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24 | 28TH OCTOBER - 3RD NOVEMBER 2016 | UTILITY WEEK Customers Analysis T he government seems set on introduc- ing competition into the residential part of the water retail market, but will it be a damp squib? With savings pre- dicted to fall far short of what customers would expect, and many vulnerable custom- ers likely lose out on even minute savings, the Consumer Council for Water (CCWater) warns that it will be. In its cost-benefit analysis, published in September, Ofwat outlined four potential scenarios that it believes could arise follow- ing the opening of the household retail mar- ket. In the "best" scenario it results in lower costs, widespread innovation and strong competitive activity, which would deliver a net present value of £2.9 billion. The "worst" scenario would see higher costs, little inno- vation and weak competitive activity yield a negative net present value of £1.4 billion, which would cost households around £3 each a year. "Overly optimistic" assumptions were made and CCWater says customers will be disappointed with the savings they can real- istically make in an open market. It wrote to the regulator last week challenging some of the more positive assumptions. Additionally, Ofwat has not made clear which of its scenarios is the most likely to come about. CCWater says it is "crucial" the regulator tells government what it believes will be the most likely outcome, before a decision is made. The vision thing The vision of the "pro-market" regulator is to "end the final retail monopoly", leading to innovation, improved customer service, and new offers, including bundling of products such as energy and telecoms with water. Ofwat chief executive Cathryn Ross said at the time the report was published: "We are living in an age of retail revolution, but water customers are being le behind. The service offers from water companies can feel behind the curve compared to the innova- tion customers benefit from when buying other goods. "The uncomfortable truth is that when it comes to retail offers, water companies provide an analogue service in a digital age. Customers tell us they think they should have the freedom to choose and don't understand why water is the only retail market in which there isn't some form of competition." However, she added that "this isn't a one-way street", and that there are signifi- cant costs to be considered. She also said it is important to ensure customers, especially the vulnerable, are protected. "The decision for the government to make is whether the potential benefits outweigh the costs and risks," she said. Domestic distraction? Sector representative Water UK responded to Ofwat's review with caution, insisting that water companies remain "intensely focused" on delivering continued improvements and are "working hard" to prepare for next April's start of retail competition for 1.2 mil- lion business customers in England. "Extending retail competition to over 20 million households could secure potential benefits for domestic customers, but would also be a major undertaking and so deserves to be given very careful consideration," it warned. "We look forward to a timely deci- sion from government which helps sus- tain the stability the industry needs to continue successfully meeting the needs of its customers." Others have gone as far as to warn that domestic competition may prove to be an irrelevance. Research group WRc's head of water and environment, Karen Wright, says she thinks the pledge to encompass the household market "is a distraction" because "a whole new set of players have now pricked up their ears and are starting to look a bit more closely". However, Martin Baggs, a former chief executive of Thames Water, feels differently. He told Utility Week that competition "makes sense for customers". He believes the savings for customers from opening the market could be much higher than the £8 a year mooted by Ofwat in its recent cost-benefit review. When you start bundling services such as gas, electricity and telecoms together, it starts to make more sense, he argues. "When you can add water to that list, I think it will be a game-changer." "From a water company point of view, it is too easy to say 'here's a list of reasons why it won't work', but if you're a customer and someone knocks on your door with a clipboard and says 'I'll give you one bill for water, gas, electricity, telecoms, and by the way I'll save you £30 a year as well', people are going to say yes. We all like an easy life and we like saving money." What is stopping it? There are many reasons why the market might not go ahead, and they are similar to the reasons it hasn't happened on previous occasions. For example, a lack of metering penetration; vast and complicated cross- subsidies to unwind; and issues about how to deal with vulnerable customers. Research by ICS Consulting, commis- sioned by Water UK, estimates that retail cross-subsidies stand at about £52 million a year, based on the average cost to serve assumed in current regulatory price con- trols. That is equivalent to £4.30 per billed household. With a de-averaged cost approach that accounts for wider variations in the house- hold cost to serve, the estimate for total retail cross-subsidies increases to about £184 mil- lion a year, or £15.10 per billed household. ICS says its analysis suggests a complex pattern of how these cross-subsidies are dis- tributed across household customers. Within all demographic segments there are patterns of households who contribute subsidies – typically low cost-to-serve households – and those who benefit from subsidies – typically higher cost-to-serve households. A further challenge resulting from an open market would be the need to increase the number of smart meters in the sector. WRc's Wright says: "I think smart metering is Water competition doubts The government says it wants to introduce competition into the domestic water market, and Ofwat is enthusiastic – but will customers be? Lois Vallely reports.