Water industry regulator Ofwat has published a new paper on the provision of retail services to non-household customers by water retailers in England and Wales which highlights the Scottish water market as the most useful comparison.

Allowing all non-household customers in England to choose their retail supplier of water and sewerage services is among a number of the UK Government’s proposals to reform the UK water sector. The paper says this is to achieve benefits like:

• potential efficiencies for customers with multiple sites;

• better tailored services that suit customers’ needs; and

• opportunities for water companies to develop value-added services.

Ofwat said Defining retail services - A discussion paper is intended to stimulate debate among all interested parties on the issues it is considering for the provision of retail services to non-household customers. Key issues addressed in the paper include:

•  why the definition matters;

•  how retail services could be defined;

•  the views of stakeholders;

•  comparisons with other markets; and

•  the advantages and disadvantages of potentially defining some activities as retail services.

Although Ofwat says that it has not set out its preferred approach for defining retail services in the document, the paper provides some useful pointers on the regulator’s direction of travel on the issue. It would seem reasonable to conclude that the regulator will probably follow a similar approach to the Scottish model where a retail market is already operating.

Retail choice will give water companies incentives to innovate

 Outlining the potential benefits of introducing greater competition, the paper states:

“Choice also gives companies incentives to innovate – searching out new products or services and new ways of providing them. Also, retail companies can put pressure on wholesale companies – on behalf of customers – to deliver more efficient resource and network management. And as well-performing companies become more efficient, they can improve returns to their investors.”

 Ofwat has divided the proposed retail services into two groups - non-contentious areas where there is broad agreement among stakeholders that an activity is a retail service and those that are more contentious. 

Scottish water market is the most useful comparison

 The paper makes comparisons between other utility sectors and the Scottish water market which have already gone through the process of deciding which activities should be carried out by retail companies.

According to Ofwat, the most useful comparison is to look at the Scottish water market where there is a fully-operating retail market for all non-household customers. Scottish Water is also the only organisation which carries out all the contentious activities. The paper highlights the fact that the Water Industry Commission for Scotland (WICS) thought that including all customer-facing activities, such as metering, within the retail market was critical to ensuring that benefits continued to accrue to customers, licensed providers and Scottish Water.

Metering in Scotland became a retail service on 1 April 2012. Temporary disconnections became part of the retail market from 1 April 2012 and permanent disconnections will be part of the market from 1 April 2013.

On customer-side leaks, the paper says that WICS’ decision to define this as a retail service because tackling the leaks was seen as a central part of the service that retailers was the right one, given the savings that customers have been able to make.

Demand management and water efficiency key differentiators in Scottish market

 On demand management, which commonly involves providing services or products to help customers use water more efficiently, there is a statutory (legal) mechanism in Scotland. This allows reductions in supply-side costs resulting from activities of the retailer to be reflected in individual reductions for customers in wholesale costs. The paper says that demand management and water efficiency are areas where Scottish retailers have been able to differentiate the services they offer to customers.

Business Stream, the new water retailer created directly from Scottish Water which operates as a retailer providing water and waste water services to business customers, reports that it has saved its customers £19 million by helping them to reduce their consumption. The paper says that this is likely to be a key service offered by retailers to their customers and a way of differentiating the service they provide from that provided by other retailers. However, the potential downside is that the wholesaler may have a greater incentive to reduce demand if, in the long term, it could consequently reduce the amount of investment needed on new sources of water and treatment.

WICS – must be robust and demonstrable separation between wholesale and retail businesses

 Whether the outcome of the consultation will see a similar move by the water companies in England and Wales to set up similar stand-alone retailers remains to be seen. Ofwat will no doubt be considering the measures put in place to avoid giving Business Stream an unfair advantage over other new retailers.

In particular, the Water Industry Commission for Scotland set Business Stream the following three tests in order to ensure that it operates at arm’s length from Scottish Water:

• Robust and demonstrable separation between wholesale and retail businesses must be evident;
• Governance arrangements must ensure independent decision making for Business Stream and Scottish Water; and
• Business Stream must demonstrate financial viability.

Ofwat said it is already aware that stakeholders have a diverse range of opinions on the definition of retail services. The paper is the result of the regulator’s decision to seek more detailed, informal views from them on the issues ahead of the formal consultation planned for summer 2012 where Ofwat will set out the options under consideration.

The consultation will be launched following the publication of Ofwat’s ‘Future price limits – our statement of principles’ later this month, which will set out Ofwat’s conclusions to ‘Future price limits – a consultation on the framework’.

Anyone interested on commenting on the issues raised in the paper should contact Matthew Halden of Ofwat’s Market Reform Team on 0121 6447576 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it .