Strategic Panel calls for retail price protection rethink

The Strategic Panel and MOSL have called on Ofwat to modernise its approach to setting retail price protections for smaller customers.

In its response to the regulator’s Retail Exit Code (REC) review consultation, the Panel’s preference was for the form of protections to be rethought. It called on Ofwat to: 

• Provide greater clarity on the harms being addressed by the REC.

• Consider alternative approaches, such as those used in energy and telecoms where businesses are not offered price caps at all but encouraged to switch to get better deals.

• Reframe the review so it focuses not only on keeping bills down but also on driving engagement, fostering competition and supporting economic growth.

The Panel went on to suggest improvements to the current form of caps, if they are retained. These included: 

• Reducing the level of the cap to a ‘safeguard’ level rather than keeping it at an ‘efficient benchmark’ level (currently it is set at the 37.5 centile on an assessment of retailer costs), as this effectively excludes customers above the cap from participating in the market. 

• Making price caps reflect cost to serve more accurately, by allowing variation according to factors such as customer payment method.

• Creating opportunities to change specific elements of the REC mid period to reflect prevailing conditions, such as interest rate changes or growing evidence on smart metering costs (akin to how the domestic energy price cap is adjusted every three months).

• Ensuring protections reflect the maturing market and its upcoming improvements (smart meters, BR-MeX, MPF reform) that will strengthen customer protection, rather than simply ensuring customers are no worse off.

MOSL concurred with some of these points, including the need for more sophisticated cost reflectivity and more agility to be built in to the REC review process. It also called on Ofwat to:

• Establish a clear pathway for easing price protections, by setting out what market characteristics need to be present to allow this to happen. It said Ofwat could in fact do more to encourage customer engagement, as Ofgem has through its engagement trials for disengaged energy consumers.

• Consider whether customers at the top of the Group One and Group Two bandings could safely be afforded the opportunities available to those in the groups above, by moving the thresholds down.

• Cease defining customer protections under the REC terminology and opt instead for something clearer and more accessible for customers. There also needs to be greater clarity on how eligibility is defined and multi-sites treated, as approaches to Group One protections vary between retailers.