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Does Ofwat’s five year settlement for the water industry mean bills are going down in real terms – or up?

  • Published: Dec 12, 2014
  • Category: Services

The headline on today’s announcement from the water industry regulator Ofwat that water bills in England and Wales will fall by 5% in real terms between 2015 and 2020 looks like good news. Not much relief after years of steadily rising water bills but something.

Yet as far as we can tell, Ofwat only gets this nice result by using the Retail Price Index (RPI) as its measure of inflation. As the graph shows, the independent Office for Budget Responsibility (OBR) foresees the RPI rising by 18% between the first quarter of 2015 and the first quarter of 2020. If that’s what happens to the RPI, Ofwat’s announcement would mean water bills rising in nominal terms – what is actually paid - by 12%.

For decades, the increase in the RPI was “inflation”. But that has ceased to be so for several years. Instead, when the official inflation statistic is published each month, it is no longer RPI that measures it but CPI – the Consumer Price Index (CPI).

The key fact point is that CPI normally rises more slowly than RPI. For example, in October, CPI was up 1.3% on a year earlier while the RPI was up 2.3%. As the graph shows, this is how the OBR sees things to 2020, the 18% rise in the RPI being accompanied by a mere 10% rise in the CPI.

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If this indeed is how the difference between five years of CPI and five years of RPI turns out, the 12% rise in water bills allowed by Ofwat should properly be seen as a real rise of 2%. Over five years, this isn’t much – but the point is that it is a real rise not a real fall.

In conclusion, two points. The first is a sigh of regret for having had to ladle out alphabet soup. The second is to say that if we’re wrong we’ll happy acknowledge the fact. Though note: arithmetic aside, the only way we can be wrong is if Ofwat is already using the CPI to work out whether a water bill is going up or down in real terms, not RPI.


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