A report prepared by PwC for water watchdog CCWater has said that consumer protection is not the primary concern of the Government's Open Water programme led by Defra, Ofwat and MOSL, the market operator currently putting the final arrangements for the non-household retail sector in place.

The Open Water programme was set up by the UK Government to deliver the non-household competitive market by April 2017.

CCWater commissioned the report to improve its understanding of issues that could arise in a household retail market. Consultants PricewaterhouseCoopers (PwC) examined how household competition was introduced and regulated in the UK utility sectors (including energy and telecoms) and looked at:

• What makes a successful household retail market.
• What risks or detriments have been experienced by domestic customers in other utilities, and what regulatory interventions were made to address the issues that the water sector could consider.

If competition were to be introduced in the household sector, market size would grow substantially to between 23 million to 24 million customers.

The PwC report is set in the context of the ongoing Ofwat study into the potential cost and benefits of household retail competition, and the potential for future reforms to the household retail market.

A number of success criteria already exist for the non-household retail market, which will open in April 2017 - PwC has  explored the extent to which these criteria can be applied to the possible introduction of household competition. Looking at the criteria for success published by OpenWater, MOSL and CCWater and whether customers will be3nefit from market liberalisation, the report says

“It should be recognised that the primary concern of MOSL and to some extent OpenWater is not necessarily consumer protection, although these parties are putting in place market arrangements that are likely to protect consumers.”

More protection needed for vulnerable groups

The report suggests that one of OpenWater’s success criteria appears to be relevant to both household and non-household competition - “Outcomes are cost-beneficial for the majority of customers.”, saying this may need to be expanded in the case of household competition to cover the protection of vulnerable groups.

PwC has outlined nine key lessons learnt from other sectors and the areas where detriment commonly occurs in regulated markets:

1. Incumbents may apply differential pricing or terms in dominant parts of their business

2. Incumbents may reduce service levels (e.g. to captive and high cost to serve customers)

3. Mis-selling and misleading information is a risk during the ‘dash for customers’

4. Incumbent actions or regulatory failures may frustrate market entry

5. Retailers or regulatory failures may frustrate switching

6. Poor data or processes can result in mistakes during switching

7. Complexity leading to customer confusion

8. Unfair and/ or hidden contract terms can confuse and disadvantage customers, especially the fringe customers (e.g. time poor)

9. Customers may be unaware of their right to switch or disincentivised to do so due to behavioural biases

Six key factors for success in household retail market in water

The report identifies six key success factors for a household retail market in water:

1. Price competition among retailers with a ‘level playing field’ (i.e. no dominant behaviour by any retailers in the market)
2. Customers receive value for money for the price and services offered by retailers.
3. Customers are active and engaged in the market, with an easy smooth process for switching supplier and no group of customers excluded or deterred from engaging with the market.
4. Retailers motivated to deliver improved services.
5. New suppliers can enter the market freely – and are not deterred from entering the market due to any actual/perceived threat of a dominant supplier/ oligopoly, nor by overcomplicated regulatory barriers to entry.
6. Customers who need extra protection receive it.

The report shows how the development of a household retail market in water and wastewater could adopt some of the actions taken in other sectors, including the energy and telecoms markets,  to help protect customers’ interests.

Switching – savings likely to be “significantly less” compare to energy sector

Commenting on the ability of customers to switch suppliers, the report says that compared to the energy sector, in water and wastewater, the savings are likely to be significantly less because retail makes up a smaller part of the value chain, and there is likely to be less benefit from savings from upstream competition.

However , it points out that for water only (or sewerage only) customers, a dual water and sewerage retailer will become possible if there is a household market, and multi-utility (e.g. water, sewerage and energy) may also be viable.

With a diverse customer base, retailers are given an incentive to ‘cherry pick’ and target high value customers who require low costs to serve. This is potentially harmful for many vulnerable and low income customer groups. PwC says appropriate protection needs to be put in place to help vulnerable and sensitive customers to participate in the market

“Appears difficult for regulators to intervene in markets quickly to remedy detriments”

Commenting on regulation in a competitive household market, the report states:

“ It appears to be difficult for regulators to intervene in markets quickly with targeted, proportionate and effective measures to remedy detriments. Careful consideration of the initial market design is needed given that it has proved difficult to make timely changes to market arrangements once the market is operational.”

Does self-regulation work?

Regulators may not make effective interventions when consumers face problems in the market, the report says - and often do not intervene quickly or decisively enough when self-regulation is failing.

Relevant stakeholders often consider that regulators have a misplaced confidence in the ability of market mechanisms to change company behaviour, in particular consumers switching between providers.

This feeds a perception that regulators are slow to intervene, sometimes only doing so following significant public pressure. The report states:

“This feature of regulatory behaviour is likely to have the largest impact on vulnerable consumers who, due to their personal circumstances or the actions of providers, are less able to fend for themselves. Examples of specific areas where the issue and action to address it have had a long duration include doorstep selling, contract rollovers, recalibration of prepayment meters and green tariffs.”

The report cites a number of examples from other sectors, including retail banking and telecoms, which also illustrate the difficulty of changing the regulatory framework after the initial market design.

It also says that regulators can introduce incentives to help customers reduce consumption and therefore bills, commenting:

“ As the energy cost of heating/pumping water and water usage are linked, there are questions about the potential synergies between retailing water and energy together.”

Click here to download the full report Household retail competition and market liberalisation