Ofwat has published an information note about the way it intends to undertake the review of markets for residential customers, areas of focus, key milestones and how it will engage with stakeholders during the review.

In November 2015 the UK government asked the water sector regulator to provide an assessment by summer 2016 of the costs and benefits of extending retail competition to household water customers as part of its blueprint paper  ‘A better deal: Boosting competition to bring down bills for families and firms’, saying :

“Following this, the government will work with water companies to begin the transition to household retail competition before the end of this Parliament.”

The review will 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. It will also include an assessment of the costs and benefits as well as the factors that will influence them.

Review will also look at ‘do nothing’ option for household retail competition

Ofwat will also consider the possible options for introducing competition to household customers, including the ‘do nothing’ option for household retail competition.

Introducing its terms of reference for the review, Ofwat said:

“By introducing household retail price controls we could set a more targeted efficiency challenge specifically for retail services, providing much stronger regulatory incentives than was previously the case.”

The information note also says that introducing the right for retailers to exit the non-household retail market has provided a greater opportunity for mergers and acquisitions in the sector.

By undertaking the review now and reporting back to the UK Government later this year, the regulator is  expecting to be able to factor the UK Government’s conclusions and decisions into the upcoming next price review in 2019.

Due to the constraints of the timescale the regulator has already begun work on the review. However, Ofwat said it would welcome stakeholder views on any possible refinements or gaps in its proposed approach that it might take into account as the review progresses and has issued a call for evidence.

Ofwat is following three key principles in the review:

• The decision on whether, in what form and on what timeline the household retail market in England will be opened to competition is a matter for the UK Government.
• The assessment of the costs and benefits of extending retail competition to households will be evidence based.
• Ofwat will follow an open and transparent process and seek evidence and ideas from the water sector and beyond.

The regulator said it intends to take an approach which will help it to understand a range of issues, including customers’ views and how they are likely to behave in respect of choice in water and wastewater retail activities.

Ofwat will then set out the overall potential costs and benefits that might be incurred, specific issues that could affect the feasibility of implementing certain competition models e.g. time available for implementation; and the options under various different scenarios of the way that the future water sector in England may evolve.

Competitive retail market scenarios set out by Ofwat include:

• A “thin” retail market: where the scope of activities is limited to providing core retail services, such as billing and payment handling;
• A “thick” retail market: where the scope of activities that retailers could undertake is broader, including resource procurement, local distribution networks, meter provision and metering, new connections and more customer interactions.
• A “narrow” market: where a specific sub-set or sub-sets of household customers are contestable. This could enable different regions of the market or customer segments to be opened at different times;
• A “wide” market: where all household customers are contestable.

The competition models Ofwat will use to support its analysis will specifically consider new and existing evidence, including the information that is provided by stakeholders as part of the review process.

Energy sector review could provide important lessons

The regulator said that experience of retail markets and behaviours in other sectors, including recent market reviews of these sectors could also provide important lessons and evidence - including but, not limited to, reviews in energy.

Where Ofwat identifies potential barriers to effective competition or risks to consumers from household retail competition, it will consider what forms of price control and other protection mechanisms could be used to enable effective choice and realise net benefits for customers.

The review will not consider the potential for competition in the household retail market in Wales. However, Ofwat recognises that if the UK Government decide to progress competition in the household market in England, it  would need to work with the Welsh Government and stakeholders in Wales to consider the implications for Wales.

In addition to publication of its initial findings in July for comment. Ofwat also proposes to publish specific evidence or analysis at an earlier stage if it raises important issues and it would be helpful to understand stakeholder views earlier in the process rather than wait.

According to the milestones for the review set out in the information note, Ofwat’s evidence gathering and analysis supported by stakeholder engagement and customer research, runs from January to April.

Click here to download Review of retail household markets in the water and wastewater sector: Terms of reference