Bold water reform needed for competition

Johanna Dow voices concerns about the lack of competition shaping up in the non-domestic water market.

The countdown has begun. There are now less than 20 months until the non-domestic water retail market in England opens to competition. However, whilst good progress is being made, there are still three key issues that need to be addressed if an efficient and successful retail water market is to be delivered; namely a level playing field, a single unified market and sufficient retail margins.

With time running out, the industry needs to act now if we’re to create a market that can deliver the choice and the benefits which customers so desperately want. 

From the outset we have argued for the absolute need for there to be a level playing field. Customers want choice, and in order for this to be fully realised, new entrants need to be encouraged to enter the market.

“There is a clear disparity between the margin available and customer expectations.”

As it currently stands, there is a real risk that new entrants will feel unable to compete on fair terms with the retail arms of the incumbent water companies and consequently choose not to enter the market. This would undoubtedly limit the amount of choice available to customers.

We strongly believe that there needs to be a set of rules that clearly define the level of separation required between the incumbent companies and their retail arms. There also needs to be restrictions on retailers to prevent abuse of their dominant power and an obligation on wholesalers to treat all retailers, including their own associated company, on the same terms. Ofwat’s recently opened consultation on licensing arrangements is the perfect opportunity to address this issue.

We know from market research that multi-site customers want to be able to switch to one supplier once the market opens, with the expectation that they will benefit from a single price and a single service standard. However, for this aspiration to become a reality there needs to be consistency across the country in areas such as tariff structures, payment terms, metering policies, data standards and wholesaler policies. In order to create a single, unified market, and therefore keep it simple for customers, a set of common standards should be created and tariff structures should be simplified and harmonised where possible.

Finally, in order for customers to reap the benefits of competition, the difference between the wholesale and retail prices (the retail margin) needs to be big enough for retailers to be able to offer savings to customers and to encourage investment in innovation. The wholesale prices in England have been set at a level that leaves the resulting gross margin at only 6 per cent on average.

As highlighted in a recent You Gov survey, 48 per cent of customers need a discount of at least 5 per cent in order for them to switch, while 19 per cent are looking for a minimum of 10 per cent. There is a clear disparity between the margin available and customer expectations.

The low margins will also mean little or no money available to fund innovation and service enhancements which will disincentivise new entrants from entering the market, thereby reducing the amount of choice available to customers. Widening the retail margins ahead of market opening would provide the effective incentive.

Customers have been demanding reform for a number of years – we know that all customers want choice. We know multi-site customers want to be able to switch all their sites to one supplier on the day the market opens. And we know that customers want good customer service and competitive prices.

The water market reforms, if implemented successfully, can achieve all of this and more. However, it is essential that these three key issues are addressed if the industry is to deliver an effective market which meets customers’ expectations. We have one opportunity to get this right. We need to seize the moment, be bold and realise the ambition