Economies of scale and scope in Australian urban water utilities

Abstract

This paper estimates economies of scale and scope for 55 major Australian urban utilities over the period 2005/06 to 2008/09. The models used specify operating and capital costs as a function of chemical and microbiological compliance, water losses, water quality and service, water main breaks, total connected properties, and urban water supplied. The input variables used to help determine water utility costs include the density of properties served and the sourcing of water from bulk suppliers, groundwater, recycling and surface water. In terms of economies of scale, the evidence suggests strong economies of scale at relatively low levels of output (50-75% of current mean output). In terms of product-specific economies of scale (increasing the scale of a specific output in isolation), there is substantially stronger evidence that the operating costs of urban water utilities would benefit from increasing scale with regard to chemical compliance, water quality and service complaints, and the number of connected properties. In contrast, capital costs would benefit from scale increases with regard to the management of water losses and water main breaks. For economies of scope, it is clear that there are substantial cost benefits from the joint production of treated quality water delivered across a network with minimal water losses and main breaks. The main cost advantage at all levels of output is decreasing water losses, and this would benefit both operating and capital costs.