Residential retail building for success

For the market to be successful, customers must have trust and confidence in it. That trust and confidence must be justified with the right decisions being taken on design, opening and ongoing regulation of the market. It will also rely on good information. And the assurance that we have learned from other sectors and from opening the business customer market in England to competition.

It is also needs us to identify, reduce and act against the risks which would undermine the market and its effectiveness and see certain customer groups lose out.

Treating customers fairly

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Risks

Vulnerable customers lose out, and better deals are secured by the most savvy customers only. New service offers, innovation and savings are not widely available.

The new market is unattractive to customers, who do not engage. While in theory there is choice, in practice there is little to distinguish retailers. Customers do not feel they have good quality, reliable, easy to access information on how to engage and find the best deal. Customers feel as though the complexity and hassle of switching is not worth the effort.

Addressing the risks

Consumer law offers protection to customers but regulation would also be needed to make sure customers receive good information about their water use, the services they receive, the price they pay and alternative deals. It would also need to make sure they are not subject to misleading or high-pressure sales techniques.

There must be effective redress when things go wrong. There is a set of minimum standards for water companies, which could be adapted to work in a competitive market.

Competition could reduce bad debt as retailers look to cut costs through better billing and debt management. This does not rely on any change to the ban on disconnecting customers.

Some customers genuinely struggle to pay their bill and there must continue to be protections to make sure they receive help in a competitive market.

It is also important to make sure that vulnerable customers get the support they need, and we could set conditions so retailers have to provide it.

It must be simple and easy for customers to engage in the market. We recognise not all customers will choose to, but it should be easy to compare deals and switch, and the regulator ought to step in if it is not.

Some will get better deals than others in a competitive market and it is possible that some customers will be worse off. It is important to consider what the different deals might be, and who is more likely to get the best and worse deals. Depending what this analysis shows, we may need some form of tariff regulation.

In identifying the right safeguards to protect against these risks, it is important that the regulator does not stifle competition.

Competition and competitors

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Risks

New entrants do not enter the market and the big, existing water companies use their status to try and influence the market to their own benefit.

Addressing the risks

A successful market needs competition. Experience from the business customer market suggests not all current water retailers will remain in a competitive market. But the potential for some companies to leave would create opportunities for new entry and innovation.

The market design must not create undue barriers to entry. New entrants should have a voice in how the market is set up, so it works for all and not just existing water companies. Regulation will be needed to ensure companies who can influence the market do not distort it to their own advantage. We expect good quality data on customers and their water use to be accessible to new entrants, helping them understand the market and compete.

Throughout this change, strong measures to protect customers must be put in place.

Public health and safety

Risks

There is confusion between retailers and wholesalers about their responsibilities in the event of a public health issue or a reluctance to work together to tackle issues.

Addressing the risks

Even with retail competition, the current regional wholesale companies would still be responsible for providing reliable, safe drinking water and for taking away waste water. But wholesalers would need to work closely with retailers to maintain public health and safety, and to communicate with customers if there are problems with water services. We would use regulation to ensure wholesalers and retailers work together to protect public health and the environment, and that customers are involved and informed.

Resilience and long-term planning

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Risks

A new focus on water efficiency fails to take hold.

Retailers adopt a short-term mind-set which sits at odds with the long-term approach needed to manage the environment and water network.

As a result, necessary investment decisions are compromised.

Addressing the risks

Wholesalers will continue to be vital in maintaining resilient water services. But retailers would also have a crucial role to play as they would have incentives to provide water efficiency services to reduce consumption and bills – as happened in the business customer market in Scotland. With the right incentives in place, retailers could benefit from reduced costs if they help wholesalers deliver more resilient services (for example, if costly new investment were avoided as a result of water efficiency).

Wholesalers and retailers need the right incentives to work together to maintain resilience and plan over the long-term, so customers of the future have the water services they need at a fair price.

Timing

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Risks

A decision in principle is delayed meaning potential entrants lose interest and both entrants and existing companies cannot plan.

Companies that might have entered the business market on the basis of the potential of the residential market do not enter. Intelligence and experience from opening the business market is lost.

If the process for opening the market is rushed, lessons from the opening of the business market are not learned and mistakes undermine confidence plan better for the future to ensure customers have fair water services at a fair price

Addressing the risks

An early in principle decision would help companies prepare their business plans for our 2019 price review. It would also help companies think about their retail strategy, and could be a material factor in deciding whether and how to engage in the business customer market.

Companies and investors would welcome such an early in principle decision.

Once a decision in principle is made, there is a separate question of when the market should open. A competitive residential retail market in England would be the largest competitive water retail market in the world and would affect every household in the country. So it would be important to allow time for the process to be thoroughly planned and tested.

It would also be important to consider how the timing could help take advantage of the learning from opening the business customer market.

A further consideration is whether the market should be opened on a single date, or whether a phased roll out could be adopted.

How an effective market would look

If these issues and challenges are carefully and successfully addressed a successful market could be launched.

Market success depends upon the government, regulators, water companies and customer representative groups fulfilling their duties effectively.

Customer success

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A successful retail water market for customers would see:

  • Retail costs fall with benefits being passed on to customers
  • Technology being used more widely allowing customers to manage their account more effectively
  • Bundled services with telecoms and energy, for example, to make life easier
  • Ease of access to find the best deals and switch
  • The introduction of better deals and services
  • Retailers offering services and advice for greater water efficiency
  • More effective regulation to reduce prices

Environmental success

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A successful market for the environment would see:

  • Retailers promoting greater water efficiency
  • Increased recycling of wastewater
  • Growing focus on capturing and reusing rainwater
  • Better management of water resources through increased understanding of usage
  • Introduction of new services to increase leak detection

 

Investor success

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A successful market for investors would see:

  • Existing regional water companies growing their market share
  • Increase in mergers and acquisitions
  • New business models attracting specialised investors
  • Retail services being delivered by successful experts in retailing practices