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Posted: 29/06/17

BLOG: Ofwat’s Chief Economist, Alena Kozakova, offers some thoughts on the first weeks of the retail market

Almost three months ago and after years of preparation by us, the Government and the industry, we opened the business retail market in water and wastewater services. It is a big step for us and the industry but of course, this is not the first utility market to open. So there is plenty for us to learn from including a lesson not to judge the market too early. I will break with my rule immediately and share some reflections on how things are going.

The first concern that most commentators will point to is whether anyone will switch. Experience in other regulated industries and utility markets in general is that getting customers to switch can be hard work. And you could put in place the best market support infrastructure in the world, but if no one switches, you don’t have a market. Since the market opened, there have been around 30,000 switches – that’s 10,000 a month, or 2,500 a week – so far, so phew!

The next question is, whether that is enough. Some will say, ‘surely you need everyone to switch’ to make this work for customers. The economist in me will grasp for the concept of marginal customers to answer that, but the simple answer is this: you don’t need everyone to engage to make a market work, you need enough of them. We are only three months in, so it’s really too early to say. We are pleased that the market is moving and more and more customers are switching and many others are renegotiating with current retailers.

It’s also important to see who is switching. Predictably, it’s looking like large multi-site customers are switching most and small businesses less so. We saw this trend in other utilities and are really keen to ensure small businesses find the market as beneficial as large ones. We have been hearing anecdotal evidence that some small businesses find it difficult to compare offers. This is something we take very seriously and we have told retailers we want them to find a market solution to this, and quickly.

So, should we be intervening in the market already? Perhaps mandating a ‘clear and simple’ tariff structure? I have heard calls for that. It is way too early to make that call. Besides, like other economists, I remember well-intentioned tariff interventions in other utilities markets which produced quite the opposite effect of what was needed. The one thing that we as regulators have learned is that sometimes it’s best to hold your nerve.

Having a live retail market is a change for us, the industry and the stakeholders. Markets are “noisy”. Some retailers will try to get themselves at the forefront of their clients’ minds by crying wolf. And we have seen some of that. Some wholesalers will use the legal framework to make their life as risk free as possible. That again is something we have already come across.

Yet, these noises aren’t necessarily bad. They suggest that there is lively activity in the market. I am very pleased about that.

When we launched the market, we said that we will need to learn to live with uncertainty. Now the time has come, we have to be ready to live up to our promises.

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