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UTILITY WEEK | 4TH - 10TH DECEMBER 2015 | 27 Customers THE HEART OF THE MATTER Implementation. The cost of implementation will likely be high. Ofwat will review the costs against the benefits over the next six to nine months and report back to the Treasury. The question of who will pay for market opening and when is a pressing one, because many of the costs will presum- ably have to be met in the current asset management plan cycle. Will investors bear the costs, or could customer bills go up? Consumer protection. Ofwat will have to make sure customers, particularly those who are vulner- able, are protected. The regulator will need to work out how to open the market and let innovation and competition happen while protecting customers who have a higher cost to serve. Meanwhile, initiatives such as social tariffs, which are nearing universal implementation, will suddenly become a lot more complex. Political. Competition issues in the energy retail market, currently under investigation by the Competition and Markets Authority, have damaged trust in energy markets. The government and the regulator will have to ensure the same thing doesn't happen in the water market. While the political upside of domestic water competition is limited – how many votes can there be in switch- ing water supplier? – the downside is huge. Having initiated this change, the government will be watching carefully to ensure it doesn't end up doing its political image more harm than good. Business models. The ramifications for water companies' business models are huge. Domestic market opening will necessitate the full disaggregation of retail and wholesale businesses, and a number of today's water companies will likely withdraw from the retail market. In turn, new entrants would appear, with multi-utility bundling and white labelling likely outcomes. Investor confidence. This week's announcement will be a blow to investor confidence. Investors hate nothing more than uncertainty and, having just got to grips with non-household competition, will view this further reform dimly. Moreover, investors that are attracted to regulated income and asset-based businesses are unlikely to want to play in a competitive retail market. Analysis C hancellor George Osborne has shocked the water sector with the announce- ment that the domestic market may be opened up to competition by 2020. But is this change in policy stance just a trial balloon sent up by the Treasury? Only time will tell, as Ofwat reviews the costs and benefits of opening up the house- hold retail market and reports to the govern- ment next summer. Then the government must decide if and when it wants to give household customers a choice. This decision will apparently be taken before the opening of the market for non-household customers in 2017, contrary to the industry's expecta- tions. While further reform has always been on the horizon, it was widely expected that non-household market opening would be allowed to play out first, with the lessons learnt taken into account during any debate on domestic competition. But the Treasury seems set on moving sooner, and the document states that fol- lowing the review and assessment, "the gov- ernment will work with water companies to begin the transition to household retail com- petition before the end of this parliament ". Warm reception? On the face of it, the industry seems ten- tatively positive about the announcement. Some water firms have come forward to express their support for further competi- tion, saying they will "actively engage in reform of the sector" and work alongside the government and Ofwat to ensure the "best possible deal for our customers". Ofwat, too, has welcomed the decision. Pinsent Masons environment lawyer Ellie Watson calls the announcement a "posi- tive step" and "encouraging" for customers and the water industry, with the potential to increase engagement with customers, lower water prices, and increase the resilience and efficiency of water services. However, the "devil is in the detail", she adds, and the detail is "yet to be made clear". "The development of tailored and robust secondary legislation is crucial," she tells Utility Week. "In the meantime, Ofwat will continue to closely regulate the water companies and ensure their efficiency and water charges are closely controlled through the regular five-yearly price control reviews." Speaking privately, the companies are more willing to express concern. Certainly, the timing of the announcement came as a surprise, and there was no industry consul- tation. Whether supportive of competition or not, companies are anxious that the many implications of market opening are worked through thoroughly, rather than rushed to fit a tight timescale. They are also keen that the lessons of non-household market opening are learnt – it's been far from a smooth process and there are ongoing questions about whether it will be ready on time. Whatever the compa- nies' stance, the announcement throws up a huge range of issues that must be addressed before the domestic retail market could be opened, such as the cost of market opening and the need to protect all customers. The opening up of the non-household retail market means the sector will not have to start from scratch. However, many of the challenges will be larger because of the size of the customer base. "We need to see how successful the non-household market reforms are before plans can push ahead with this reform in earnest," says Watson. With the government looking for action before the end of this parliament in 2020, that doesn't leave long. As the industry scrambles to catch up with the new agenda, there are some busy years ahead. Water competition in full flow The water sector is still digesting the shock announcement that domestic water competition is being rushed in before non- household competition has even proved itself. Lois Vallely reports.