After the Chancellor's shock announcement at the end of November that retail competition in the water industry should be extended to households, Ofwat have scrambled to meet his tight deadline of providing a cost benefit analysis by the end of the summer.  They have published a draft Terms of Reference together with a Call for Evidence

Timeframes

There is no time to wait for comments on the Terms of Reference; stakeholders could comment until 28 January but in the meantime, Ofwat are starting the analysis.  The Call for Evidence is open until 17 February but it seems Ofwat will consider evidence submitted after this and will be having discussions with key stakeholders until April.  They intend to publish their initial findings in July for comment and their final review in full by September.  The process will be open and transparent so they may well publish specific evidence and analysis earlier where it raises important issues that stakeholder views are needed on.

Possible scenarios

Ofwat will look at the possible options for introducing competition to the household water market, including the "do nothing" option.  The scenarios could range from an extension of the non-household retail market approach, a separate household retail market, or an auction style competition, and are likely to include:

  • A "thin" retail market, limited to core retail activities like billing and payment  handling
  • A "thick" retail market, with a wider scope of activities including resource procurement, local distribution networks, meter provision and metering, new connections and more customer interactions
  • A "narrow" market, where only a specific set of customers are contestable (allowing different regions or segments to open to competition at different times)
  • A "wide" market, where all household customers are contestable.

Ofwat will assess the costs and benefits of each scenario against its own objectives:

  • Value for money for customers and quality of service
  • Protecting vulnerable customers
  • Protecting the environment and resilience
  • Encouraging water efficiency and sustainability of supply
  • Investment in infrastructure
  • Proportionate and targeted regulation.

Where Ofwat identify potential barriers to effective competition or risks to consumers from household retail competition, they will consider what forms of price control and other protection mechanisms could be used to get round these.  They will also highlight any wider potential policy issues that different scenarios could create, and identify possible solutions.

Evidence

Ofwat will not only use the evidence it gets from its Call for Evidence but will also look at the findings of previous reviews such as the Cave review of 2009, the 2014 price review, the work done for non-household competition and Water 2020, plus lessons and reviews from other sectors such as energy.

Comment

Coming on top of all the work being done to open the non-household retail market to competition and to look ahead to upstream market reforms, the water industry could see this as an additional headache that it could do without.

It is however an opportunity to shape Government policy as, despite the Chancellor's rhetoric, the opening up of the household water market to competition is not a foregone conclusion if there is sufficient evidence to show it will not benefit consumers.  Ofwat is committed to working openly and transparently with the industry so now is the time to capitalise on that and make suggestions that will benefit everyone in the long run.