The Retail Price Index
62. The RPI has been used
in the price control formulae in order to link the annual price
changes to the level of inflation. The Public Utility Reform
Group (PURGe) argued very strongly that the use of RPI, which
they called a crude proxy for the rate of inflation, resulted
in higher prices to consumers than if a more suitable index, such
as the RPIY, was used. The RPIY index excludes indirect taxes
and mortgage interest payments and it is for this reason that
PURGe regard it to be more suitable. PURGe argued that, during
the period August 1989 to August 1991, the RPI rose by 18.9%,
whilst the RPIY rose by only 13.7%, resulting in regulated companies
being allowed to raise prices by 4.5% more than they could have
if the RPIY had been used.[120]
The Bank of England were more cautious about RPIY and pointed
out that "while RPIY was below RPI ...for all of 1994 and
1995, this relationship has not held at all times in the past
and, for substantial periods the relationship was reversed."
[121]
We believe that the real issue here is not whether a lower price
index should be used but which index is the most appropriate.
63. There are good arguments
for keeping the RPI element. It has the advantage of being simple
and generally understood by the public. OFTEL rejected RPIY,
after considering it, specifically on the grounds that it is less
well known.[122]
Also, as OFGAS pointed out, other considerations are taken into
account in setting X and, as RPI-X is relatively crude anyway,
using another index such as RPIY would make very little difference
to the price control.[123]
64. Both the energy regulators
rejected using industry specific indices, which would more closely
reflect the costs of the particular industry. The DGES believes
that the use of any other index would cause confusion and suspicion
among consumers. He told us "they will not know what that
is and ... they will begin to get suspicious: how is this index
constructed and who is to say that the companies are not influencing
that in some way. What we would end up with if you went down
that route is a series of different indexes" both between
industries and within them for different sectors.[124]
65. We believe that the
arguments for keeping RPI are much stronger than those for moving
to RPIY or any other index at present. If prices are higher than
they should be it is not because of the use of RPI rather than
RPIY in the formula, but because X has not been set as accurately
as it could have been. Confidence in the formula can only be
sustained if improvements are made to the methodology for calculating
X. We therefore recommend that regulators continue to use
RPI as a measure of inflation in the price control formula while
continuing to seek improvements in the methodology for estimating
X.
120 Ev. p.144. Back
121 Mem.
p.1. Back
122 Ev.
p.144. Back
123 QQ.883-885. Back
124 Q.1016. Back
