Productivity and price performance in the privatized water and sewerage companies of England and Wales

After its privatization in 1989, the water and sewerage industry of England and Wales faced a new regulatory régime and implemented a substantial capital investment program aimed at improving water and environmental standards. A new RPI + K regulatory pricing system was designed to compensate the industry for its increased capital costs, encourage increased efficiency, and maintain fair prices for customers. This paper evaluates how successful privatization and the resulting system of economic regulation has been. Estimates of productivity growth, derived with quality adjusted output indices, suggest that despite reductions in labor usage, total factor productivity growth has not improved since privatization. Moreover, total price performance indices reveal that increases in output prices have outstripped increases in input costs, a trend which is largely responsible for the increase in economic profits that has occurred since privatization. * We would like to thank Emmanuel Thanassoulis, Joshy Easaw, Jim Love, John Sawkins, and an anonymous referee for helpful comments on earlier drafts of this paper. The usual disclaimer applies.

Techniques to improve forecasting models: applications to energy demand and price

This thesis is a study of three techniques to improve performance of some standard fore-casting models, application to the energy demand and prices. We focus on forecasting demand and price one-day ahead. First, the wavelet transform was used as a pre-processing procedure with two approaches: multicomponent-forecasts and direct-forecasts. We have empirically compared these approaches and found that the former consistently outperformed the latter. Second, adaptive models were introduced to continuously update model parameters in the testing period by combining ?lters with standard forecasting methods. Among these adaptive models, the adaptive LR-GARCH model was proposed for the fi?rst time in the thesis. Third, with regard to noise distributions of the dependent variables in the forecasting models, we used either Gaussian or Student-t distributions. This thesis proposed a novel algorithm to infer parameters of Student-t noise models. The method is an extension of earlier work for models that are linear in parameters to the non-linear multilayer perceptron. Therefore, the proposed method broadens the range of models that can use a Student-t noise distribution. Because these techniques cannot stand alone, they must be combined with prediction models to improve their performance. We combined these techniques with some standard forecasting models: multilayer perceptron, radial basis functions, linear regression, and linear regression with GARCH. These techniques and forecasting models were applied to two datasets from the UK energy markets: daily electricity demand (which is stationary) and gas forward prices (non-stationary). The results showed that these techniques provided good improvement to prediction performance.

Price policy and price decision making in small companies

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Economic efficiency when prices are not fixed:disentangling quantity and price efficiency

This paper proposes an approach to compute cost efficiency in contexts where units can adjust input quantities and to some degree prices so that through their joint determination they can minimise the aggregate cost of the outputs they secure. The model developed is based on the data envelopment analysis (DEA) framework and can accommodate situations where the degree of influence over prices ranges from minimal to considerable. When units cannot influence prices at all the model proposed reduces to the standard cost efficiency DEA model for the case where prices are taken as exogenous. In addition to the cost efficiency model, we introduce an additive decomposition of potential cost savings into a quantity and a price component, based on Bennet indicators. © 2014 Elsevier Ltd.

Profit, productivity and price performance changes in the water and sewerage industry:an empirical application for England and Wales

This paper aims to analyse the impact of regulation in the financial performance of the Water and Sewerage companies (WaSCs) in England and Wales over the period 1991–2008. In doing so, a panel index approach is applied across WaSCs over time to decompose unit-specific index number-based profitability growth as a function of the profitability, productivity and price performance growth achieved by benchmark firms, and the catch up to the benchmark firm achieved by less productive firms. The results indicated that after 2000 there is a steady decline in average price performance, while productivity improves resulting in a relatively stable economic profitability. It is suggested that the English and Welsh water regulator is now more focused on passing productivity benefits to consumers, and maintaining stable profitability than it was in earlier regulatory periods. This technique is of great interest for regulators to evaluate the effectiveness of regulation and companies to identify the determinants of profit change and improve future performance, even if sample sizes are limited.

