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Economies of Scale, Distribution Costs and Density Effects in Urban Water Supply

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Economies of Scale, Distribution Costs and Density Effects in Urban Water Supply ECONOMIES OF SCALE, DISTRIBUTION COSTS AND DENSITY EFFECTS IN URBAN WATER SUPPLY A spatial analysis of the role of infrastructure in urban agglomeration Thesis submitted for the degree of Doctor of Philosophy (Ph.D) by Hugh Boyd WENBAN-SMITH LONDON SCHOOL OF ECONOMICS AND POLITICAL SCIENCE 1 Declaration This thesis is my own work, apart from referenced quotations and assistance specifically acknowledged. (Signed): ……………………………………………………. (H B WENBAN-SMITH) (Date): ………………………………….. 2 ECONOMIES OF SCALE, DISTRIBUTION COSTS AND DENSITY EFFECTS IN URBAN WATER SUPPLY: A spatial analysis of the role of infrastructure in urban agglomeration Abstract Economies of scale in infrastructure are a recognised factor in urban agglomeration. Less recognised is the effect of distribution or access costs. Infrastructure can be classified as: (a) Area-type (e.g. utilities); or (b) Point-type (e.g. hospitals). The former involves distribution costs, the latter access costs. Taking water supply as an example of Area-type infrastructure, the interaction between production costs and distribution costs at settlement level is investigated using data from England & Wales and the USA. Plant level economies of scale in water production are confirmed, and quantified. Water distribution costs are analysed using a new measure of water distribution output (which combines volume and distance), and modelling distribution areas as monocentric settlements. Unit distribution costs are shown to be characterised by scale economies with respect to volume but diseconomies with respect to average distance to properties. It follows that higher settlement densities reduce unit distribution costs, while lower densities raise them. The interaction with production costs then means that (a) higher urban density (“ Densification ”) is characterised by economies of scale in both production and distribution; (b) more spread out settlement (“ Dispersion ”) leads to diseconomies in distribution; (c) “Suburbanisation ” (expansion into lower density peripheral areas) lies in between, with roughly constant returns to scale, taking production and distribution together; and (d) “Constant density” expansion leads to small economies of scale. Keeping (per capita) water supply costs low thus appears to depend as much on density as size. Tentative generalisation suggests similar effects with other Area-type infrastructure (sewerage, electricity supply, telecommunications); and with Point-type infrastructure (such as hospitals), viewing access costs as distribution costs in reverse. It follows that the presumption in urban economics that such services are always characterised by economies of scale and therefore conducive to agglomeration may not be correct. 3 ECONOMIES OF SCALE, DISTRIBUTION COSTS AND DENSITY EFFECTS IN URBAN WATER SUPPLY: A spatial analysis of the role of infrastructure in urban agglomeration Contents I. Overview: Motivation, methodology and key findings … p.11 1. Motivation 2. Research strategy 3. Methodology 4. Key findings a. What is new in this thesis b. Water production c. Water distribution d. Production and distribution combined e. Wider implications of the research f. Limitations of the research 5. Outline of thesis 6. Acknowledgements II. Infrastructure and the urban economy … p.27 1. Defining infrastructure 2. Infrastructure and agglomeration 3. Sprawl and the cost of public services 4. Types of urban infrastructure a. Supply characteristics b. Demand characteristics c. Network economics d. Summary 5. Water supply as a case study of urban infrastructure 6. Focus of this research III. Methodological implications of the different characteristics of water production and water distribution ... p.54 1. Introduction 2. The quasi-fixity of capital 3. The (non-)separability of water production and water distribution a. The trade-off between the costs of production and the costs of distribution b. Separating distribution from production using production/cost functions c. Proposed way forward 4. Defining distribution output 5. Assessing scale effects in water production and distribution 6. Treatment of leakage 7. Data sources 4 8. Conclusions IV. Economies of scale in water production: Empirical investigation … p.76 1. Framework for investigation a. Cost functions: General considerations b. Cost function for water production c. Cost function for water distribution d. Cost function for water production and distribution combined e. What about using a panel data approach? 