Water reform: Tough just got tougher

So you thought playing in the water retail market was going to be tough? Well, it got a whole lot tougher this week, when senior representatives from Defra and Ofwat made it clear they were setting the rules, answering a resounding “no” to two heartfelt pleas from industry.

Speaking at a Westminster Energy, Environment and Transport Forum in London, Defra deputy director for water reform Gabrielle Edwards confirmed industry fears that government wouldn’t take a final decision on whether the market was ready to go live on time until just months before the April 2017 deadline, leaving the industry at risk of raising customer’s hopes only to dash them at the eleventh hour. Hot on her heels, Ofwat’s senior director for Water 2020 David Black slapped down requests to raise the non-household retail margin from its PR14 level of 2.5 per cent.

Each on its own would significantly hit the confidence of the sector, but together they have led to some water companies questioning whether competition will be stifled and customer trust eroded.

Go/no-go

Defra’s Edwards told the watching crowd of water company chief executives, water customers, consultants and other interested stakeholders that the final go/no-go decision will be made in “early 2017”, only a few months before the market is meant to open in April 2017.

The industry response? This is “too late” and would severely damage the sector. “It could put us back years,” said one senior director at a water company warned.

The main worry is around reputation. Non-household customers have been promised competition since the Water Act was passed in 2014. Their preparations will have gone into overdrive by the start of 2017 as the companies’ marketing campaigns will be well under way.

Two senior directors from leading water companies told Utility Week there needs to be an appropriate amount of time to engage with the market and stakeholders to inform them of any delay. Failing to build in time to these plans would “impact the industry’s reputation” and “make it all look a bit disjointed,” they added.

Ofwat holds firm on retail margin reassessments

At the same event, the delivery of bad news was compounded by Ofwat’s Black. He slapped down calls from the industry for the non-household retail margin to be increased from the 2.5 per cent set in PR14.

Black said: “To be very clear, we are only reopening the retail non-household control.”

For those, such as Business Stream chief executive Johanna Dow, claiming the margins are too low to make running a water retailer a worthwhile, this came as a significant blow.

She said: “The margins have to be reconsidered if we’re going to create a successful dynamic market.

“This will come to the fore when we get into market opening because if companies choose to use the exit policy and set up a separate retail subsidiary, they’ll realise they can’t run the business with the cost allowance.”

Thames Water director of strategy and regulation Nick Fincham agreed. He told delegates it remains “unclear about how we can generate the headroom needed to enable the competitive process to take place” without a review of the margins.

However, Ofwat is sticking resolutely to only reviewing the non-household retail price determination in 2016 and holding the overall margin at 2.5 per cent.

All doom and gloom?

This is not a fatal blow to the industry, according to PA consulting director of utilities Ted Hopcroft, at least on the margin front. The 2.5 per cent set for business customers is more than double that for domestic retail activities (1 per cent). Plus this level of margin is “in the middle of the range” of margins in other competitive utility fields.

There is also comfort to be taken from the Scottish market. Since 2008, the retail margins prescribed by the Water Industry Commission for Scotland have risen from around 3 per cent to around 7 per cent, and competition has grown along with the margins. Even if Ofwat holds the line as it says, there is hope the margin could grow later, just as it did north of the border.

Hopcroft adds there is also the opportunity for retailers to offer “value added services where there is more flexibility with margins”.

This, he says, could lead to retailers offering innovative propositions, including deals where a company can earn more by reducing the water usage of its customers.

As for the go/no-go decision, and the threat of a late postponement, the industry remains confident in its ability to deliver on time.

Despite timetable concerns, no water company has said they are too far behind schedule and unable to meet the deadlines. The assurance process, which will regularly monitor company progress, will keep the pressure on companies to stick to the reform timetable. If this is the case, there will be no need to fear a “no-go” decision months before the market is due to open as it will be ready.

Tough has got tougher thanks to Defra and Ofwat, but the industry is still optimistic it can deliver a competitive market on time.