Edited by David Pearce
Chapter 13: Valuing Water Service Level Changes: A Random Utilty Approach and Benefit Transfer Comparison
13. Valuing water service level changes: a random utility approach and benefit transfer comparison Kenneth Willis and Riccardo Scarpa INTRODUCTION Public regulation of water and sewerage companies is accepted because they are regional monopolies and because they create environmental externalities (through water abstraction and waste-water disposal). Moreover, their service delivery exhibits ‘public good’ elements (everyone on a supply network receives the same level of service). The economic regulator for water and sewerage companies in England and Wales is OFWAT (Ofﬁce of Water Services). This government agency sets standards to which water companies must conform, and every ﬁve years sets prices that water and sewerage companies can charge their customers over the ensuing quinquennium. Water companies have to conform to legal minimum standards set by the UK government,1 and to EU Directives.2 The regulator OFWAT allows water companies discretion to vary service levels provided beyond these minimum standards, provided water companies can demonstrate to the regulator that beneﬁts to customers and the general public exceed costs to customers. This study demonstrates the use of random utility models (RUMs) in evaluating water company customers’ preferences; and in estimating the beneﬁts of changes in service levels associated with attributes of water supply, water quality and waste-water disposal, which exceed statutory minimum standards. The study also illustrates the importance of using RUMs to value non-statutory environmental improvements that water companies might be called upon to make by the Environment Agency (EA), which regulates environmental standards in England and Wales. 274...
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