Are the issues facing the water retail market indicative of an abuse of dominance or do they reflect more fundamental issues with the structure of the market and the stage of market development?
Abuse of dominance is a common issue in liberalised markets
It is widely acknowledged that the new water retail arket faces a number of substantial problems. Newly liberalised markets, which move from being regulated to a competitive structure, often face substantial market opening issues. One of the potential issues is the behaviour of former vertically integrated incumbents who may seek to exclude new entrants in favour of their own linked operations in the newly liberalised market. This article explores whether such a potential abuse of dominance might be one of the causes behind the issues facing the water retail market.
The Business Retail Water Market opened in April 2017, and introduced the ability for non-household customers (businesses, charity, government, etc.) in England to purchase their water and sewerage services from retailers other than their geographically incumbent water and sewerage undertaker. Thus businesses can chose who will provide the retailing element of their water and wastewater services. The wholesale element, however, continues to be part of the local incumbent undertaker’s regulated service and thus wholesale charges and performance are regulated by Ofwat. Ofwat also currently regulates maximum default tariffs for retail customers, although there are questions about whether and, if so, how such regulation will continue.
This broadly aligns with the position in Scotland so that there is effectively a single market across England and Scotland. Welsh non-household customers (other than the very largest water users) and all household customers can still only purchase their water and sewerage services from their local incumbent undertakers.
Ofwat has identified a number of successes as a result of market opening. These include: annualised customer savings of around £12 million per year, consumption savings of between 380 and 760Ml annually (with the consequential benefits for the environment), time and administrative savings for customers (particularly large multi-site customers) particularly through billing consolidation, improved retail service experience and increased availability of additional services (such as water efficiency services). These are all relatively small in a market whose total annual revenue is £2.5 billion and whose annual consumption is 1,030,324 Ml.
Given these limited successes a number of issues have been identified by Ofwat and others with the way in which the market is currently functioning:
- limited scope of retailer offerings (e.g. not enough value added services such as water efficiency services)
- low retail margins and default tariffs, making it difficult for some retailers to compete
- credit requirements on new entrants greater than for initial in-area retailers
- availability, quality, timeliness and cost of meter reading services (approx. 15 per cent of meters have no up to date readings on the CMOS system and 1/3 of these have no readings at all)
- data quality (locations of supply points, customer details, locations of meters, inaccurate meter/consumption data, unpaired supply point) impacting on ability of retailers to switch customers efficiently and billing
- billing issues (e.g. bill accuracy, customer issues with advance billing rather than billing in arrears)
- wholesaler performance against industry standards (e.g. making new connections)
- wholesaler interactions with retailers particularly as regards customer complaints
- diversity and complexity of wholesale tariffs for different undertakers
- customer difficulties in comparing retailer offerings
Abuse of dominance?
A number of these market issues clearly are the responsibility of wholesalers (i.e. incumbent water and sewerage undertakers). In particular, the wholesalers are responsible for a range of issues including: setting wholesale charges, some aspects of customer data quality, dealing with some customer complaints, making new connections.
The classic abuse of dominance in these kinds of market opening scenarios occurs when incumbents (such as the water and sewerage wholesalers) treat their own downstream (retail) operations better in some way than those of other retailers, thus making it harder for new retailers to compete with those associated with incumbents. The standard example of such an abuse would be to charge lower wholesale prices to their associated retailer than to other retailers. Given Ofwat continues to regulate wholesale charges this is not a realistic option open to wholesalers in this market. However, wholesalers could theoretically still treat their associated retailers better than others by putting more effort into the wholesale services they provide them, for example, dealing with their customer complaints more quickly or prioritising new connections for them. This might be particularly tempting given the tight margins in the retail market and the difficulties in getting customers (other than the very large ones) to switch retailers.
However, there is no indication in the documents published by Ofwat and MOSL (the market operator for the water retail market in England) that this is the case. It very much seems to be that (other than perhaps in relation to credit requirements on new entrants) all retailers are struggling with the same sets of issues with all wholesalers. Therefore the current market issues do not appear to be down to abuse of dominance by the wholesalers.
Conclusions and next steps for the market
It would appear that wholesalers’ efforts at securing real separation between their wholesale and retail operations to comply with competition law have been largely successful. This suggests that the issues the market is facing must be down to market design.
Ofwat and MOSL are seeking to address these issues. Ofwat is focusing on improving wholesaler performance in relation to their market activities by increasing the reputational and financial incentives on wholesalers to comply and has recently issued a call for inputs in relation to strengthening wholesaler performance and service. MOSL is focusing on its seven step Market Improvement Strategy to reduce friction in the market and enabling the market to operate efficiently and promoting effective competition. The market therefore awaits the developments which may come from these with interest.