate the shadow price of water using a panel data from reports published by the Office of Water Services (Ofwat) for the period 1996 to 2010 (three regulatory periods). These shadow prices are derived from a parametric multi‐output, multi‐input, input distance function characterized by a translog technology. Following O'Donnell and Coelli (2005), we use a Bayesian econometric framework in order to impose regularity–monotonicity and curvature–conditions on a high‐flexible technology. Consequently, our results can be interpreted at the firm level without requiring the need to base analysis on the averages. Our estimations offer guidance for regulation purposes and provide an assessment of how the water supply companies deal with water losses under each regulatory period. The relevance of the study is quite general as water scarcity is a problem that will become more important with population growth and the impact of climate change.