1. Retail competition in a broader context
Moody’s Water Event
12 October 2016

2. Retail competition in water Non-household customers
Scotland
market for non-household customers open to competition since April 2008
2011; WICS estimated that the reform would bring a net benefit of around £140m
2016; Business Stream reported big price reductions, consumption down 23,000 lpcpy
England
non-household retail market is going to be opened to competition in April 2017
Defra estimate suggested a net benefit of around £200m, (earlier) Cave £500m+
Wales
Welsh government ‘not yet convinced’—has not introduced non-household competition
Source: Oxera analysis and Business Stream (2016), Defra (2015), WICS (2011) and Cave Review (2009).
12 October 2016

3. Retail competition in water Household customers—England
September 2016
Retail competition in water Household customers—England
May 2014
Water Act 2014—commitment to retail competition for NHH in England from 2017
November 2015
Ofwat asked to conduct a cost–benefit analysis of HH retail competition in England
September 2016
Ofwat impact assessment report projects potential benefits of retail competition
Early 2020s
‘time…needed for…delivery’
12 October 2016

4. Benefits of retail competition Ofwat’s impact assessment
Costs=£4
net benefit: PV from -£3 to £8 per customer per year1
Ofwat analysis of benefits from household retail competition—positive but marginal
Source: Ofwat (2016).
12 October 2016

5. Benefits of retail competition Household water value chain
£12 gross benefits
Average £400 bill
Wholesale cost savings
Retail cost savings
predicted retail savings are a large proportion of a small part of the typical bill
only a third of potential benefits are predicted to come from wholesale
Source: Ofwat and Oxera analysis.
12 October 2016

6. Broadband/ line rental
Benefits of retail competition Is the level of retail market engagement realistic?
Criteria
Energy
Motor insurance
Broadband/ line rental
Banking (PCA)
Water
Average benefit of switching
£200
£100
<£30?
Average bill
£1,200
£700
£400
‘free if in credit’
Differentiation L M H
Complexity of tariffs
Switching rates
Ofwat Scenario 1
Source: CMA (2014, 2016), Which? (2015), Europa Consumer Markets Scoreboard (2013) and price comparison websites.
12 October 2016

7. Benefits of retail competition Are the retail savings realistic?
Retail cost breakdown = £40
Observations
half of the retail cost within the average household bill is bad debt and metering
companies can already outsource debt collection and metering services. New savings may not be easy
effective competition vs. cherry picking
early telecom’s liberalisation
segmental focus e.g. banking, energy
risks to institutionalised cross subsidies
social, geographic
Source: Oxera and Ofwat analysis.
12 October 2016

8. Benefits of retail competition Potential for wholesale efficiency
telecoms—TalkTalk and Sky influence BT’s network efficiency
cheaper lines
better service
incentive to invest in fibre
transport—airlines pressurise Gatwick, Heathrow and CAA for lower charges
energy—gas, electricity suppliers actively engage with Ofgem
Experience from other sectors
Retailer
Regulator
Wholesaler
12 October 2016

9. Benefits of retail competition Potential for customer efficiency (usage)
independent retailers may be able to offer products or mechanisms that encourage customers to save water
is incentive big enough?
can Ofwat drive this? Is it appropriate?
Customer efficiency 1
Note: 1 ‘Other household use’.
Source: Affinity Water.
Pictures designed by Freepik, Madebyoliver, Ema Dimitrova and Vectors Market from Flaticon.
12 October 2016

10. Retail competition in a broader context Conclusions
Scope for retail savings, but
may not be as large as
hoped—beware
ineffective competition
Competition and choice is
valued by customers—
what is this worth?
Retail savings
Value of choice
Wholesale efficiency
Customer efficiency
Retail competition
could increase
pressure for reduced
costs and improved
service—difficult to scale
Independent
retailers with
strong incentives
may influence customer
behaviour—difficult to scale
12 October 2016

11. Contact: Craig Lonie +44 (0) 20 7776 6627 Craig.Lonie@oxera.com
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