Business retail market 2021-22 review of the Retail Exit Code - Decision
| Date | 15 December 2022 |
December 2022
Business retail market 2021-22 review
of the Retail Exit Code - Decision
Main document
Business retail market: 2021-22 review of the Retail Exit Code - Decision
Main document
1
Executive summary
Since April 2017, around 1.2 million business customers in England have been eligible to
choose their supplier of retail water and wastewater services. For business customers who do
not engage in the market and remain on 'deemed contracts', the Retail Exit Code ('REC')
provides regulatory protections. The current REC specifies maximum prices for 'Group One
customers' (consuming up to 0.5Ml per year) and 'Group Two customers' (consuming more
than 0.5Ml per year but less than 50Ml). It also protects customers against non-voluntary
changes to their non-price terms (unless the Retailer can demonstrate the change makes
them no worse off).
In December 2021, we consulted on our approach to reviewing the current REC price and
non-price protections. In September 2022, we consulted on specific changes to the price
caps applying to Group One customers. Following careful consideration of all consultation
responses, this document sets out and explains our decision to increase the price caps
applying to Group One customers on deemed contracts from April 2023.
Group One customers
Our aim in reviewing the REC is to ensure that business customers are protected, wherever
appropriate by promoting effective competition. It is not yet clear whether or when effective
competition will develop amongst smaller business customers. At present we continue to see
low levels of market awareness and engagement by smaller business customers. They
currently have less incentive to engage in the market. They can expect to make smaller
financial savings from switching and face limited differentiation in supplier offerings and
possibly also a lack of awareness about how service offerings differ between Retailers.
In the absence of effective competition and to protect smaller business customers from
paying prices that do not reflect costs or the quality of service they receive, we have decided
to retain price protections for Group One customers. We have decided to set price caps that
reflect reasonably efficient business retail costs to serve. We consider this approach is most
consistent with our duties. It will protect customers in the shorter term from the risk they
receive poor value for money, and it will protect customers in the longer term by supporting a
more sustainable and stable market as it will ensure reasonably efficient Retailers can earn a
fair return.
Our approach to setting price caps that reflect reasonably (and not the most) efficient costs
to serve should enable a reasonably efficient Retailer to make a return and enable the more
efficient Retailers more generous headroom. We consider this should provide incentives for
higher cost Retailers to make cost savings and for the more efficient Retailers to try to grow
their market share. We also expect the increase in retail allowances to enable Retailers to
improve their services to smaller business customers.
This is the first time we have done a thorough assessment of business retail costs to serve
smaller customers as the current price caps are broadly based on the tariffs set by the
vertically integrated companies prior to market opening. We conclude that business retail
costs to serve do not vary systematically on a regional basis and have therefore decided to
Business retail market: 2021-22 review of the Retail Exit Code - Decision
Main document
2
move away from price caps that vary on a regional basis and will set a single, England-wide,
REC price cap for Group One customers.
We have broadly retained the overall approach to assessing reasonably efficient costs as set
out in our September 2022 consultation. We have used Retailer-reported data on annual
costs over 2017-18 to 2021-22, broken down into defined cost categories. We have retained
our overall approach to removing certain costs (including exceptional costs, amortisation
costs related to acquisition of customer books and MPF penalties) and by allocating costs to
Group One Customers using an appropriate cost driver.
In response to the consultation, we received some new data from Retailers that has affected
our assessment of costs. This includes a material restatement of running costs from one
Retailer who contacted us during the consultation to tell us it had not included common
costs in its original RFI submission, and it considered these should be included to the extent
they are part of the cost to serve Group One customers. We agree that a proportion of
common costs should have been included in this Retailer's initial RFI response, and we have
made an adjustment to reflect an appropriate allowance for common costs. As we have
decided to retain our approach to benchmark reasonably efficient costs using the 37.5th
percentile, we note that this Retailer's costs do not influence our assessment of reasonably
efficient costs.
We also accepted a more minor restatement of costs from one Retailer in relation to their
meter reading costs. In response to consultation feedback, we have made some adjustments
to our approach to calculating customer bad debt costs. We have also made some small
adjustments to correct for minor errors found in our models. Table 1 sets out how our decision
compares to our September 2022 proposals.
Table 1: Summary of Decisions for allowances for REC price caps for Group One
Element of REC price cap for Group
One customers
September 2022
published
proposals
(2021-22 prices)
September 2022
proposals
(corrected)
(2021-22 prices)
Allowed
Cost to
Serve
(ACTS)
Running costs
£32.97
£34.63
£42.74
MOSL, CCW, and Ofwat fees
£0.68
£0.72
£0.72
Water efficiency
£0.42
£0.45
£0.45
Total ACTS
£34.07
£35.80
£43.91
Meter read cost allowance
£7.34
£7.56
£8.56
Customer bad debt costs (%)
2.0%
2.0%
2.45%
Allowed Net Margin (%)
2.0%
2.0%
2.0%
On average, across all regions in England, our decision is expected to lead to average bills for
a metered dual tariff (water and wastewater) customer increasing by around 6.4%, before
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