On 1 April 2017 the non-household retail water market in England was opened to competition by the Department for Environment, Food and Rural Affairs (Defra) and the Water Services Regulation Authority (Ofwat).1 This has been long in the making, even before the passing of the Water Act 2014 which provided for the new competitive market. The Scottish non-household retail market has been operating competitively since 2008.2 Ofwat has said that England following suite has created the largest competitive water retail market in the world and means that more than 1.2 million businesses, charities and public sector bodies (i.e. all except domestic users) can choose their water and wastewater retail services provider rather than having to purchase water services from their former regional monopoly incumbent. Ofwat’s Chief Executive, Cathryn Ross, remarked that the new retail market in England is “part of the biggest shakeup to the water industry since privatisation in 1989” and “heralds a new dawn for the water customer”.

According to the UK Government, the changes could deliver up to £200m of benefits to customers and the UK economy. Ofwat believes that a competitive market will drive down prices, improve water efficiency, encourage innovation and improve customer service. In particular, the market will give large companies such as supermarkets and breweries, who operate across the country, the option of receiving just one bill, rather than the hundreds they might currently receive.

How will the market work?

Ofwat will regulate the market in line with the new legal and regulatory framework. Market Operator Services Limited (MOSL), a private company that works on behalf of, and which is funded solely by, its water company members will be responsible for the operation of the retail market.

New players and existing water and wastewater retailers need to obtain a water supply and sewerage licence (WSSL) from Ofwat. A licensee will be able to buy wholesale services and sell them to eligible customers as a package along with other retail services, such as metering and billing.

There are five market codes, set out in the new legal and regulatory framework, which have been developed to govern and underpin the market. These include:

(i) the Markets Arrangements Code (MAC) which is a non-statutory code setting out the arrangements for the operation of the retail market including the creation of a panel to oversee the various codes, and the appointment and operation of a Market Operator. In March 2017 regional incumbents, water supply and sewerage licensees and MOSL signed the MAC Framework Agreement. Ofwat describes this as the contract document under which the MAC becomes binding and enforceable between all wholesalers, retailers and the market operator;

(ii) the Wholesale Retail Code which is a statutory code setting out the relationship between wholesalers and retailers. The code includes the standard form “Wholesale Contract” with provisions on the business, market and operational terms to be entered into by wholesalers and retailers, which in effect makes the code the contract;

(iii) the Retail Exit Code which was developed as a result of Defra’s “Exit Regulations” which allow a regional incumbent to transfer its non-household customers to a retailer, whether part of the same group or to a third party. Where this occurs, WSSL retailers are required to make and keep under review a scheme setting out the terms and conditions for all customers who have not negotiated a contract. The code sets out the basis for such schemes of terms and conditions;

(iv) the Interim Supply Code which sets out the arrangements which will be put into place to ensure continuity and protection for customers and other market participants if a licensee stops being able to supply its customers in the new market, for example due to insolvency. The code describes the interim supply arrangements that will be implemented by Ofwat to address such situations, including Ofwat’s powers to direct an alternative retailer to supply the customer of a failed retailer, the terms and conditions under which this alternative retailer must continue to supply the customer and the mechanisms and procedures open to affected customers; and

(v) the Customer Protection Code of Practice which sets out the minimum standards that all retailers must comply with when dealing with their customers. There are minimum standards on (i) sales and marketing activities, (ii) contracts and information, (iii) switching suppliers, (iv) billing and data, and (v) handling complaints and disputes.

Strategic decisions

Alongside ensuring compliance with the new arrangements, increased corporate activity preceded the market opening on 1 April. Companies made strategic choices including altering and strengthening their service offerings to compete in the new market, or divesting their non-household retail activities. There have been new entrants to the market including companies that have not previously operated in the water sector and companies that do operate within the water sector but have previously only operated within a limited geographical footprint (for example retailers who are already active in Scotland). In 2016 Severn Trent and United Utilities announced a joint venture agreement to combine their non-household water and wastewater retail businesses with the aim of delivering “an attractive proposition for large and small business customers across England and Scotland”.3

Other regional incumbents have chosen to exit the non-household retail market. Thames Water announced in July 2016 that it would transfer its non-household retail activities to Scottish company Castle Water, a business retail specialist. Castle Water will take on billing and cash collection, whilst Thames Water will concentrate on its core regional household business and operational water and wastewater services. Similarly Portsmouth Water announced plans to divest its non-household retail functions to Castle Water and Southern Water announced the sale of its non-household retail business to Business Stream.

Companies may now face the additional challenge of deciding how to respond to the potential introduction of competition in the household retail market. In June 2016 Ofwat set out its emerging findings in a cost benefit analysis of a residential retail market. The decision on whether to open the household retail market to competition is currently with the Government. Ofwat’s report suggests that, although introducing competition could result in significant quantifiable benefits of approximately £3 billion, in terms of net reductions to customer bills these could be as little as £8 per customer per year. However the report does cite other benefits such as innovation and improved customer service. The Chief Executive of Ofwat said that “customers tell us they think they should have the freedom to choose and don’t understand why water is the only retail market in which there isn’t some form of competition”. However she also highlighted the challenges involved in introducing competition to the domestic water sector, especially regarding customers’ potential unwillingness to switch given the low cost savings which are forecast.


The opening of the non-household retail market in England has been long anticipated and, despite some early scepticism about how quickly competition might take root, the corporate activity we have seen so far suggests it is likely to thrive. This is also supported by the recent Scottish experience, in relation to which Defra’s 2011 White Paper reported significant customer transfers to new suppliers as well as around 42 per cent of the market renegotiating their supplies without having to change supplier - receiving either better prices or more tailored service provision, and in many cases both.

The prospects for introducing competition in the domestic water sector are inevitably more speculative. There is no Scottish experience to mirror and the potential for customers to recoup only minor savings by switching supplier may affect their willingness to switch and engage with the market generally. The challenge for the Government and regulators may therefore be whether this could result in a similar level and type of customer disengagement to that which the Competition and Markets Authority (CMA) investigated in the energy sector, and if so how to tackle it.