Strategic Panel seeks clarity on REC boundaries and long-term competition plan

(by Karma Loveday)

The Strategic Panel has called on Ofwat to show the reasoning and evidence behind its Retail Exit Code (REC) Review positions.

Responding to the REC consultation, the most senior governance body in the business retail water market welcomed the direction of travel proposed by the regulator in terms of more closely tailoring protections to harms. But it probed for detailed evidence of harm and therefore the need for protection, and wanted to see a more dynamic approach that would evolve as market conditions change. “Consistent with the Panel's Roadmap to a Flourishing Market, the long-term objective should be a market that delivers strong customer outcomes through effective competition, innovation and investment, with regulatory protections increasingly targeted at those customers who need them most. The Panel therefore encourages Ofwat to set out a clear framework for how protections will adapt over time, balancing customer protection with the broader goal of enabling a flourishing market.”

Among the specific challenges lodged by the Strategic Panel were: 

• Ofwat has not yet demonstrated why the proposed boundaries represent the most proportionate means of targeting protections, the specific harms that the proposed arrangements are intended to address, and the evidence linking those harms to particular customer segments. It sought explanation on whether the threshold between Groups One and Two is set at the right level, reminding the regulator of evidence submitted by the Panel in response to the last consultation that showed the switch rates either side of the Group One/Two boundary are very similar. It also said Ofwat has not explained why 5 megalitres of use per year is the appropriate threshold at which to take customers out of price caps. It sought a consistent evidential framework across both the Group One/Two and Group Two/Three boundaries, arguing: “If information on engagement, awareness and potential harm is being used to justify reducing one threshold, Ofwat should explain why similar evidence does, or does not, support changes to the other. This would help provide confidence that the proposed boundaries are proportionate and not simply inherited from previous regulatory arrangements.” 

• Where customers do come out of caps, there should be “early, coordinated and plain-English communications” under a no-surprises approach for customers. “Communications should explain what is changing, what choices are available, how customers can compare offers, and where they can go for impartial information. The Panel believes this would ideally be supported by a fully functioning Open Water website which is an action on Ofwat in our Roadmap to a Flourishing Market that has not yet been delivered.” 

• Ofwat should take the opportunity of the REC review to provide greater clarity on whether, and how, retailers should aggregate consumption for multi-site Group One customers. It pointed out: “Despite some high-level guidance in the REC22 decision documents, retailers continue to adopt different approaches, creating uncertainty and the potential for inconsistent customer outcomes.” 

  
  

The Panel went on to champion five key principles for an effective customer protection regime: 

• A clear long-term framework for how customer protections should evolve as the market matures. 

• A balance between customer protection, and competition and greater cost reflectivity.

• Evidence-based protections targeted at addressing clearly-identified customer harms.

• Increasingly proportionate regulation, focused on those customers who most require protection.

• A REC that is capable of more dynamic review where market conditions, customer outcomes or retailer costs change materially.

  
  

Independent chair Trisha McAuley OBE said: “This review provides an important opportunity not only to consider what protections are needed today, but also to establish a clearer long-term framework for how those protections should evolve in future.”