Ofwat moves to ‘more legitimate’ CPI to set price controls

Ofwat has said it will move to a “more legitimate” consumer price index when setting price controls, to allow for inflation in cost recovery.

Currently Ofwat uses the retail price index (RPI), but says this is increasingly discredited as a reliable measure of inflation. Therefore, the regulator plans to gradually move to the consumer price index (CPI) starting in PR19.

“To help companies manage this change, at the start of the next control period we will apply a transition mechanism that ensures that half of the RCV continues to be indexed by RPI for PR19,” it said in a statement.

Ofwat has said it wants to “remove regulatory red tape” to open up the market for sludge and encourage innovation, as well as kick starting a water trading market.

The regulator today published its initial proposals for Water 2020 which builds on its established approach to setting prices.

As part of these proposals, Ofwat said water companies must source water and use sewage sludge more efficiently, and use resources to harness energy from waste.

Treating wastewater produces sludge which is used to create gas. This can be used for energy generation supplied to water companies themselves and fed into the grid. It can also be used to fertilise fields.

The regulator has proposed splitting out sludge and water resources from the water and wastewater wholesale price controls to allow for competition.

It also wants to kick start a water trading market by overhauling how information on supplies is shared and maintaining pressure on companies to use the most efficient source, estimating that the unrealised benefits could be as much as £1 billion.

Ofwat chief executive Cathryn Ross said: “Our job is to keep companies on their toes so that customers are protected. Companies have told us that they have already made all the easier efficiencies. That’s why we want to open up a new frontier for efficiencies.

“Supplies are already stretched in areas where the population is rising. We want to kick start water trading where this will help keep bills down and stop us taking too much water from our rivers. We also want to deregulate to free up scope for companies to make better use of sewage sludge to help meet their own, and the country’s energy needs.

“If we can encourage companies to innovate, and to truly understand what customers want now and in the future, we will be in a strong position to maintain trust and confidence in this vital public service.”