Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government
Issue link: https://fhpublishing.uberflip.com/i/571465
Policy & Regulation 12 | 18TH - 24TH SEPTEMBER 2015 | UTILITY WEEK Analysis S o you thought playing in the water retail market was going to be tough? Well, it just got a whole lot tougher this week when senior representatives from the Department for Environment, Food and Rural Affairs (Defra) and Ofwat made it clear they were setting the rules with a resounding "no" to two heartfelt pleas from industry. Speaking at a Westminster Energy, Envi- ronment and Transport Forum in London, Defra deputy director for water reform Gabrielle Edwards confirmed industry fears that the government would not take a final decision on whether the market was ready to go live as scheduled until just months before the April 2017 deadline. This leaves the industry at risk of raising customers' hopes only to dash them at the eleventh hour. Hot on her heels, Ofwat's senior director for Water 2020, David Black, slapped down requests to raise the non-household retail margin from its PR14 level of 2.5 per cent. Each on its own would significantly hit the confidence of the sector, but together they have led to some water companies ques- tioning whether competition will be stifled and customer trust eroded. Go/no-go Defra's Edwards told the watching crowd of water company chief executives, water customers, consultants and other interested stakeholders that the final go/no-go decision would be made in "early 2017", only a few months before the market is meant to open. The industry response? This is "too late" and would severely damage the sector. "It could put us back years," one senior director at a water company warned. The main worry is around reputation. Non-household customers have been prom- ised competition since the Water Act was passed in 2014. Their preparations will have gone into overdrive by the start of 2017 as the companies' marketing campaigns will be well under way. Two senior directors from leading water companies told Utility Week there needs to be an appropriate amount of time to engage with the market and stakeholders to inform them of any delay. Failing to build in time to these plans would "impact the industry's reputation" and "make it all look a bit dis- jointed," they added. Ofwat holds firm on retail margin reassessments At the same event, the delivery of bad news was compounded by Ofwat's Black. He slapped down calls from the industry for the non-household retail margin to be increased from the 2.5 per cent set in PR14. Black said: "To be very clear, we are only reopening the retail non-household control." For those such as Business Stream chief executive Johanna Dow, who claim the mar- gins are too low to make running a water retailer worthwhile, this came as a signifi- cant blow. She said: "The margins have to be recon- sidered if we're going to create a successful, dynamic market. "This will come to the fore when we get into market opening because if companies choose to use the exit policy and set up a separate retail subsidiary, they'll realise they can't run the business with the cost allowance." Thames Water director of strategy and regulation Nick Fincham agreed. He told del- egates it was "unclear how we can generate the headroom needed to enable the competi- tive process to take place" without a review of the margins. However, Ofwat is sticking resolutely to only reviewing the non-household retail price determination in 2016 and holding the overall margin at 2.5 per cent. All doom and gloom? This is not a fatal blow to the industry, according to PA consulting director of utili- ties Ted Hopcro, at least on the margin front. The 2.5 per cent set for business cus- tomers is more than double that for domestic retail activities (1 per cent). Plus, this level of margin is "in the middle of the range" of margins in other competitive utility fields. There is also comfort to be taken from the Scottish market. Since 2008, the retail margins prescribed by Scottish water regula- tor Wics have risen from around 3 per cent to around 7 per cent, and competition has grown along with the margins. Even if Ofwat holds the line as it says, there is hope the margin could grow later, just as it did north of the border. Hopcro adds that there is also the opportunity for retailers to offer "value- added services where there is more flexibility with margins". This, he says, could lead to retailers offer- ing innovative propositions, including deals where a company can earn more by reducing the water usage of its customers. As for the go/no-go decision, and the threat of a late postponement, the industry remains confident in its ability to deliver on time. Despite timetable concerns, no water company has said they are too far behind schedule and unable to meet the deadlines. The assurance process, which will regularly monitor company progress, will keep the pressure on companies to stick to the reform timetable. If this is the case, there will be no need to fear a "no-go" decision months before the market is due to open, because it will be ready. Tough has got tougher thanks to Defra and Ofwat, but the industry is still optimistic it can deliver a competitive market on time. Water reform gets tougher Despite industry pleas, water firms will get only a few months' notice that the competitive market will go live as scheduled. Neither is there movement on margins. Mathew Beech reports. Proposed timeline for the 2016 non-household retail control review 29 July 2016: Companies submit their cost and margin allocations. 16 September 2016: Ofwat issues dra non- household retail determinations 28 October 2016: Companies respond to Ofwat's dra determinations 16 December 2016: Ofwat publishes the final non-household retail determinations 1 April 2017: New charges come into effect and the retail market opens