Ofwat, the water sector regulator, has issued draft terms of reference in relation to its proposed review of retail household markets in the water and wastewater sector. The review is intended to consider the opportunities for introducing competition for the provision of water and sewerage retail services to household customers and the different scenarios through which this could happen.

Background

Following the publication in November 2015 of ‘A Better Deal: boosting competition to bring down bills for families and firms’, the UK Government requested that Ofwat provide an assessment of the costs and benefits of extending retail competition to household water customers. With the deadline for the governmental report scheduled for Summer 2016, Ofwat issued a call to stakeholders earlier this month for their views on any suggested enhancements or gaps in its proposed approach. Ofwat’s draft terms of reference provide information on how the review will be undertaken, the areas of focus, key milestones and how Ofwat intends to engage with stakeholders during the course of the review. The consultation on these draft terms of reference will close on Thursday 28 January.

Household markets review

According to the draft terms, the main aims of Ofwat’s review are to understand:

  • the views and likely behaviours of customers in relation to choice;
  • the potential benefits to customers, the wider UK economy and the environment of introducing competition to the household retail activities in water and wastewater;
  • issues that might impact the assessment of costs and benefits; and
  • potential models for implementing reform.

At this stage, the possible models for reform put forward in the draft terms of reference include an extension of the approach currently being implemented in the non-household retail market, a separate household retail market and an auction style competition. These could range from being limited to providing only core retail activities, to only a specific sub-set of household customers, or out to a wider scope of activities relating to all household customers.

The final decision as to whether, in what form and on what timescale the household retail market in England will be opened up to competition will remain with the UK Government. Ofwat’s review will not consider the household retail market in Wales.

Following evidence gathering and analysis supported by stakeholder engagement and customer research, Ofwat’s initial findings will be published in July 2016, with a full report to follow in September 2016. The expectation is that the government’s feedback and conclusions on the report will be factored into Ofwat’s 2019 price review.

Non-household market review

Similar research has previously been conducted into the non-household market, which revealed that seven out of 10 customers wanted the opportunity to choose their retailer instead of using monopoly companies. The new retail market for non-household customers, which will be the largest retail water market in the world and deliver about £200 million of overall benefit to the UK economy, is currently on track to open in April 2017. Once opened, customers will be able to shop around and switch to the best deal, and investors and retailers will have new opportunities for growth. There will also be environmental benefits from customers using new water efficient services.

Comment

Although Ofwat suggests that the question of whether the household market will be opened up to competition is still undecided, it is interesting that this review should follow so quickly after the non-household market review, and before there has been time to consider the success of this review. This gives a strong indication that the government will go ahead with these plans in due course. Whereas the non-household market will allow approximately 1.2m customers to switch supplier, the household market, if opened to competition, will enable approximately 22m customers to do so. A key question therefore may not be whether the government will go ahead with these plans, but what form these plans will take.