Retail market run at loss as allowances fail to cover cost to serve small customers

The water retail sector has been loss-making since the market opened in 2017, notably because the allowed cost to serve small customers is below the efficient cost of actually serving them.

These were among the findings of an independent report on the non household water market carried out be Economic Insight at the request of the UK Water Retailer Council (UKWRC).

The study found the actual cost to serve the smallest customers in the market (those using up to 0.5Ml of water) is more than 50% higher than the price control allowance, and that these customers account for around 70% of the entire market. Not only does this leave retailers financially vulnerable, but a number of significant customer harms result. Retailers can’t compete on quality, or readily invest in service improvement or innovation.

Other findings include that margins are not sufficient to compensate for bad debt (even before Covid impacts) and there is a material risk of systemic retailer failure.

Among Economic Insight’s recommendations were to increase the allowed average cost to serve for 0-0.5Ml band customers, and for Ofwat to strengthen its proposed bad debt cost recovery mechanism.