Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government
Issue link: https://fhpublishing.uberflip.com/i/689907
UTILITY WEEK | 10TH - 16TH JUNE 2016 | 11 Policy & Regulation RPI vs CPI The retail price index (RPI) and the consumer price index (CPI) are both measures of the price of goods and services in the UK. CPI is a headline rate excluding mortgage interest payments and housing costs, while RPI includes mortgage payments. Every year the RPI rises on average 1.2 per cent more than the CPI. CPIH is a new additional measure of consumer price inflation being proposed by the Office for National Statistics, including a measure of owner-occupiers' housing costs. Ofcom's move to CPI In March 2013, the government announced that RPI was no longer classified as an official statistic. In January 2015, the UK Statistics Authority published an independent review of CPI, led by Paul Johnson, director of the Institute for Fiscal Studies, which agreed that the RPI is "not a good measure of inflation". So far, only Ofcom has switched to using CPI rather than RPI to index prices. Many regulators have instead retained RPI for price indexation but made adjustments to the calculation of the cost of capital and other aspects of the price control calculation. Commenting on its decision – which was finalised in 2014 – the telecoms regulator said: "Having compared the CPI and the RPI, we have concluded that, on balance, it would be more appropriate to use the CPI to index… charge controls. There is little difference in the way that the two indices perform against most of the factors, but in relation to 'official status' in particular, we consider that the CPI is preferable." Why Water 2020 matters Water 2020 is Ofwat's vision for the future of the water and wastewater industry in England and Wales. The programme of work will conclude with the delivery of the 2019 price review, and will look to develop the regulatory and market mechanisms to deliver the reforms of the Water Act 2014. The recently published decision document clarifies the future regulatory framework to enable the water sector to address the challenges it faces – such as the threat of climate change and water resilience – and to help build trust and confidence among customers and wider society. It outlines the changes to company licences that flow from the new regulatory framework, and sets out specific areas for further consultation about the role of markets and the regulatory framework for the 2019 price review. Ofwat says: "We intend this document to help promote a shared understanding of our approach to regulatory design and the implications, costs and benefits associated with it." of markets in the financing and provision of new assets by third parties. "We are keen to see incumbents take responsibility for exploring all options for delivering projects and to challenge them- selves to deliver more effective outcomes for customers by taking a longer-term view in their business plans," a spokesperson tells Utility Week. "Adding a direct procurement option for discrete large-scale enhancement projects should provide incumbents with greater flexibility to select the best way to deliver value for customers." The document says: "We will expect com- panies to use direct procurement for custom- ers for suitable projects valued at more than £100 million." And, the spokesperson con- firms, companies would also be free to use direct procurement for a scheme with a value below £100 million. Evidence suggests that direct procurement could be used for around 2 per cent of the total value of the water and wastewater value chain. The regulator estimates a benefit-to- cost ratio for this policy change of more than 10 to 1, based on the benefits identified using a similar approach in the energy sector, and it sees net benefits of around £600 million. Pennon Group chief executive Chris Loughlin welcomed the change, saying it cre- ates the potential for companies that are effi- cient and can deliver schemes well to be able to win some of the wholesale business from areas outside of their own patch. Black says the regulator has made its pol- icy decisions and has moved on to thinking about how it implements these decisions. In order to implement some of its policy decisions, Ofwat said it needs companies to agree to modifications to their licences. If a company is no longer supportive of the package, the regulator said it would "not expect to continue working closely with it" to develop the changes. However, Ofwat will consult all companies, regardless of involve- ment, on the dra modifications before seek- ing their agreement for changes. The six main themes 1. Customers are the key focus. 2. Retail price index to consumer price index. 3. The deregulation of sludge. 4. Opening up a market for water resources. 5. Direct procurement for customers. 6. Licence changes. Moving from a model that was: Towards a model that is: Supported by: Prescriptive Interventionist One size fits all Regulator focused Administrative Framework based Targeted Proportionate Customer focused Pro-market Variable assurance Risk-based approach Two-way stakeholder engagement Strong stakeholder relationships Transparency JOURNEY TOWARDS A NEW REGULATORY MODEL