The Economics of Water Distribution in Switzerland

This thesis analyses three distinct aspects of the economics of water distribution in Switzerland. Climate change and mounting pressure regarding the performance of network industries command an understanding of the drivers of cost and efficiency of water utilities as well as an assessment of the consequences of changes in water availability for the Swiss economy. Firstly, Chapter 2 provides a detailed description of the cost structure of Swiss drinking water distribution utilities. The estimation of economies of density and scale reveals significant economies of production and spatial density as well as constant economies of customer density. Scale economies are constant in the short run and in the long run for small water distribution utilities, while large utilities are characterised by diseconomies of scale. Furthermore, a high ratio of water losses to extracted water increases cost, and utilities can consequently benefit from a good maintenance of the network. Chapter 3 focuses on the measurement of the performance of water utilities with the help of stochastic cost frontier analysis, accounting for differences in environmental constraints. Alternative estimation methods allow for explicitly considering both observed and unobserved heterogeneity. Results show that exogenous factors, more precisely the share of pumped over total extracted water, population density, altitude, maximum 30 day temperature and extreme precipitation events, have a statistically significant impact on variable cost. Likelihood ratio tests emphasize the importance to include observed heterogeneity in the estimations. Efficiency rankings are relatively similar regardless of the inclusion of environmental factors. On the contrary, the efficiency ranks diverge strongly between the alternative estimation techniques that differ concerning the way unobserved heterogeneity is treated. Chapter 4 concentrates on the simulation of the economic impact of changes in water availability in Switzerland. To do so, it extends the computable general equilibrium model GEMINI-E3 to include raw water resources and a drinking water sector for Switzerland, providing a detailed description of water resources and their use in the economy. The new modelling allows for the direct extraction of raw water by all sectors that use water as an input. Simulations at a 2050 time horizon of climate-driven changes in water availability reflecting forecasts from a hydrological model show possible restrictions in water resource availability to increase raw water prices substantially compared to the baseline. The global economic impact for Switzerland is, however, limited due to the low value of raw water. A sensitivity analysis concentrating on elasticities of substitution simulates alternative levels of endogenous adaptive capacity of the economy. The abilities to reduce water losses and to transform production processes to decrease their water intensity are important determinants of the extent of welfare losses caused by restricted access to water resources.