OUR WATER
WORK
We apply economics
to markets, organisations
and policies.
We work with a wide range of clients
from the private sector, government,
regulators, and other public authorities.
Our projects span the globe. And we
have worked in almost every sector
imaginable, from fertilisers and oil
rigs to handbags and iPads.
We try to build strong relationships
with our clients, and many have worked
with us since Frontier was created
in 1999. We know that big decisions
with substantial financial implications
can rest on our analysis and that for
clients to be comfortable making those
decisions they need to trust their
advisors.
Telecoms
REGULATION
Water
Listening
Open
Unbiased
Health
Financial
Services
Insightful
Teamwork
Listeners
FRONTIER
ECONOMICS
Transport
Media
Enjoyable
Ideas
Succinct
Energy
POLICY
We distil complex issues to focus on
what matters to our clients. We help
them make credible arguments and good
decisions, backed up by robust evidence
and analysis. While our analysis may
be complex, the advice we provide is
clear, honest and delivered using plain
language.
STRATEGY
We use economics to help clients
improve performance, make better
decisions and keep ahead of the
competition. Our expertise is broad,
covering not just micro-economics but
finance, statistical modelling, game
theory, market research and even the
psychological side of economics.
Retailing
Education
Frontier Economics is one of the largest economic consultancies in
Europe with offices in Brussels, Cologne, Dublin, London and Madrid.
Flexible
Analytical
First class
Post
Environment
COMPETITION
Clear direction
Commitment
Purpose
Solutions
Consistent
Professional
FRONTIER ECONOMICS 1
Our water practice.
Water is vital to health, welfare and development. Agriculture, energy
and industry all need access to reliable water supplies. Clean water
is essential to the health and development of families. Collecting and
disposing wastewater safely is also vital for public health and
protecting the environment.
Delivering reliable water and
wastewater services is a part of the
core infrastructure of a society. Providing
these services and the pipe networks
and treatment works incurs huge
investment costs. However, by delivering
these services efficiently, the social
and environmental benefits can be far
greater.
Given the importance of water, it is a
priority for governments to ensure that
charges for the services are affordable
and that the quality of service protects
public health and the environment.
Models for delivering water and
wastewater range from direct public
ownership, concession models and
Public Private Partnerships (PPPs),
to greater private sector ownership.
Where the private sector is involved,
economic regulation is needed to tackle
the natural monopoly aspects of these
services. Regulation uses economic
methods, such as benchmarking and
incentive design, to prevent monopoly
pricing and promote efficiency.
There is also a growing recognition that
competition and market forces can play
a role in parts of the value chain.
Around the world, population growth and
climate change are putting an increasing
strain on water supply. Governments
must increasingly focus on how to
allocate this depleting resource. There
is a growing demand for using market
instruments in allocating water rights.
Water metering and properly designed
tariffs can ensure that users face the
true cost of the water they consume.
Frontier’s water team helps its clients
find solutions in this challenging sector.
We help them to understand the role
for markets and how to make them
work. We help to design and apply
regulation that delivers, for customers
now and in the future. Our work, ranging
from strategic advice to sophisticated
modelling, gives our clients new insights
that work.
Case Study:
Investment needs
across the globe
In 2010, almost 800 million people
worldwide were without good access
to water, and 2.5 billion people were
without basic sanitation.
If you want new thinking,
new approaches and
intellectual rigour, Frontier
is the right choice.
Chris Offer, Head of Regulation, Affinity Water
Providing universal access to water
for all poorly-serviced populations
worldwide will cost at least $175
billion, using just basic technologies.
An additional $550 billion is required
to provide universal access to
sanitation.
WATER
RESOURCES
AND THE
ENVIRONME
NT
T
INVESTMEN
AND
ON
TRANSACTRIT
SUPPO
COMPETITION
SUPPORT
MARKET
REFORM
ECONOMIC
REGULATIO
N
STRATEGY
AND
COMMERCIAL
2 WATER
FRONTIER ECONOMICS 3
Market reform.
Case Study:
Water trading in Australia
The water sector is constantly evolving and policy makers need to respond to
new pressures. Environmental concerns about the availability of water because
of climate change lead to calls for better use of resources. Social issues around
the affordability of water bills create pressure to ensure value for money.
Economic considerations around the efficient provision of water services raise
questions around how to structure the market.
Frontier helps governments, regulators
and water companies to use effective
market design and reform in all aspects
of the water and wastewater services.
We regularly advise clients on issues
around market reform in the water sector,
from high level conceptual analysis of
the markets to detailed market design.
