Marginal Cost of Reducing Unplanned Water Supply Interruptions: Influence of Water Company Ownership

Abstract

Water companies are expected to deliver high-quality water services to their customers that include, among others, continuity of water supply. Unplanned water supply interruptions (UWSI) indicate a cost for the water companies and a deterioration in the quality of service for the customers. Thus, it is essential to quantify the cost of reducing UWSI, i.e., the cost of improving the quality of service to customers. This study aims to estimate the marginal cost of reducing UWSI using a stochastic frontier model, which also enabled us to estimate cost efficiency, economies of scale, and economies of density. The empirical approach focused on a sample of 21 Chilean water companies over the period 2007–2017, embracing full private, concessionary, and public water companies. The results indicate that the average marginal cost for reducing UWSI is €2.703/h. This cost is lower for concessionary water companies compared to full private and public water companies. The study’s findings can aid regulators in designing effective policies to ensure that companies are rewarded (or penalized) for better (or worse) performance and to eliminate any welfare losses due to lower levels of service quality.