Ofwat locks in December plans for default tariffs after April 2020

Ofwat has locked in proposals it consulted on in December 2018 regarding price protections and non-price protections for business customers on deemed contacts (those who have not switched or renegotiated a retail deal).

From April 2020, default tariffs will be set according to three usage bands.

  1. Protections for 0-0.5Ml customers will be retained at a similar level to currently, with an inflation adjustment. This involves a “net margin” approach where the cost to serve a group of customers within a specific region is estimated and a net margin added (applied to the retail cost to serve and wholesale charge). PR16 allocated the overall allowed net margin to customer groups in different amounts, for customers using between 0-5Ml, with an overall cap of 2.5%.

  2. For 0.5-50Ml customers, there will be a gross margin cap of 8% for water customers and 10% for wastewater customers.

  3. For >50Ml customers, there will be no explicit price cap, but a ‘reasonable and non-discriminatory obligation’.

On non-price terms, Ofwat will implement an explicit "no worse off" principle. It said: “This is in line with the original intent and spirit of the Retail Exit Code and will strengthen protection for customers on deemed contracts against retailers making non-voluntary changes to their non-price terms which could lead to them being worse off than pre-market opening.”

The decisions were set down in two documents published last week on the Retail Exit Code, which governs default protections for those on deemed contracts in areas where the incumbent has exited the market (all but one geographical area).

Ofwat also last week published its second annual state of the market report, setting out its conclusions on how the market performed in year two, April 2018-2019. This contained no surprises. The regulator said customer activity was broadly steady from year one and that it was “disappointed in the slow growth of such benefits and slow progress in resolving the market frictions that were set out in our report last year”. These chiefly concern data quality, wholesaler performance and wholesaler/retailer interactions.