An Analysis of the Benchmarking Model in the Danish Water Sector

Mariah Broadhurst Augustino & Rikke Leerberg Jørgensen

Student thesis: Master thesis


This thesis examined the Water Department’s benchmarking model used in the revenue cap regulation of the Danish water sector. The regulation is incentive-based and covers more than 300 private or municipal-owned water or sewage companies since 2009. Within the regulation, firms may receive a penalty if they are deemed to operate inefficiently when comparing to other water or sewage firms. The Water Department’s process of calculating this penalty is by benchmarking with the method of data envelopment analysis. Using the Water Department’s benchmarking model from year 2013, analyses on some the choices made by the Water Department were performed. The problem statement of this thesis is: Do the benchmarking choices made by the Water Department have an impact on the results from the data envelopment analysis used to benchmark the Danish water sector? With sub-questions: How does the returns to scale assumption affect the results of the data envelopment analysis? Are there patterns in the benchmarking results based on firm characteristics? The problem statements allowed analyses using the same process as the Water Department, DEA, to investigate the returns to scale, first or second band of frontier companies, ownership influence, size analysis, regional effects, presence of economies of scope, and an examination into the variation of the model. It was determined that there was an impact on the choices made by the Water Department. The returns to scale assumption used by the Water Department has a significant impact on the firms, and is considered restrictive. Whereas the Water Department’s use of second frontier and ownership influences the efficiency of the firms, although in favor of the firms. Furthermore, inconclusive results were found in respect to the product scope and companies’ size showed to have less of an influence on the efficiency potentials. Regional effects were seen in the benchmarking results, and the density correction made by the Water Department indicated to be ineffective. In addition, it was confirmed that noise exists in the Water Department’s model and adjustments to the model is necessary. The thesis also presented a thorough understanding of the Water Department’s benchmarking model, and the history and adjustments made to the model throughout the years. A presentation of regulation and other methods is also incorporated, as well as a general representation of the law, the Water Sector Act, to gain a strong foundation of the background. Additionally, this thesis attempted to gain perspective from other countries or industries regarding regulation and benchmarking, specifically within the water sector or other natural monopolies. Finally, the results can be interpreted differently from an industry/ firm perspective, or from a societal/ regulatory perspective, and the thesis aligned more from the societal and regulatory perspective to compare with the Water Department’s choices and goals.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2013
Number of pages170