Ofwat: Water retail market still not functioning effectively

The water retail market is still “not functioning as effectively as it needs to”, according to Ofwat.

The water regulator rules that market frictions including poor quality data and wholesaler underperformance are impeding the retail sector, in its annual ‘state of the market’ assessment.

Since the opening of the business retail water market in April 2017, around 1.2 million business customers in England and eligible business customers in Wales have been able to choose their supplier of water and wastewater services.

However, six years since the market opened “it remains the case […] that the market is not functioning as effectively as it needs to, and that this continues to impede better outcomes for all customers”.

Market frictions, identified by Ofwat, relate to:

• Data quality: Poor quality customer, consumption and asset data continues to impede retailers’ abilities to operate in the market as well as undermine the customer experience, including in terms of accurate and timely billing
• Wholesaler performance: Where wholesalers do not adequately meet their obligations in supporting effective market functioning, customers and retailers suffer poorer service and higher costs

Ofwat also raises concerns about interactions between wholesalers and retailers. Its assessment adds that “cumbersome or ineffective interactions between retailers and wholesalers can result in poor customer experience, and can also lead to unnecessary and increased costs for both retailers and wholesalers”.

Despite the regulator’s concerns, the total number of written customer complaints to retailers has fallen by 16% to 12,312 compared to 14,694 in previous year.

This decline continues the trend seen since 2018-19, “bringing the number of complaints closer to the level seen pre market opening”.

However, Ofwat says that “this decline masks variation in retailer performance” as “seven of the largest retailers generated more written complaints this year”.

Billing and charging issues continue to be the main driver of complaints, accounting for 71% of all complaints.

Ofwat’s report adds: “We would also highlight that retailers should not remain complacent here and that a key reason for customers to switch can be to a retailer that offers better customer service.”

The report also raises concerns about the effectiveness of new suppliers to generate competition within the sector.

As of March 2023, there are 17 retailers, of which 10 are new entrant retailers. However, while the market share of incumbent retailers has fallen by 1.6% in 2022-23, they still hold 92.2% of the market.

Ofwat’s assessment adds: “Switching data for 2022-23 indicates that of the total [switches] away from incumbent retailers, 50.4% of these were acquired by another incumbent retailer, suggesting there is still an aspect of intra-incumbent churn in the market.”