Ofwat’s charging working group, set up in January 2014 as part of the regulator’s work on the 2014 price review and in response to the Water Bill, met for the first time last week.

The group, whose membership is by invitation only, was established to inform Ofwat’s policy development on charging reforms in relation to access pricing and water companies’ charges schemes - key issues in the run-up to the introduction of competition in 2017.

The overall timeline for charges schemes was discussed – in particular the fact that the issue of final rules would ve very late to companies to take account of in their 2015-16 charges schemes. Thjis appears to be a necessity given the timing of legislation – although it is not expected that the final rules for 2015-16 will differ significantly from the draft rules set out for consultation in 2014.

The importance of bill stability was also on the agenda – with one member of the group noting that  “the level of risk-aversion of companies to changing billing systems could no be over-estimnated.”

Opportunities for charges to be used to send more effective price signals were also discussed – with the suggestion put forward that all proposed changes should be stress-tested against the long-term future cdirection.

On the key issue of standardisation of wholesale tariffs, some members regard this as “essential” for the effective operation of the non-household retail market in England in 2017.

It was also suggested that standardisation was likely to reduce the set-up costs of the market operator. Ofwat has told the group that it may wish to specify a degree of industry-wide standardisation in wholesale tariff structures which could help facilitate an effective retail market. However, Ofwat cautioned that requiring standardised tariffs would reduce the scope for companies to develop innovative and beneficial tariffs.

The group heard that “some degree of equivalence between household and non-household charges may be desirable, especially where a property were to change its status.” This is a particularly interesting point – given that the introduction of competition is viewed as a means of driving down prices for business which could have a favourable knock-on effect on domestic customers’ bills.

According to the Government’s charging principles, household customers must continue to be protected throiugh the price control process and not subsidise the development of competitive markets for business cuastomers. The charging regime must also enable potential new entrants to compete on level terms with the  incumbent water companies.

Under the current framework, the water companies submit their charges schemes to Ofwat which then approves the schemes before they come into effect. New legislation set out in the Water Bill will allow Ofwat to produce charging rules, which companies’ charges schemes must comply with, and importantly, removes the requirement for charges schemes to be approved by Ofwat .

In the non-household retail market, access for potential new entrants to a monopoly company’s water supply and sewerage infrastructure may include access to their networks, storage facilities and treatment works. In addition, new entrants may also want to purchase a range of other services from the monopoly company.

New entrants could apply for a ‘wholesale authorisation’, which would enable it to introduce water into the supply system of an existing monopoly company in connection with an intended supply under a retail authorisation, although not necessarily its own. The monopoly company would then charge a price for moving the new entrant’s water through its pipe network. In addition, new entrants may also want to purchase a range of other services from the monopoly company.