The study estimates a variable cost model of the UK water industry. From this variable cost function, estimates of economies of scale and economies of capital utilisation and capacity utilisation are made. The data used cover 20 English
and Welsh water companies. The results suggest that only slight, albeit, signzficant dis-economies of scale and substantial diseconomies of capital utilisation exist in the industry. These estimates indicate that if output increases, with or without holding capital constant, variable costs would increase at a level
above the proportional increase in output. If the water industry is not in long-term equilibrium, in terms of capital, neither merger nor acquisition amongst water companies are justzfied in terms of cost efficiency. A low level of capital utilisation is also indicated for the water industry. It is shown that the level of
capital utilisation does increase over the sample period to approximately 30per cent in 1996, indicating dis-equilibrium, in terms of capital, is present in this sector.