Water choice – could competition meet households’ expectations?

With the Government still pondering whether to give households in England a choice over their retail water supplier, CCWater’s Chief Executive Tony Smith explains why the market may struggle without the lure of substantial savings for customers. This article first appeared in magazine Utility Week opens in new window.

Almost a year on from first tabling its proposals, the Government may soon make a decision that will have big implications for the water industry and its customers.

Giving households in England the freedom to switch their water retailer would represent a major shift in the water consumer landscape, eclipsing the impact of non-household competition which will open up choice to 1.2 million eligible customers from next April.

Last month Ofwat published its review of the costs and benefits of household competition, which is likely to be instrumental in shaping the Government’s final decision. But instead of providing clear answers for Ministers, one could argue the regulator’s findings have muddied the waters. That’s why we have written to Ofwat setting out our concerns.

What is indisputable is that the majority of households have told us and Ofwat they want choice. On that basis we would love to see a thriving, active market delivering better prices and services for customers. But the inescapable truth is that the retail water market cannot deliver the bill savings that customers want. Ofwat’s own research revealed as little as 2 per cent of customers would be tempted to switch for an annual saving of £4 to £8. This is the amount that households might reasonably expect to save from retail competition and was used in the customer research carried out by Ofwat and CCWater. Our research suggested around 6 per cent might switch for the same amount, and most customers would want to save at least £40 – the whole of the retail component of the bill.

But this compelling evidence appears to have been almost overlooked in Ofwat’s final analysis and the four potential scenarios it has presented to Government. Some of these contain very optimistic assumptions. How likely is it we will see up to 12.5 per cent of customers switching for a modest saving of £8 a year? Switching rates in gas and electricity markets have run at around 12 to 18 per cent, despite energy offering savings that can sometimes run into hundreds of pounds.

Surprisingly, Ofwat also doesn’t make clear to the Government which of the four scenarios it considers to be the most likely. Given that two of these could result in a very marginal gain or an increase in bills for customers, the Government should be given clearer direction from the regulator on what it thinks are the most likely scenarios.

Low switching rates could well dilute any competitive rivalry in the market and increase the risk of poor service, more complaints and higher prices. This might mean that it’s necessary to continue to regulate the market.

Our greatest concern is that without the lure of substantial savings, very large numbers of customers – and particularly the most vulnerable and expensive to serve – will not engage in the market. That in turn could result in higher bills for these households. A market that doesn’t work for all customers would also damage trust and confidence in the sector, as it has done in energy, and damage the reputation of those regulating it.

Ultimately it will be for the Government to decide the way forward but the opening of the non-household market in England next April presents us with the chance to make a more informed choice. We have a golden opportunity to watch and learn from how small and medium-sized businesses engage with the market. This would provide us with more robust evidence to inform the timing and development of a household market that works for all customers, not just the few who might engage with it.