Ofwat has launched a new consultation on its proposals for monitoring the operation of the new business retail market which opens on 1st April 2017 warning it would be closely watching water retailers and will not hesitate to take action right from the start if it sees misconduct.

Ofwat plans to get a full picture of the new market by using several different methods including water retail company reports, the experience of customers and water retailers, any complaints it receives, market research and proactive checks.

The water industry regulator is seeking views on its proposals on how it intends to monitor the outcomes and performance of the expanded competitive retail market. 

Ofwat said it will take account of views from respondents to the consultation in order to finalise its market monitoring policy. Key questions addressed in the consultation paper include:

• Do you agree with the issues we propose to monitor? What issues do you think should be monitored particularly closely?
• Do you agree with the type and format of the information we are planning to obtain from the market operator?
• Do you agree with the choice of metrics, their usefulness for our assessment of the market and ways of ensuring they are as useful as possible?

Ofwat is also seeking views on its proposal for informal monitoring and how best to involve third party intermediaries in the monitoring framework.

Introducing the consultation, Ofwat said the expansion of the business retail market to further eligible non-household customers in England would start a new chapter in the approach to regulation. Until now the regulator has used primarily ex-ante regulatory tools designed to deal with problems of monopol y e.g. by setting specific limits on prices and targets for service quality for retail services in advance of each five year control period, based on forecasts.

The introduction of  competition means Ofwat will in future use moreframework-based regulatory tools which will see it establishing overarching rules to allow transactions between market participants to take place with as little friction as possible, and using ex-post intervention if it sees evidence that market participants are not acting in line with the rules.

Where specific competition or regulatory concerns occur, Ofwat expects to rely primarily on ex-post regulation (ie regulation after the event, based on actual findings) and concurrent competition law powers.

The consultation paper says:

“A strong monitoring framework will play an important role in supporting this form of regulation. Such a monitoring framework is essential if we are to be able to intervene in a timely and effective way to support the functioning of the market. Even if no interventions are needed, the ability to harness and evaluate such information and, where appropriate, its transparency, will support the maintenance of trust and confidence in the market.”

Ofwat said it expects to monitor the market more closely around the time the market opens, and for some time afterwards, to help customers and other stakeholders gain confidence. Listening to customers and responding to challenging stakeholder expectations will be an even higher priority in a market environment, not least because of customers’ experiences in other regulated markets, the paper says.

Ofwat senior director Richard Khaldi commented:

“Introducing choice for businesses, charities and public sector organisations is the biggest change to the water sector since its privatisation more than 25 years ago. This will create the biggest competitive water market in the world.”

“We want to ensure this market operates well and protection is in place to build customer trust and confidence. And we will not hesitate to take action right from the start if we see customers being missold or mislead.”

Lessons learnt from energy and financial services markets

Ofwat refers to the energy and financial services markets in particular, where For example, experience  suggested that the behaviour and bargaining position of smaller businesses in a competitive retail market is more aligned with that of household customers. The regulator has introduced extra protections for small business customers in its initial regulatory framework and said it will be looking closely at their experience as part of monitoring.

The paper flags up common themes from other markets which Ofwat has taken forward in its approach to monitoring, stating:

“For instance, most regulators monitor the following metrics: market share, switching rates, customer satisfaction and customers’ awareness of the options available.”

Regulators found that considering a basket of metrics rather than focusing on one metric in particular led to better monitoring. Regulators also found it important to understand the impact of third party intermediaries and to monitor markets pro-actively.”

The Open Water programme has set a number of success criteria for retail market opening which capture a number of the hallmarks of well-functioning markets:

• All eligible non-household customers have a choice and know how to exercise that choice.
• They are in a position to negotiate better targeted, more efficient and more cost-effective services.
• Costs improve for the majority of customers.
• The new competitive markets are fair, transparent and efficient.
• Customers’ experience of the market between England and Scotland is seamless.
• The market incentivises both existing and new market participants to offer innovative services.
• The market minimises barriers to entry, encouraging a variety of different participants to enter.

Opening of other water markets

The paper also suggests that monitoring of the business retail market in water will also provide Ofwat with evidencethat will enable it to consider the impact of opening other water and wastewatermarkets to competition. For instance, the monitoring work will provide furthervaluable insights into what customers expect from their water and wastewaterservices.

Ofwat said:

“We consider that there is likely to be a close read across to the design andoperation of a competitive residential retail market for customers who are served byundertakers whose areas are wholly or mainly in England, should the UKGovernment decide to open this market. There may also be useful lessons for thewater resources and bio-resources markets.”

Deadline to submit comments is 10^th February 2017 – click here to download Monitoring the business retail market from April 2017: a consultation