Over in the business water retail market, in March this year Ofwat made refinements to the process for applying for a self-supply licence. For those unaware, self-supply is a licensing option, typically for larger water customers, where they 'become their own retailer'. Customers engage in the wholesale water market directly rather than through a licenced water Retailer and avoid paying the retailer's margins.
Ofwat's refinements to the process for application include a fairly significant chunk shaved from the application fee. There are also more streamlined information requirements when self supply applicants are making their application. Ofwat's decision document is available here.
While these changes are of interest in themselves, the development of the self-supply regime in England has been interesting for different reasons. In particular, the emergence of 'middle-man' type companies that are not-quite-retailers and not self suppliers but who have been selling various water customers on the benefits of self-supply.
History of Ofwat and self supply
Self-supply has been available in Scotland for a number of years. With the English market opening in 2017, there has been a steady stream of self-supply applications granted by Ofwat. Contrasting the two markets, self-supply activity in the first year of English market opening has been rather buoyant. Much of this application activity can be attributed to specialist companies advising (usually larger) customers around their options for engaging with the water retail market with self-supply being one of those options.
These companies could be described as a form of Third Party Intermediary (TPIs). Generally these companies are 'arms-length' from the full suite of regulation imposed on a 'normal' water Retailer. Some look, and seem to act quite a lot like 'full-fat' retailers. They offer billing services, support on engaging with wholesalers and the market operator, plus other things that Retailers would normally take care of. But they are not Retailers – and seem to occupy a space that is just outside of the regulatory oversight of Ofwat when offering these self-supply options to customers.
Ofwat do not have the power to directly regulate TPIs, but have sought to regulate TPI activities indirectly through the retail licensing framework. Generally, this has been done by making Retailers responsible for the actions of TPIs who act for them, via Ofwat's Customer Protection Code of Practice. Compliance with the Code being enforced through a Licence condition on the Retailer. This covers TPIs acting for retailers, such as brokers, or perhaps some market players offering a multi-utility service to customers. But what about TPIs not acting for retailers? At first glance the framework would not cover consultancies offering services to potential self-supply customers, where there is no regulated Retailer involved.
To regulate or not to regulate? Energy market lessons
In the energy retail market, regulation of non-domestic TPIs generally has been something of a moving feast, although the focus has often been on energy brokers. Ofgem discussed potentially regulating some of these TPI activities as far back as 2012, with regulatory policy development occurring through to 2015. However, the issue was then scooped up into the CMA's Energy Market Investigation. The CMA highlighted that TPIs are not without criticism in terms of the end customer experience. Despite this (and some enforcement action against some energy retailers), no substantive action was taken by Ofgem to pro-actively regulate TPIs. In the water market, the interaction of TPIs and the self-supply regime brings a new dynamic not previously seen in the energy market.
Ofwat's approach to regulating TPIs in the newly formed water market seems to be relatively cautious. On one hand, there are limited pro-active interventions by Ofwat, to the extent the regulator has the powers to do so (such as the Code of Practice). On the other, Ofwat clearly see TPIs and self-supply as potentials drivers for innovation. The latest changes to the self-supply regime seem to reinforce that. Ofwat are clearly keen to learn lessons from the energy market, but still allow innovation to emerge.
Innovation and compliance
All this being said – there are limits to these latest reforms. Self-supply licensees will still need to get clued-up on technical competency requirements, as expected by the Environment Agency and Drinking Water Inspectorate. It is worth remembering that in Ofwat's eyes, self-supply licensees (i.e. the customer) will continue to be responsible for complying with their own licence conditions – there is no 'contracting out' compliance for self-supply licensees!
And given that the political spotlight appears to be squarely on the water industry at the moment (see foreign ownership and recent interruptions to supply the previous winter), the regulator will no doubt continue to closely monitor how this particular slice of the retail market performs for customers, and whether these independent TPIs work in the customer interest.
Whether or not Ofwat proposes to regulate TPIs is an open question at this very early stage of the water market. However, if there is one lesson to be taken from Ofgem's experience on TPI regulation, it should be to avoid the 'will-they-won't-they regulate them' approach taken by the electricity regulator on the issue.
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