Ofwat confirms move to CPI as part of ‘major’ water market reforms

Ofwat has today (25 May) published its Water 2020 decision document, setting out a series of “major reforms”, including the announcement that it is stepping away from the use of the retail price index (RPI) measure of inflation, towards a consumer price index (CPI), or CPIH, measure.

Following a consultation, Ofwat has confirmed that it will phase out the use of the RPI measure of inflation and move towards a CPI-based measure, in line with government and Office of National Statistics advice.

“RPI has lost its status as an official statistic and is increasingly an index which customers do not recognise, with CPI more commonly in use,” the regulator said.

The reforms also include measures to create new markets in sludge and water trading – which together could be worth £1.6 billion; a strengthened role and remit for customer challenge groups, to help give customers an “increased role in water companies’ decision-making”; and encouraging water companies to use direct procurement to deliver benefits for customers.

“Given the financial and environmental benefits, Ofwat wants to empower markets to unleash innovation and efficiencies, bring in third parties and promote the trading of bioresources. Bill payers could benefit too, with the cost of water services being reduced by these new markets,” the regulator said.

It added that setting conditions to encourage water companies to trade between themselves and with third parties would result in a smarter use of water reserves.

“If the water sector is to meet the future challenges it is facing, including increasingly scarce water resources in the face of climate change and population growth, dealing with environmental water quality problems and customers who are struggling to afford their bills, it will need to change,” Ofwat said.

“That is why Ofwat is encouraging bold action to support that change and to deepen levels of trust and confidence in the sector with an increased focus on pro-market regulation to promote consumers’ interests.”

Ofwat chief executive Cathryn Ross said: “The challenges posed by climate change and population growth mean we need bold, creative and innovative action to ensure we have reliable access to resilient, affordable water services in the future. Today we unveil a package of reforms to help set the sector on the path to secure that goal.

“As the old saying goes, ‘where there’s muck, there’s brass’. We think there is something in that idea. The trading of bioresources could be a real breakthrough – economically and environmentally. By kick-starting this market, we could develop reliable, domestically sourced low-carbon energy generation and reduce water bills.

“While some may be squeamish about this, it is an industry we ought to support because it is safe, green, sustainable and economically attractive.”

Ross talks about the Water 2020 decisions