We understand that market reform
affects all those involved in supplying
or using water. Our advice helps clients
understand the options and trade-offs
and make the right decisions.
Our advice is based on practical and
effective analysis, underpinned by sound
economic theory. We advise clients on
the options for market reform and on
developing and applying criteria that will
help them choose the best ones.
We also undertake detailed analysis of
the impacts of different options from
economic, social and environmental
points of view.
B
C
F
E
4 WATER
Water trading was considered as a way of
achieving specific environmental results.
The government did this by fixing the quantity
of water that could be taken and by allowing
We have played an important role
in influencing market reform in the
water sector in several countries and
have built long-term relationships
with clients. We enjoy the challenge
of developing analysis that will satisfy
all stakeholders.
A
D
Water scarcity has been a critical issue in
Australia for many years. In the mid 1990s,
Australian governments recognised that
over use was causing significant environmental damage.
licence holders to trade licences (in much
the same way as carbon credits can
be traded in the EU emissions trading
scheme). This enabled market prices for
water to adjust. Trading was seen as a way
of ensuring that water resources were put
to their best use. It was also considered to
be a highly adaptable mechanism: reducing
the cap enabled changes in future water
availability to be easily managed. This is
important, given the uncertainty surrounding
the impact of climate change.
H
A
WATER ABSTRACTION
AND STORAGE
B
BULK TRANSPORT
C
WATER TREATMENT
D
WATER DISTRIBUTION
E
RETAIL - METER, BILLING,
CUSTOMER SERVICE TO
HOUSEHOLDS & BUSINESSES
F
WASTEWATER COLLECTION
AND TRANSPORT
G
WASTEWATER, EFFLUENT
TREATMENT
H
RETURN TO NATURAL
ENVIRONMENT
G
FRONTIER ECONOMICS 5
Regulation.
Case Study:
Regulatory reform of Irish Water
Water and wastewater services are often natural monopolies, where there will
be only one provider in a region. Where the private sector is involved in delivering
these services, economic regulation is needed to prevent monopoly pricing and
promote efficiency and quality. Implementing “best practice” regulation can deliver
efficiency and support the financing of investment.
Regulation applies economic methods,
such as benchmarking and incentive
design, to prevent monopoly pricing and
promote efficiency. We provide economic
analysis and regulatory support for
water companies and regulators
throughout the whole process of setting
regulated price limits. Our analysis is
always firmly grounded in economic
theory and tailored to suit the practical
needs of our clients.
We help regulators to assess and develop
regulatory methods and devise incentive
structures. Our extensive experience
puts us in a good position to assess
the advantages and disadvantages of
different regulatory regimes and to
advise regulators internationally on the
regulatory design that strikes a balance
between efficiency for the customer and
value for the investor.
We help to assess and develop
regulatory methods and devise incentive
structures. We develop financial models
that apply the regulatory methodology
and calculate regulated prices alongside
financial statements and ratios.
We support companies in preparing
their business plan submissions and
providing assurance over the quality of
the evidence. We also assist companies
in making representations to regulators
and appeal bodies.
Irish Water is introducing domestic charging
for water services. Before this, Ireland was
Irish Water was established in 2013 to
the only country in the OECD where housecombine the water and wastewater services
holds were not charged for these services.
of 34 local authorities within a single company
The company is regulated by the Commission
and provide those services to the whole
for Energy Regulation (CER), which is
country. Once consolidation is complete,
establishing a system of Regulatory Asset
Irish Water will be responsible for public
Base (RAB) based regulation for the
water services (including managing and
company.
maintaining the water system) investment
and planning, managing capital projects,
and customer care and billing.
Economic regulation prevents monopoly pricing and promoted efficiency:
Cost of financing
investment
Corporate tax
Benchmarking
and appraisal
methods
Regulated
price limits
Depreciation of
investment
Tariffs
Operating
expenditure
Allowed
revenue
One of the tests here is that the output mustn’t
be like that of other companies - and it wasn’t.
Ian McGuffog, South West Water
6 WATER
FRONTIER ECONOMICS 7
Competition support.
There is a growing interest in the possibility of introducing competition into potentially
contestable segments of the value chain, such as: retail services, supplying untreated
water and effluent treatment. Water and wastewater providers who have a dominant
market position need to make sure that they comply with competition law.
As parts of the value chain are
restructured and opened to competition,
companies need to ensure that their
pricing is in line with competition law.
This requires detailed understanding
of the underlying costs of providing the
services, to minimise the risk of “margin
squeeze” or excessive pricing cases.
