Ofwat is now offering the water companies the opportunity to change both the length or form of their non-household retail controls ahead of the opening of the non-household retail market in April 2017.

The proposal forms part of a new information notice setting out the water industry regulator's initial observations on the companies’ proposals for their non-household retail price controls.

The regulator first found a number of issues with companies’ non-household retail price control proposals when business plans were submitted in December 2013. Following further guidance from Ofwat to help them develop their non-household retail price control proposals, the water companies subsequently submitted the revised proposals by the end of June.

Ofwat is now inviting the companies to consider whether they would prefer it to:

• set their non-household retail price control for five years; or
• change the form of the control in some way that would allow them greater time to consider and address any issues.

Commenting on the proposal, Ofwat said:

“Some companies may feel confident that they have developed their non-household retail proposals in a very robust manner. So they may feel entirely comfortable managing any compliance risks associated with their resultant average revenue controls for the five years from 2015 to 2020.”

“Other companies may not be so confident. So they may appreciate the benefit of having further time to consider and address any issues associated with their cost and net margin allocations ahead of the opening of the non-household retail market in April 2017.”

Ofwat has acknowledged that the invitation will result in different requests from individual companies across the sector, saying it is “not necessarily expecting a common, sector-wide solution to emerge.” The notice states:

“Companies that are comfortable with their proposals may prefer to set those controls for five years as we originally envisaged in our methodology. Others may prefer to seek:

• a shorter control ‒ for example, one to two years ‒ in order to give them further time to develop their cost and net margin allocations; or
• a different form of reopener that may, for example, allow changes to their price control as part of an overall five-year settlement. We also consider that it is important to understand whether customers would wish for average revenue controls based on companies’ current proposals to remain in place until 2020.”

Ofwat said it would expect to see evidence that the water companies had engaged with their customers about the possibility of reopening their non-household retail price control within the next five years. As a minimum, this would be evidence that

• each company has engaged with its customer challenge group and ideally local non-household customer groups as well, on potential options to change the length or form of control;
• there is customer support for the structure of its proposed average revenue controls and associated default tariffs; and
• revenue levels appear acceptable to those customers.

"Variation can make identifying any anti-competitive behaviour extremely difficult"

In the information notice Ofwat has also drawn attention to the fact that even unintended “anti-competitive behaviour” could lead to significant financial penalties for the companies concerned.

Ofwat said:

“We have reviewed each company’s revised proposals, and have observed significant variation across the industry in how companies have approached their non-household retail proposals. While a variation in approach is not a concern in itself, it can make identifying any anti-competitive proposals extremely difficult.”

“For example, the average gross margins per customer for unmetered water customer types that companies proposed as part of their June submissions are shown in figure 1.This shows that there is significant variation across the industry, with a variation of more than 100% between the upper and lower quartiles – although some variation is to be expected, as companies have different cost structures and customer segmentations.”

“Companies are ultimately responsible for ensuring that they comply with their duties and obligations, including competition law – observing such variation in approach could make it difficult for a company to be confident that it is indeed compliant. For example, the penalty for breaking competition law can be up to 10% of a company’s group turnover.”

Ofwat said it is publishing the information notice now to help give companies time to engage with their customers and consider the need for any reopener arrangements ahead of the 3 October deadline for representations.

The regulator will set out in its draft determinations which are due to be published on 29 August 2014 and will include the non-household retail price controls for all companies where it has particular concerns for individual companies.

Ofwat said it is giving the feedback to companies now to enable them to consider the issues raised and address them ahead of 3 October 2014 – the deadline for all stakeholder comment on the draft determinations.

Click here to download the information notice