Alternative Measures of Inflation in the Regulatory Framework
ISBN: 1 84057 617 0
This is the report from the UKWIR study on alternative measures of inflation. Its purpose is two-fold: to examine the implications of using the Consumer Prices Index (CPI) rather than the Retail Price Index (RPI) as the water and sewerage industry's main price control index; and to consider how best to index Ofwat's capital expenditure allowances.
On the first of these issues, the report highlights how a switch of index might reduce unhelpful volatility in prices, but would also result in higher customers bills and have unsettling effects on investors. The report recommends that Ofwat should index price controls in line with RPI for the forseeable future. On the second issue, the report identifies a number of candidate capital cost inflation indices, but finds concerns with all of these options. The report concludes that Ofwat should consult during the next periodic review on the possibility of dispensing with a specific capital cost indexation mechanism in favour of indexing capex allowances in line with RPI.
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