Our expertise covers all aspects of water
competition policy: merger analysis,
alleged abuse cases, and pricing third
party access. We combine competition
expertise with an in-depth understanding
of water and wastewater markets.
When competition cases arise, we work
with clients and legal counsel to provide
strategic advice and technical support.
Our typical roles include:
•helping to understand where
competition issues may arise;
•producing and responding to
technical analysis;
•preparing regulatory submissions; and
•acting as expert witnesses,
by giving written or oral evidence.
In dispute cases, economists have
traditionally been asked to give evidence
in relation to calculating damages.
However, increasingly we find that clients
value the evidence we provide based on
the merits of cases. This is because of
our deep knowledge of the sector and
our understanding of both commercial
behaviour and regulatory practice.
We are skilled, not only in applying
economics, but also in presenting
economic concepts clearly to lawyers,
tribunal members and judges by using
straightforward language and avoiding
jargon.
Assessing margin squeeze:
The issue of margin squeeze arises when an incumbent firm is vertically
integrated so it provides upstream (wholesale) services and downstream
(retail) services.
The wholesale services are essential for the provision of downstream services.
If a competitor wants to enter the market to provide retail services, it has to
buy the wholesale inputs from the incumbent. To avoid entry, the incumbent
can lower its retail margin and increase its wholesale margin so that the
potential new entrant cannot operate profitably at the new retail margin.
The question is therefore whether the retail margins are sufficient to allow
a new entry in the retail market to sustain a profitable business.
Incumbent
New entrant
Product wholesale
input (at cost C)
Sell at W
Incur downstream
costs
Buy for W
The incumbent company
sells the wholesale product
to the new entrant at the
price W.
Incur downstream
costs
Sell at P1
Sell at P2
Customers
Margin = P1 - C
Margin = P2 - W
Both the incumbent and
the new entrant sell the
retail product to customers.
Margin squeeze occurs if
the retail margin set by the
incumbent is not sufficient
to allow the new entrant to
run a profitable business.
The new entrant would
either have to charge a
higher margin and lose
customers or charge a
margin that is not sufficient
to cover all costs
C – Incumbent wholesale cost
W– Incumbent wholesale price
P1– Incumbent retail price
P2– New entrant retail price
8 WATER
FRONTIER ECONOMICS 9
Water resources and
the environment.
I was impressed by the flexibility
of the Frontier team in delivering
the project, the quality of the
final report, and the presentation
that communicated the work to
key stakeholders.
Many parts of the world are faced with an increasing water shortage and changing
patterns of water availability because of climate change and rising demand.
Policymakers have to tackle this by promoting efficient water use, focussing on
how water is allocated between users, and balancing the requirements of human
activity and the natural environments.
Economics can play an important role in this.
In the UK, Defra and the Environment
Agency are managing a programme to
help develop abstraction reform options.
These include helping the trading of
water abstraction licenses and introducing
pricing mechanisms linked to water
scarcity. We have advised the government
and companies on assessing the impact
of reform options and on implementing
licence trading arrangements.
Water companies can play an important
role in reducing water consumption.
Since 2010, Ofwat has set water efficiency
targets that water companies must
meet. Companies are expected to find
innovative ways of encouraging customers
to change their behaviour and use water
saving devices. We have advised companies
on evaluating programmes to reduce
consumption, including metering and
smart metering, reducing leakage and
fitting water saving devices in homes.
Economic techniques can help develop
policies that protect and restore ecosystems. We have experience of valuing
environmental improvements and
incorporating these valuations into
investment appraisals and cost-benefit
analysis. This makes sure that the
environment is properly considered.
David Legg, Economic Adviser, Rural Communities Policy Unit,
UK Department for Environment, Food and Rural Affairs (Defra)
Sustainable water management supports
development and economic activity:
Sustainable water resource management
Protecting water
quality and sustaining
the ecosystem
Improved
access for
basic human
needs
Efficiently allocating
available water supply
Increased production
and productivity of
non-consumptive activities
Tourism & Transport/ Fishing
recreation navigation
Hydropower
Increased
production and
productivity
in consumptive
industries
Efficient investment in
and management of
water supply infrastructure
Reduced
costs of
over/under
investment
Reduced
productivity
losses from
floods and
droughts
Agriculture Mining &
industry
Improved development and economic growth
10 WATER
FRONTIER ECONOMICS 11
Investments and
transactions support.