A branch and efficiency algorithm for the optimal design of supply chain networks

Supply chain operations directly affect service levels. Decision on amendment of facilities is generally decided based on overall cost, leaving out the efficiency of each unit. Decomposing the supply chain superstructure, efficiency analysis of the facilities (warehouses or distribution centers) that serve customers can be easily implemented. With the proposed algorithm, the selection of a facility is based on service level maximization and not just cost minimization as this analysis filters all the feasible solutions utilizing Data Envelopment Analysis (DEA) technique. Through multiple iterations, solutions are filtered via DEA and only the efficient ones are selected leading to cost minimization. In this work, the problem of optimal supply chain networks design is addressed based on a DEA based algorithm. A Branch and Efficiency (B&E) algorithm is deployed for the solution of this problem. Based on this DEA approach, each solution (potentially installed warehouse, plant etc) is treated as a Decision Making Unit, thus is characterized by inputs and outputs. The algorithm through additional constraints named “efficiency cuts”, selects only efficient solutions providing better objective function values. The applicability of the proposed algorithm is demonstrated through illustrative examples.

Regulatory price performance, excess cost indexes and profitability:how effective is price cap regulation in the water industry?

In this study we apply an index number approach to allow for cross sectional comparisons of relative profitability, productivity and price performance of the regulated Water and Sewerage companies (WaSCs) in England and Wales during the years 1991-2008. In order to better analyse the impact of regulation on WaSC performance, we decompose actual economic profits into spatial multilateral Fisher productivity (TFP) index, the inverse of which is demonstrated to be a regulatory excess cost index that measures the deviation of a firm’s actual costs from benchmark costs, and a newly developed regulatory total price performance (TPP) index, which measures the excess of regulated revenues relative to benchmark costs. Increases (decreases) in regulatory price performance are indicative of the loosening (tightening) of price cap regulation. Moreover, we also show that the relationship between actual economic profitability, regulatory excess costs and regulatory price performance indices can be used to categorize regulatory price caps as “weak”, “powerful” or “catch-up promoting”. The results indicated that throughout the entire 1991-2008 period, price caps were never “powerful”, in the sense that they required less productive firms to immediately and fully catch-up to the most productive firm to regain economic profitability. More specifically, during the years 1991-2000 price caps were “weak” as prices were high enough for the firms to achieve economic profits despite their low productivity levels. However, after 2001 prices became “catch up promoting” as they required less productive companies to eliminate at least some excess costs in order to eliminate economic losses. Finally, we emphasize that as our results also clearly demonstrated a much closer alignment between allowed revenues and benchmark costs after 2001, Ofwat’s approach during this period was not only appropriate, but should also be continued in the 2009 price review.

Short-term electricity demand and gas price forecasts using wavelet transforms and adaptive models

This paper presents some forecasting techniques for energy demand and price prediction, one day ahead. These techniques combine wavelet transform (WT) with fixed and adaptive machine learning/time series models (multi-layer perceptron (MLP), radial basis functions, linear regression, or GARCH). To create an adaptive model, we use an extended Kalman filter or particle filter to update the parameters continuously on the test set. The adaptive GARCH model is a new contribution, broadening the applicability of GARCH methods. We empirically compared two approaches of combining the WT with prediction models: multicomponent forecasts and direct forecasts. These techniques are applied to large sets of real data (both stationary and non-stationary) from the UK energy markets, so as to provide comparative results that are statistically stronger than those previously reported. The results showed that the forecasting accuracy is significantly improved by using the WT and adaptive models. The best models on the electricity demand/gas price forecast are the adaptive MLP/GARCH with the multicomponent forecast; their MSEs are 0.02314 and 0.15384 respectively.

