Ofwat proposes national price cap for small businesses

Ofwat has proposed to replace the current regional retail price caps for small, disengaged business customers with a single national cap across the whole of England.

The national cap would apply to business customers with annual water usage of less than 0.5 megalitres that have not switched or engaged with the open market.

Under the current arrangements, these customers’ water bills are capped at their wholesale charges plus a fixed retail cost allowance in pounds that varies by wholesale region and tariff type, as well as an allowed net margin set as a percentage of the sum of their wholesale charges and the retail cost allowance.

Ofwat said there are currently more than 50 different allowances for retail costs for customers in this group.

Under the regulator’s proposals, a single fixed allowance for retail costs of £34.07 per unique service would be added to customers’ wholesale charges. Bad debt and net margin allowances, each worth 2% of the sum of the wholesale charges and retail allowances, would also be added to give the overall cap on customers’ bills. There would additionally be a fixed meter reading allowance of £7.34 for customers with measured water services.

Water, wastewater, trade effluent, and wastewater and trade effluent, would each be considered as unique services, meaning the combination of water and wastewater services would be considered two unique services, each with an accompanying retail allowance and allowed net margin.

Ofwat said an average consumption customer receiving metered water and wastewater services would see their overall bills capped at £438.90 in 2023/24. This would represent a 0.1% increase over the average cap for a typical customer if the present arrangements remained in place.

However, regulator said the current regional variations mean an average consumption customer receiving these services could see their maximum bill fall by up to 13% or rise by up to 18%, depending on where they are located.

To protect customers from bills shocks, Ofwat has proposed to implement a “glidepath” that would limit annual movements in their individual retail allowances for 2023/24 and 2024/25 to plus or minus 25% before inflation. It said this should limit overall bill changes during these years to plus or minus 5% in real terms.

The regulator also noted significant disparities between retailers in their average cost per service for customers in this group, which ranged between £19.74 and £55.23. It said the worst performing companies would therefore need to significantly improve their efficiency to cover their costs within the £34.07 allowance, but described this as a reasonable challenge.

Georgina Mills, business retail market director at Ofwat said: “Competition is working less well for smaller business customers, so our proposals aim to protect these customers whilst supporting a sustainable market where efficient retailers can earn a fair return.”

The proposals are under consultation until 14 October and any adjustments to price protections would come into effect from April 2023.