Title: Economic regulation of the water supply industry in the UK: a game theoretic consideration of the implications for responding to drought risk

Authors: Wietze Lise, Karen Bakker

Addresses: Institute for Environmental Studies, Faculty of Earth and Life Sciences, Free University, De Boelelaan 1087, 1081 HV Amsterdam, The Netherlands. ' Department of Geography, University of British Columbia, Room 217, 1984 West Mall, Vancouver, BC V6T 1Z2, Canada

Abstract: Droughts have tested the water supply companies in UK over the past decade. This paper employs game theoretic modelling to test hypotheses regarding the implications of price cap regulation for resource and supply security. We present an empirical analysis of drought management by ten water companies in UK as a basis for formulating formal games. These games are estimated. The game between the economic regulator and water companies as they negotiate the price cap, indicates that a high price-cap, low capital investment pattern (a variation of the Averch-Johnson effect) is optimal behaviour. The game between water companies as they compete with one another under ||comparative competition|| indicates that it is optimal for some companies to focus on operational-intensive strategies, and for others to focus on capital-intensive strategies, leading to further additional hypotheses concerning resource and supply security, the viability of bulk water trading and the structure of the water industry.

Keywords: drought risk; economic regulation; game estimation; noncooperative games; UK; water supply industry; game theory; game theoretic modelling; price cap regulation; water resource security; water supply security; drought management; capital investment; bulk water trading.

DOI: 10.1504/IJW.2005.007157

International Journal of Water, 2005 Vol.3 No.1, pp.18 - 37

Published online: 31 May 2005 *

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