2. Application to water production a. Introduction b. Specification 3. Application to BWC data a. Data issues b. Specification and results 4. Application to AWWA data a. Data issues b. Specification and results 5. Using Ofwat data to differentiate between boreholes and WTWs a. Data issues b. Specification and results 6. Discussion of findings V. Economies of scale and spatial costs in water distribution: Empirical investigation ... p.100 1. Introduction 2. Implementation of a Leontief-type production function for water distribution a. Measuring distribution output b. Cost function specification c. Estimating distribution elasticities 3. Application to BWC data a. Data issues b. Results for BWC’s 184 zones c. Results for 35 BWC “urban districts” 4. Application to Ofwat data for 11 WOCs 5. Application to AWWA data a. Data issues b. Results 6. Implications of results a. Basis for calculations b. Calculations for 35 BWC urban districts c. Calculations for 11 WOCs d. Calculations for 305 US retail only utilities e. Effect of multiple settlements f. Derived elasticities 7. Conclusions on scale effects in water distribution 5 VI. Bringing together water production and distribution: The volume/space trade-off in urban water supply … p.130 1. Introduction 2. Bringing water production and distribution together: (i) BWC a. 35 “urban districts” b. Water supply areas c. The 4 towns case 3. Bringing water production and distribution together: (ii) AWWA a. Effect of analyzing production and distribution separately b. Comparison of results with Torres & Morrison Paul (2006) 4. Bringing water production and distribution together: (iii) WOCs a. Water production costs for WOCs b. Water distribution costs for WOCs c. Combined costs for WOCs d. Comparison with Stone & Webster Consultants (2004) 5. Conclusions VII. Generalisation: Application to other urban infrastructure and implications for urban economics … p.158 1. Focus of this research 2. Summary of water supply findings 3. Application to other Area-type infrastructure a. Sewerage and sewage treatment b. Electricity supply c. Telecommunications 4. Application to Point-type infrastructure 5. Application to transport a. The role of density in urban transport b. Assessing economies of scale in aviation services 6. Implications for urban economics 7. Conclusions Appendices ………… p.183 Bibliography ………… p.275 6 Appendices A. Using the Ofwat data for water supply (England & Wales) … p.183 B. Estimating scale effects for utilities: A selective review of the literature … p.190 1. Introduction 2. Schmalensee’s approach 3. Use of cost functions in analysis of electricity supply 4. Use of cost functions in analysis of water supply 5. Other approaches 6. Lessons from the literature surveyed C. Asset values for water companies in England & Wales … p.238 D. Components of water delivered … p.243 E. Company level estimates of returns to scale in water production … p.244 F. Simplified models of water distribution … p.249 G. Alternative cost function estimation for water distribution (with application to BWC zones) … p.263 H. Processing the BWC distribution data … p.269 I. Extract from Urban Areas Area/Lambda/Density Table (used to estimate λ, given R and average density) … p.274 7 List of Tables and Figures Chapter I Table 1.1: Estimated plant level returns to scale in water production Table 1.2: Comparison of distribution cost elasticities across three data sets Chapter II Figure 2.1: Changing profile of a typical US city (not to scale) Table 2.1: types of urban infrastructure Table 2.2: A classification scheme for goods and services, based on degree of “publicness” and accessibility Chapter III Figure 3.1: Water supply: Should this area be served by (a) one treatment works or (b) two (or more) treatment works? Figure 3.2: Production functions for water distribution Figure 3.3: Circular settlement Table 3.1A: Water only companies (England & Wales, 2003) Table 3.1B: Water and Sewerage companies (England & Wales, 2003) Table 3.2: Comparison of size distribution of US water utilities Chapter IV Table 4.1: BWC water sources by type Table 4.2: BWC size of treatment plants Table 4.3: BWC type of treatment and plant size Figure 4.1: BWC water treatment works average costs Table 4.4: Regression results for BWC’s WTWs using (4.10) Figure 4.2: Sketch of relationship between average cost and size of works for boreholes and surface treatment works Table 4.5: Selection of treatment cases from AWWA 96 data Figure 4.3: Log plot of unit water supply and treatment costs against volume supplied Table 4.6: Regression results using (4.11), AWWA data Table 4.7: Regression results using (4.12) for groundwater only and surface water only cases, AWWA data Figure 4.4: Log plot of average operating costs against quantity produced for US boreholes Figure 4.5: Log plot of average operating costs against quantity produced for US treatment works Table 4.8A: Estimated data on boreholes and treatment works for WoCs Table 4.8B: Estimated data on boreholes and treatment works for WaSCs Table 4.9: Results of non-linear
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