Stochastic frontier analysis
of sewage companies

SFA 3D visualization

The Danish regulator’s benchmarking model for water and sewage is a TOTEX (capital expenditure + operational costs) model, which simulates competition for utilities by identifying the most efficient utilities and stating that all other utilities should be as efficient as them.

In this demo, we show the stochastic frontier analysis (SFA) model currently in use in the sewage sector. Here it can be observed that the regulation does not take proper account of how asset-heavy utilities’ costs are, as the optimal position to be closest to the efficient plane is theoretically in the middle between CAPEX and OPEX axes.

For most utilities subject to this benchmarking regulation, it is likely profitable to reduce CAPEX spending and increase OPEX spending.

Click and drag on the 3D model below to rotate it and see how far each company (the dots) is from the efficient plane (the blue surface).