In this study we analyze the evolution of operating cost inefficiency for the English and Welsh water industry over the period 1995-2001 by estimating an heteroskedastic stochastic variable cost frontier. The main aim of this paper is to provide an overall picture of the industry costudinefficiency, as we consider both the water and sewerage companies and the smaller water only companies. The main results of this paper are that industry operating cost inefficiency has decreased over the sample periodudand that inefficiency differentials among firms have steadily narrowed. This pattern of inefficiency might have been generated by the incentives provided by comparative and capital market competition which became fully operative after the 1994 price review.
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