A cost-quality approach to productivity and PC marginal cost estimates at PR24

Ahead of PR24, Economic Insight has been asked by a consortium of 14 water companies to develop (i) a robust approach for deriving best-practice marginal cost estimates; (ii) a framework for establishing what level of performance (i.e. outcomes) is funded in Ofwat’s cost allowances; and (iii) quality-adjusted measures of productivity.

This is currently ongoing. We have published two notes relating to this work which briefly outline the purpose and scope of our work – and how it relates to the proposals in Ofwat’s Draft PR24 Methodology (July 2022). Specifically, in the first we discuss the relevance of marginal cost estimates; and in the second we provide an ‘early view’ of what frontier shift might look like, based on a ‘conventional’ approach (i.e. before one accounts for gains in quality).


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