Ofwat review must ‘focus on household customer engagement’

Northumbrian Water has urged Ofwat to make sure it understands how likely household water customers are to engage with the retail market, and what the potential barriers to engagement will be, as part of its cost-benefit review.

In a report, the water firm said that, to determine the benefits of introducing competition, Ofwat must place “significant emphasis” on understanding the likely level of customer engagement in the market, including how many customers might switch and what type of customers might switch.

The regulator is carrying out an in-depth cost-benefit review of household water competition, following an announcement from the Treasury in November last year that domestic water consumers could be given a choice of water supplier by 2020. It is due to report back in the summer.

To assist with this, Northumbrian commissioned a study looking at some of the major competition investigations in the energy retail market, including the current investigation being carried out by the Competition and Markets Authority, and the implications of these for Ofwat’s review.

The report found that the most constant feature of the energy market reviews is the focus on the demand-side barriers such as weak customer engagement and response.

Northumbrian called on Ofwat to establish whether the inherent characteristics of water retail mean that customer switching is likely to be low, regardless of the behaviour of suppliers.

For example, it should look at the extent to which customers are interested in the possibility of switching water retailer, and the scale of price-saving or service improvement that would be needed to encourage switching.

“A typical starting point is to look across to other industries (as we have done here with energy), or countries, who have been through a similar regulatory reform, in order to draw meaningful inferences,” the report said.

Northumbrian suggested Ofwat look at the Scottish market, which opened up the retail market for non-household customers in Scotland in 2008.