Ofwat proposes widening retail margins from 2020

Limits on the margin that water retailers may earn from their customers in the business market may be loosened from April 2020 under new proposals from the regulator.

Ofwat issued a consultation on 11 December in which it set out plans that would see the cap on allowed margins for mid-sized customers double, and completely remove it for very large customers. Currently, all business customers benefit from some form of price protection. Those who use less than 5Ml/year may only be charged a net margin of 2.5%; sites in the 5-50Ml/year band may be charged a gross margin of 5.0% for water and 5.3% for wastewater; while customers over 50Ml/year may be charged at 3.3% gross for water and 2.8% for wastewater.

However, these caps are widely viewed as restricting the scope of competition because they mean all retailers’ tariffs are broadly similar, preventing differentiation on price. Recognising that competition is developing in the market and there is now better information on the cost to serve customers, the regulator proposed redefining the bands of the price controls from 1 April 2020, when the current controls expire.