Ofwat has today published its final determinations for the price review 2016 (PR16), in preparation for the opening of the retail water market for the business, public and charity sector in April 2017.

The final determinations cover the new business retail price controls for the 17 water and sewerage companies (WaSCs) and water-only companies (WOCs) in England and Wales which will come into force when the market opens in April 2017 and will be in place for the next three years. They recognise that the Welsh Government’s decision that retail competition in Wales will remain at current levels and the price controls that will apply to these activities reflect the different conditions as regards competition that apply to these customers.

Ofwat: arrangements will be key to development of business retail market

Introducing the paper setting out the determinations, the regulator said for companies remaining in the business retail market and for those planning to enter it, the arrangements will be key to the development of the business retail market.

According to Ofwat, the business retail price controls should provide back-stop protection for customers and enable the development of competition by offering a comparison point for customers when the market opens so they can determine if they would be better off by changing suppliers.

For smaller customers (those using less than 5MI of water or wastewater per year), the form of control will remain default tariff caps. Ofwat said these customers may need greater protection as they may be less able, at least initially, to take advantage of the competitive market - as will those customers of companies operating wholly or mainly in Wales not able to participate in the competitive markets.  The price control will also provide confidence that the new market arrangements will not unduly disadvantage groups of customers.

These controls set the total allowed revenue that a retailer can earn for a given customer type, based on an allowed average cost per customer and a net margin as well as forecasts of wholesale revenue and customer numbers in each year. Companies set charges that comply with the annual allowed revenue controls for each customer type which are called default tariffs.

At the last price review in 2014, the PR14 final determinations set the price caps for business retail price controls for a two-year period, allowing for a review of these arrangements prior to market opening. The caps limit what companies can charge business customers on existing tariffs when the retail market opens for competition next year.

If a water company leaves the market, their customers will automatically transfer to a chosen retailer, unless they decide to move to a new retailer. Ofwat said customers will be protected as they will remain on the same tariff regardless of which company they are with, until the customer decides to change the deal they are on.

The following twelve companies (including South West Water that made separate proposals for the South West and Bournemouth areas) accepted Ofwat’s draft determinations.

• Affinity Water
• Bristol Water
• Dee Valley Water
• Portsmouth Water
• Severn Trent Water
• South East Water
•  South Staffordshire
• South West Water (for both its South West and Bournemouth areas)
• Southern Water
• Sutton and East Surrey Water
• United Utilities
• Wessex Water

Anglian Water only company where Ofwat remains "unconvinced" by costs evidence

Anglian Water is now the only water company where the regulator has decided that the information it provided in its response to Ofwat’s draft determination in support of its PR16 proposal does not meet the evidential thresholds described in Ofwat’s statement of method. On that basis, Ofwat has decided to retain the PR14 caps used in its draft determination in its final determination.

The determination says:

 “The information that Anglian Water has provided on its cost increases has not persuaded us to increase its overall allowance for costs. This is because we are not convinced that the extra costs should be recovered from its default tariff caps or that the costs are being efficiently incurred.”

Some firms’ draft PR16 proposals not supported by evidence that was “sufficiently transparent, convincing and/or robust.”

The regulator has now accepted further proposals put forward by Dŵr Cymru, Northumbrian Water and Thames Water – at draft determination stage Ofwat had concluded that their proposals, together with Anglian Water’s, were not supported by evidence that was “sufficiently transparent, convincing and/or robust.”

Bristol Water’s, Dee Valley Water’s, Portsmouth Water’s and South West Water’s (in relation to its South West area) draft proposals were accepted at draft determination stage as their new default tariff caps for customers using less than 5Ml of water or wastewater per year involved no or very limited changes to their PR14 caps.

Affinity Water’s, South East Water’s, South Staffordshire Water’s, Southern Water’s, and Sutton and East Surrey Water’s proposals were also acceptable as their new default tariff caps for customers using less than 5Ml of water or wastewater per year involved only minor changes from their PR14 caps and they provided relevant supporting evidence.

The regulator has also accepted revised proposals and further evidence from Yorkshire Water, Severn Trent Water,  United Utilities and Wessex Water following on from the draft determinations.

Each company will now have two months to decide whether to ask Ofwat to refer its determination to the Competition and Markets Authority. If a company wants the regulator to refer its determination to the CMA it must notify Ofwat in writing no later than 15 February 2017.

David Black, Senior Director at Ofwat, said:

“When the market opens, it will provide great opportunities for business customers to get the deal that best suits them.”

“As the market becomes established, it is sensible that we have to put in place safeguards to protect all customers. The price limits set in PR16 ensure that no customer will be worse off after the market opens.”

The PR16 price controls which come into effect from April 2017 will be considered as part of the PR19 process and will be revised, if required, in time for 2020.

Click here to download Business retail price review 2016: final determinations