Utility Week

UTILITY Week 16th October 2015

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6 | 16TH - 22ND OCTOBER 2015 | UTILITY WEEK People & Opinion In-area trading ban must stay Incumbents must not be allowed to tie customers to long-term contracts before market opens. Chief executive's view Johanna Dow, Business Steam I n my last Utility Week col- umn in July, I highlighted the three key issues that need to be addressed in order to cre- ate an effective water market in England: a level playing field; greater alignment or standardi- sation within regions; and retail margins that are high enough to encourage new entrants and to meet customer's expectations. Since then, another key issue has emerged, which is the pro- posal in Ofwat's consultation over the summer to li the ban on in-area trading before the market opens. Looking back to the creation of the Scottish market, Business Stream was barred from signing new contracts with customers in advance of the market open- ing. Existing contracts had to be amended to make the agree- ments tradable, so that custom- ers could opt to switch to a new supplier at market opening. The terms and prices (both wholesale and retail) applying to all those contracts were also published, meaning that new entrants could choose to match the prices or indeed offer further price reductions. Clearly there are very good reasons why such steps were required, and in England the in-area trading ban was initially introduced to ensure that new entrants were not discriminated against. In previous reviews on the subject, including the 2013 Ofwat discussion document on a level playing field, the li- ing of the ban was explicitly linked to the introduction of new measures to prevent such discrimination. The removal of the in-area trading ban will give incumbents an overwhelming advantage, especially in the current 5ML market, allowing them to sign up customers on to long-term con- tracts in advance of full market opening. In addition, Ofwat's consul- tation also addressed the condi- tions on non-discrimination and arm's length transactions, which we believe are not yet sufficiently detailed to guarantee equal treat- ment for all retailers – a pre- requisite to an effective market. The high level principles leave it open to incumbents' own interpretation as to how they will choose to operate in practice. A governance code produced by undertakers and associated retailers that sets out clearly what form of separation exists between the two operations, and on what terms they can engage with each other, would help to address this issue. We also think that special conditions should apply to incumbents that choose to exit. As the proposals stand, they will enjoy the benefits of incumbency without any matching duties of customer protection or limits on their market power. One final issue is that we are concerned that the proposed arrangements are insufficient to guarantee the necessary level of customer protection. There are three particular risks to custom- ers: they may not be able to find a retailer willing to supply them; they may be charged dispropor- tionately for services; and they may be prevented from switch- ing by punitive exit charges. To mitigate these risks, incumbents should be required to provide a default package of services at a default price to any customer that requests it, and customers must be able to cancel their contracts without penalty on 20 business days' notice. It was noted at a recent work- shop that the best form of cus- tomer protection is a flourishing market. While we do agree with this, it is not realistic to expect there will be active competition across every class of customer in every region from day one. This will be particularly true given the tight retail margins proposed. There must therefore be suf- ficient customer protection built into the initial arrangements, with scope to remove these con- ditions only once competition has been bedded in. The Ofwat consultation has now closed but there is still some way to run on these key issues. We expect further proposals and consultations from Ofwat and hope they reflect some of the concerns that we and others have highlighted. As with most of the outstand- ing issues to be resolved, there are lessons to be learnt from what worked, and what didn't, in Scotland. Indeed, one of Defra's success criteria for the retail market is the need to ensure a seamless customer experience between Scotland and England. If the licence conditions pro- posed in the consultation are implemented, they will intro- duce more disparity, as opposed to greater alignment. By tak- ing the time to address these issues now, we can help ensure the market is a success when it opens. "Other countries have not made such an elementary mistake and have been partnering renewables with new storage" David Holmes, managing director, Quarry Battery Company, blogging in response to the announcement of a new National Infrastructure Commission. See his blog in full at utilityweek.co.uk

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