Bigger is not always better in the water industry, report concludes

There is no evidence of general economies of scale in the water industry, according to an independent report published recently. The Jan. 15 report, commissioned by Ofwat and produced by Stone and Webster Consultants, examined the data collected by Ofwat from the industry over the last ten years.

Jan. 26, 2004

2 min read

Jan. 26, 2004 -- There is no evidence of general economies of scale in the water industry, according to an independent report published recently.

The Jan. 15 report (click for PDF file), commissioned by Ofwat and produced by Stone and Webster Consultants, examined the data collected by Ofwat from the industry over the last ten years.

Its aim is to help the water regulator understand how costs have varied with company size and the range of activities undertaken in the industry.

Stone and Webster found there was no clear evidence of economies of scale for the water service companies. They also found significant diseconomies of scale - unit costs rising as companies get bigger - for water and sewerage companies, although these are now declining.

The consultants found no evidence of overall costs savings from the same company providing both water supply and sewerage services. But the current structures of water companies which integrate water production and distribution were seen as offering efficiency benefits.

The report's findings will be used by Ofwat to help inform its approach to issues relating to industry structures.

Welcoming the report, Philip Fletcher, Director General of Water Services, said:

"This is a useful contribution to our understanding of economies of scale in the water industry. Our own comparative work has shown that bigger is not necessarily better. We will continue to look with an open mind at proposals for new and revised industry structures in terms of the potential long-term benefits for customers of what remains at present very largely a monopolistic sector."