Ofwat mulls changes in protections for deemed contract customers
Ofwat is proposing to bolster the non price protections available to business customers who have not switched or renegotiated a deal in the retail market, while at the same time loosening the price protection afforded to larger customers.
It is consulting until 15 February on two documents relating to the Retail Exit Code (REC): one on price terms and one on non-price terms for those on deemed contracts. The price requirements are linked to the PR16 price control that is due to expire at the end of March 2020.
The new price package put forward differentiates the protections that will be available from April 2020 to different types of non household customer, in recognition of the development of competition and how this has affected different segments:
• Ofwat said the lowest usage customers (0-0.5Ml) “have relatively low awareness of market opening, relatively low bills and relatively high discounts needed to motivate a switch. The difficulty retailers and brokers have engaging with them is currently exacerbated by frictions in the operation of the new market”. It is therefore proposing to continue with price protections that are broadly consistent with the current methodology for these customers, with the addition of an inflation adjustment.
• The regulator said customers using 0.5-50Ml are more aware of the market and some have accessed benefits from it, therefore there is less need for tight regulation which might distort the market. It proposed increases in the level of the default tariff for customers in this group, while still retaining a backstop. It has proposed a gross margin approach, with a national 8% (water) and 10% (wastewater) gross margin applied to wholesale charges.
• For those using more than 50Ml, who “have the strongest incentive and ability to engage in the market, for whom awareness is high, and where we have seen the greatest retailer focus in terms of competitive offers, we are proposing to remove specified ex ante protections entirely, and rely on a reasonable and non-discriminatory condition.”
On non price terms, Ofwat is considering the introduction of an explicit ‘no worse-off’ principle. It explained: “We consider that this is in line with the original intent and spirit of the REC and would prevent retailers from making any non-voluntary changes to their non-price terms which could lead to customers being worse off.”
The regulator pointed out it is not seeking to “ossify existing arrangements by stifling innovation or preventing retailers from making efficiency enhancing changes that may actually benefit customers” and “for this reason, we consider that when interpreting the no worse off principle, retailers should be able to alter the non-price terms and conditions for customers on deemed contracts, if they are: transparent about any proposed changes; are able to clearly articulate what the impact on individual customers will be and are able to demonstrate to customers why, and how, customers will be at least no worse off as a result of those changes.”