Economic Insight was commissioned on behalf of a consortium of water companies to reach our own independent view on the scope for frontier shift at PR24 – the upcoming price control in the water industry.

Frontier shift represents the efficiency gains that can be made by even the most efficient companies in an industry, given that economic theory dictates that all companies will become more efficient over time.  Frontier shift is highly important, as it represents a reduction in costs that the regulator imposes on companies in each year of the price control, which feeds into the prices paid by customers.

In order to do this, we used total factor productivity (TFP) data from EU KLEMS, which contains productivity gains made over time across a range of industries.  TFP data represents the change in the quantity of outputs that cannot be explained by a change in the quantity of inputs.  Over time, productivity gains (measured by TFP) in the UK have fallen steadily, whilst frontier shift challenges set by regulators have risen.