Case Study:
Thames Tideway Tunnel
The water and wastewater industries need to finance substantial investments to
maintain or replace their water transport pipe networks, treatment plants and
other groundwork. Finance for investment in the sector comes from many sources,
including governments and international agencies, commercial lending, sovereign
funds and public and private equity investors.
The regulatory and policy institutions
play an important role in ensuring that
long-term investment can be financed.
The regulatory and policy institutions
play an important role in ensuring that
long-term investments can be financed.
The regulatory framework should make
sure that efficiently incurred investment
can be recovered through charges, for
example, through a Regulatory Asset
Base (RAB) methodology. This captures
the amount of finance raised from debt
and equity investors and allows efficient
companies to earn a fair return on the RAB.
Regulatory structures with consistent
rules can help secure low cost finance.
We frequently advise regulators, water
companies and investors on investment in
water infrastructure. Our advice reflects
our expertise in economics, quantitative
techniques, financial modelling and
corporate finance, as well as our
detailed sector knowledge.
Major transactions require significant
local regulatory and commercial expertise.
Drawing on our knowledge of the directions
in policy and regulation, we provide
insights into how existing regulatory
and market arrangements work and
views on potential changes.
Our transaction services enable our
clients to put a value on their investments
in water infrastructure. We give advice
that is creative, practical and informed,
and which makes a difference to the
success of infrastructure transaction
bids.
The aim of the Thames Tideway
Tunnel project is to upgrade London’s
sewerage system to cope with the
increasing demands of the city. The
project involves constructing a 25
kilometre interception, storage and
transfer tunnel running up to 65
metres below the Thames. The project
will be financed and delivered by an
infrastructure provider, separate
from the wastewater provider
Thames Water. The regulator Ofwat
is proposing a RAB based regulatory
model with different returns during
construction and post-construction.
Investment in England & Wales
industry since privatisation
•The water industry is asset heavy and has
invested over £100 billion since 1989 (in today’s
money). This represents £5,000 for every house
hold in England and Wales. The investment has improved services for customers. It has also protected the environment, including providing cleaner rivers and beaches.
•Investment is paid for through customer charges. Since the investments deliver benefits over the asset’s life, much of the investment is financed
by the company and paid for by customers over time.
12 WATER
FRONTIER ECONOMICS 13
Strategy and commercial.
High quality economic analysis, combined with industry expertise, can help
companies make commercial and strategic decisions. This includes optimising
investment programmes, designing and implementing innovative tariffs and
responding to customer feedback. For example, industry reform is placing
greater emphasis on strategic decisions in the retail business.
The retail focus is already encouraging
companies to be more customerfocussed, and this will drive further
scrutiny of their service and tariff offerings.
Understanding customer behaviour and
preferences is vital, as is knowing how to
use this information to drive successful
outcomes for customers and the
business.
We can help companies by bringing
new skills and approaches. We also help
them understand how economics can
change customer behaviour, and how to
work with market research organisations
to analyse customer preferences. We
also have much corporate experience
with a range of retailing sectors to help
devise successful commercial and
customer strategies.
In the network and resources &
treatment segments of the water
industry, advanced evaluation techniques
can help companies get the most from
investment, drive improvements in
performance and reduce risk exposure.
We are experienced in applying “least
cost” planning, “real options” analysis
and simulation techniques to help
commercial decision making.
Case Study:
Smart metering in water
Smart meter technologies in the
water sector can deliver many benefits.
Improved customer information and
billing can reduce consumption and
payment problems. Data from meter
readings can improve network
management, reduce water losses,
optimise power usage and improve
maintenance efficiency. Smart meters
can also reduce meter reading
costs. Analysing these benefits is
vital to building the business case
for smart metering.
687689642
Wa
ter
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e
0058726
2023
63123456
63123456
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on
s
a
tr
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Ul
0800 1000 0800 0300
FLOW
M11 0200
14 WATER
FRONTIER ECONOMICS 15
Where you can find us.
London
71 High Holborn
WC1V 6DA
United Kingdom
T:+44 207031 7000
Cologne
Kranhaus Süd
Im Zollhafen 24
D-50678
Germany
T:+49 221337130
Brussels
Place Stephanie
Avenue Louise 65
Box 11
1050 Belgium
T:+32 2 535 7812
Madrid
Paseo de la Castellana
60, Fifth Floor
28046
Spain
T:+34 91343 2350
Dublin
Fitzwilliam Hall
Fitzwilliam Place
Dublin 2
D02 T292
Ireland
T:+353 1669 8531
For more information please visit:
www.frontier-economics.com