Ofwat is consulting on the need for further measures to shield customers from what it describes as “potential abuse associated with remaining pockets of substantial market power” in the run-up to competition in April 2017.

The water sector regulator now wants to ensure that the price controls do not create undue barriers to entry or expansion, or restrict the ability of customers to secure deals with retailers that best meet their needs.

In what Ofwat describes as the “largest retail water market in the world”, 1.2 million businesses and other non-household customers will be able to choose their supplier of water and wastewater retail services from April 2017 onwards.

The consultation is centred round the issue of default tariffs - the tariffs that align to the average revenue controls and provide the ‘default’ position from which customers have a choice of moving away from. All non-household customers began the new control period PR14 which started on 1 April 2015 on the ‘default tariffs’.

In the guidance it provided to the water companies on producing default tariffs as part the 2014 Price Review process, Ofwat described the default tariffs as a form of ‘back-stop’ protection for customers, saying:

“In competitive environments, it is normal for market participants to offer a range of potential tariffs to customers reflecting their different circumstances. So, companies may wish to offer their customers alternatives to the default tariffs – but the default tariffs reflect a capped level of average revenue for companies to deliver their regulatory and legislative obligations, and must always be offered.”

Ofwat set out the non-household retail price controls that will operate between 1 April 2015 and 31 March 2017 as part of its PR14 December 2014 price control determination.

Ofwat is expecting significant benefits to both eligible businesses and to customers that are not able to switch retailer, as innovative retailers identify better ways of doing things that can apply to all customers.

Need to "shield customers from potential abuse associated with remaining pockets of substantial market power"

However, Ofwat said that experience in other sectors suggests that in the transition to full competition there may be a need for continuing regulatory protections in order to:

• shield customers from potential abuse associated with remaining pockets of substantial market power
• provide confidence that the new market arrangements will not unnecessarily disadvantage groups of customers.

The consultation paper says that as part of the process leading to Ofwat’s final determinations the water companies faced significant challenges in allocating non-household retail costs and margins to individual default tariff caps.

Given this challenge, the regulator set non-household retail price controls for a period of two years to allow for a review ahead of market opening and for companies to be able to provide new evidence and, where appropriate, suggest changes to the way in which non-household retail costs and margins were allocated to the default tariff caps.

Ofwat said the new review is an opportunity for companies and other stakeholders (including customers and potential new entrants to the market) to comment on and provide evidence on companies’ allocations of non-household retail costs and margins between the default tariff caps.

However, the regulator said:

 “While we remain open to changing the scope for this price control review, we would only do so if we were satisfied that a different approach to that which is currently envisaged and set out in this consultation would better meet our statutory duties, including protecting the interests of customers (where appropriate through promoting competition).

Two key consultation questions raised in the review are as follows:

1 Should this review focus only on issues relating to the non-household retail price controls and the default tariff price caps?

2. In considering non-household retail issues, should this review allow for the reallocation of costs and margins between default tariff price caps, but with the constraint that aggregate levels of non-household retail costs and margins remain the same as in the existing controls, consistent with the expectations set out in our final determinations?

The regulator is also seeking comment on a number of other issues, including how the transparency in the mapping of tariffs to the default tariff caps be improved and what information should the water companies be asked to provide and publish in support of any proposals (including for no change) they make in respect of their default tariff caps.

Ofwat has also asked whether a three-year duration is appropriate for the next non-household retail price control and if not what is the most appropriate duration and why.

Deadline for responses to the consultation is 11 December 2015 - as well as responses to the questions contained in the paper Ofwat said it would also “welcome views from stakeholders on any other issues that they consider important.”

Click here to access the consultation paper Consultation on the review of non-household retail price controls