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Indexation of future price controls in the water sector

As part of the Water 2020 programme, Ofwat, the industry regulator in England and Wales, is reviewing the appropriate inflation statistic to use in indexing future price controls. The Water 2020 programme considers the regulatory framework for wholesale markets for the PR19 price review in the water and sewerage sector. Historically, most regulated sectors in the UK, including the water sector, have used the retail price index (RPI) to set the annual increase in allowed revenues or prices. In recent years, some regulators have started to move away from RPI in favour of the consumer price index (CPI) for the indexation of prices. At this stage, Ofwat is the first regulator to consider changes to the indexation of both revenues (the ‘inflation – X’ price control mechanism) and the regulatory capital value (RCV). The need for change has largely been prompted by the debate about the appropriateness of RPI as a measure of inflation.