Experience in the early years of price regulation suggested that changes in UK water industry capital costs were out-of-step with changes in other sectors and with the retail price index (RPI) used by the regulator Ofwat in England and Wales to control prices. To ensure that revenues allowed by Ofwat reflected the true needs of the industry, there was a need to monitor changes in water industry capital costs and compare them with RPI and the other areas of the economy.
The capital cost index (CCI) was developed to meet that need and has provided project members with quarterly inflation comparisons for ten years.
Possible structural changes in the industry, with increasing use of outsourcing contractors, will generate needs for formal contractual relationships between licensed water undertakers and service contractors. Knowledge of capital cost trends will assist both parties when negotiating asset management contracts. Thus the CCI will not only continue to be of use to Water Utilities, but also to all parties involved in asset management outsourcing.
The current stage of the project is complete and further development is being undertaken alongside the TR61 capital and operating cost models (see CP025).