Firm-level inefficiency and its determinants in the Swedish water and wastewater sector

The Swedish Water and Wastewater (WW) utilities are subject to a cost-of-service regulation with no regulatory incentives to reduce costs. An estimation of firm-level inefficiency using stochastic frontier models on a cross-sectional sample of 148 utilities from 2006 suggests that overall the sector has at least a 15% cost reduction potential. Utilities can increase efficiency by reducing network losses. The cost frontier shifts to a higher level when (1) two or more municipalities merge their WW operations and when (2) utilities receive tax subsidies.