Typical case behaviour of spin systems in random graph and composite ensembles

This thesis includes analysis of disordered spin ensembles corresponding to Exact Cover, a multi-access channel problem, and composite models combining sparse and dense interactions. The satisfiability problem in Exact Cover is addressed using a statistical analysis of a simple branch and bound algorithm. The algorithm can be formulated in the large system limit as a branching process, for which critical properties can be analysed. Far from the critical point a set of differential equations may be used to model the process, and these are solved by numerical integration and exact bounding methods. The multi-access channel problem is formulated as an equilibrium statistical physics problem for the case of bit transmission on a channel with power control and synchronisation. A sparse code division multiple access method is considered and the optimal detection properties are examined in typical case by use of the replica method, and compared to detection performance achieved by interactive decoding methods. These codes are found to have phenomena closely resembling the well-understood dense codes. The composite model is introduced as an abstraction of canonical sparse and dense disordered spin models. The model includes couplings due to both dense and sparse topologies simultaneously. The new type of codes are shown to outperform sparse and dense codes in some regimes both in optimal performance, and in performance achieved by iterative detection methods in finite systems.

Productivity change using growth accounting and frontier-based approaches:evidence from a Monte Carlo analysis

This study presents some quantitative evidence from a number of simulation experiments on the accuracy of the productivitygrowth estimates derived from growthaccounting (GA) and frontier-based methods (namely data envelopment analysis-, corrected ordinary least squares-, and stochastic frontier analysis-based malmquist indices) under various conditions. These include the presence of technical inefficiency, measurement error, misspecification of the production function (for the GA and parametric approaches) and increased input and price volatility from one period to the next. The study finds that the frontier-based methods usually outperform GA, but the overall performance varies by experiment. Parametric approaches generally perform best when there is no functional form misspecification, but their accuracy greatly diminishes otherwise. The results also show that the deterministic approaches perform adequately even under conditions of (modest) measurement error and when measurement error becomes larger, the accuracy of all approaches (including stochastic approaches) deteriorates rapidly, to the point that their estimates could be considered unreliable for policy purposes.

A design and implementation methodology for high variety electronics assembly systems

Small indigenous manufacturers of electronic equipment are coming under increasingly severe pressure to adopt a strong defensive position against large multinational and Far Eastern companies. A common response to this threat has been for these firms to adopt a 'market driven' business strategy based on quality and customer service, rather than a 'technology led' strategy which uses technical specification and price to compete. To successfully implement this type of strategy there is a need for production systems to be redesigned to suit the new demands of marketing. Increased range and fast response require economy of scope rather t ban economy or scale while the organisation's culture must promote quality and process consciousness. This paper describes the 'Modular Assembly Cascade' concept which addresses these needs by applying the principles of flexible manufacturing (FMS) and just in time (,JlT) to electronics assembly. A methodology for executing the concept is also outlined. This is called DRAMA (Design Houtirw !'or· Adopting Modular Assembly).

An overall profit Malmquist productivity index with fuzzy and interval data

Although crisp data are fundamentally indispensable for determining the profit Malmquist productivity index (MPI), the observed values in real-world problems are often imprecise or vague. These imprecise or vague data can be suitably characterized with fuzzy and interval methods. In this paper, we reformulate the conventional profit MPI problem as an imprecise data envelopment analysis (DEA) problem, and propose two novel methods for measuring the overall profit MPI when the inputs, outputs, and price vectors are fuzzy or vary in intervals. We develop a fuzzy version of the conventional MPI model by using a ranking method, and solve the model with a commercial off-the-shelf DEA software package. In addition, we define an interval for the overall profit MPI of each decision-making unit (DMU) and divide the DMUs into six groups according to the intervals obtained for their overall profit efficiency and MPIs. We also present two numerical examples to demonstrate the applicability of the two proposed models and exhibit the efficacy of the procedures and algorithms. © 2011 Elsevier Ltd.

NITL : what the transport and logistics industry needs going forward

The transport industry - particularly in road transport - is under serious competitive pressure. Rising costs - evident but not limited to fuel and insurance - combined with a market place that has become more demanding in relation to price and service, has resulted in a situation where companies have had to seriously reassess the nature of their competitive advantage. The competitive strategies of companies in the sector are being reviewed in light of the effective commoditisation of transport as a direct result of the traditional strong emphasis on cost and price reductions.