Domestic water competition needs further scrutiny

Challenges around bad debt and innovation need to be resolved before introducing domestic water competition, says Defra

The government and Ofwat will work together to build the evidence-base for domestic competition, before a decision is made “at the end of the Parliament or early in the next one”.

In its draft strategic policy statement to Ofwat, the Department for the Environment, Food and Rural Affairs (Defra) said further work needs to be done both to ensure the benefits of a household market can be realised, and to understand and mitigate any impacts on vulnerable customers. It is also important that lessons are learned from the opening of the business market in April, it said.

“Moreover,” Defra added. “We acknowledge the importance of addressing the issues identified in this analysis, such as high and rising levels of bad debt, and the need for greater innovation in the water sector.

“Ofwat should continue to consider how it can address these issues within the current regulatory framework, including through bringing competitive pressures to bear.”

In response to the statement, Ofwat chief executive Cathryn Ross said: “Our review on the costs and benefits of extending retail competition to residential customers showed clearly that water customers are being left behind – especially on service and innovation.

“We look forward to further work with the government to ensure that a competitive market would be one in which customers are protected, bills would be affordable and it would be easy for customers to find the best deal.”

Last year, Ofwat examined the costs and benefits of extending competition to the household retail market. It identified a range of scenarios, finding potential benefits of up to £2.9 billion.

In April, the world’s largest retail market for water services to businesses, charities and public sector bodies will open. Defra said it expects Ofwat to monitor the development of the market, with the aim of enabling business customers to secure the package that best suits their needs.

The statement sets out the government’s strategic priorities and objectives for Ofwat’s regulation of the water sector in England, in areas such as securing long-term resilience, protecting customers, and making markets work.

Stakeholders have been invited to respond to the draft statement by 11 April.

Consumer Council for Water chief executive Tony Smith said the group remains “unconvinced” by some of the more positive assumptions Ofwat has made about the benefits competition could deliver.

“Most household customers like the idea of choice but the bill reductions need to live up to their expectations. Valuable lessons can now be learned from the non-household market, which we will be watching closely. The attitude and behaviour of small businesses in the new water market can help us to better understand whether choice can really deliver what households want.”