Our response to Ofwat’s consultation on the 2025-26 review of the Retail Exit Code Protections

We agree with the proposed key objective for this review. As the purpose of the REC is to protect business customers who have not engaged in the market, it is appropriate that current and future customers’ interests are protected. Our customer research, and MOSL’s switching data, continue to show that engagement rates, particularly among low consumption businesses, are low. While competitive pressures on retailers to provide high quality services to these customers remain reduced, regulatory protections are important to retain. Having customer interests at the forefront of the REC review should ensure this remains the case.

We also agree with the first three of Ofwat’s complementary objectives, particularly the need for simplicity, clarity and transparency. It is important that customers understand the charges they are paying and what protections are in place for them.

It is equally important for retailers to understand how these should be applied too, given the negative impact this would otherwise have on customers. This is demonstrated by five retailers’ non-compliance of the REC in 2023 which resulted in a number of their business customers being overcharged. Over 3,500 business customers were eventually refunded after intervention by CCW. If this non-compliance was either solely, or partly, due to the REC requirements being unclear, or overly complex, it is vital this is addressed under the review.

We fully support ensuring that water supply and wastewater systems are resilient in the long term, and the part customers have to play in this. However, ‘improving resilience’ as a complementary objective for this review should be limited to exploring whether a specific disincentive to retailers on water efficiency exists, as Ofwat outline in section 8 of the consultation. The REC’s purpose is to protect customers, and considerations around changes to price and non-protections need to be driven by a customer protection objective. We do not believe the REC should become a wider tool to promote water efficiency, particularly in terms of how price caps could change to encourage water efficiency. There are already a large number of industry commitments to drive greater water efficiency.

We agree that price and non-price protections should continue to be in place for Group One and Group Two customers. Our customer research, and MOSL’s switching data, has consistently shown that smaller business customers are the least aware of the market, with just over 50% aware in our Testing the Waters research in 2024. Of those that are aware, they are less likely to switch or re-negotiate than large businesses, with 33% having done so, as reported in the same research. While this remains the case, the absence of competitive pressure on retailers to competitively price, and improve their services, provides continued justification for protection, particularly around price. It is important that regulatory protections remain in place until there is evidence of significantly increased engagement from these customers.

With particular regard to Group One customers, even when the smallest business customers are aware of the market, 25% say they have insufficient time and resources to explore their options and engage . Research and MOSL’s switching data also shows that low consumption is a key reason for why many business customers do not see any benefit in the market. This shows that any uplift to price caps with a view to stimulating competition is unlikely to have a material impact on Group One customer engagement. We do not want to see this group of customers paying more for the same level of service, without additional benefits.

While retailers have reported increased savings available to smaller customers as part of Ofwat’s 2023-24 price savings research, there is insufficient evidence this has resulted in an increased level of engagement. Measuring actual engagement, rather than theoretical savings, should be what informs the appropriate level of customer protection. It is also worth noting that while the possible savings available may have increased in terms of percentage, this is unlikely to be significant in monetary terms for most low consumption customers. Alongside the other evidence referenced above, we do not believe the research findings justify relaxing price protections at this current time. With particular reference to Group One, we want to see greater market awareness, alongside an increase in market activity among this Group before any change is considered in the level of protection.

The current Group One boundary and definition ensures that the lowest consumption business customers, who are the least engaged in the market, are protected. Therefore, there would need to be robust evidence that the current definition and boundaries are no longer appropriate before we could consider supporting any changes. Introducing subgroups to reflect differences could also increase complexity of how protections are being applied and increase the risk of retailers not applying these correctly. We do not want to see any customers being disadvantaged as a result.

We do not want to see any customer disadvantaged by how their price protections are applied, but we also want to understand what Ofwat mean by a disadvantage in this context. For example, is this concerning a financial disadvantage, or a perceived barrier to engagement caused by being subject to particular price protections? Any such review of metrics would need to be clearly defined, particularly if Ofwat is exploring whether some customers should be in Group Two, rather than Group One, meaning looser price protections as a result.

Given how the variance of consumption within Group Two is significant, there may be merit in gathering information to explore either redefining the boundary or dividing the group into two smaller groups. For example, in its performance dashboards, MOSL has separated the Group Two consumption banding into premises with consumption between 0.5Ml – 5Ml, and those between 5Ml – 50Ml. Doing the same under the REC could give a more consistent view on consumption bandings for stakeholders and customers, as well as better reflecting the significant differences within the existing Group Two. However, it may be simpler to redefine the boundary instead. For example, customers at the top end of the consumption banding could move into Group Three if there is an increased likelihood for these customers to engage in the market. Before both options are considered, we expect Ofwat to take a robust evidence-based approach to ensure that customers are not being adversely affected by any changes.

It is vital that price protections are being applied accurately so customers are being charged correctly. We expect the REC to be clear and understandable to reduce any ambiguity and to stop any instances of misinterpretation leading to non-compliance. To help avoid this, we believe it would be beneficial for Ofwat to make clear that while price caps are applied at the premises level, it is possible for them to be applied at a customer level if retailers have identified multiple sites belonging to one customer. While we acknowledge this was stated in the previous REC review decision document, it would benefit from being explicit in the REC itself to avoid inconsistent customer service delivery.

2.11 We prefer the option of retaining price protections for Group One customers in their current form. For the reasons we have provided in our answer to Question 2, there is considerable risk that either loosening, or removing, price caps would result in these customers paying more with no corresponding increase in the quality of those services. While competitive pressures to offer these high-quality services for low consumption customers remain reduced, there is a need for price caps to remain in place.

As the other options involve either a loosening of, or removing, explicit price caps, it is not in the best interests of customers to explore these any further. We also believe that some of the alternatives would be impractical to implement. For example, the ‘must offer’ tariff option relies on Group One customers engaging with their retailer to select their preferred tariff. However, it is unclear what would happen in the event a customer did not opt for any tariff, which is a possibility given half of small customers are currently unaware of the market . We have a similar concern with the ‘tether ratios’ option. Given the different customer needs across the three groups, ‘tethering’ Group One to Group Two and/or Group Three will involve a significant amount of work. It also carries the risk that the needs of Group One customers will not be met and could mean there is less understanding of how the price has been calculated.

Overall, we believe the current price and non-price protections for Group Two should remain in place and unchanged. We agree the potential for competition could be greater in this group with research showing that larger business customers are more likely to be engaged in the market. However, the other protection options carry significant risks for customers, as outlined in our response for Group One. Aside from the impracticalities of some options (such as the ‘must offer’ tariff), any loosening of protections across the entire group is likely to disadvantage those at the lower end of the consumption banding, who may be less motivated to engage in the market due to their lower consumption. Instead, we support reviewing the current banding to determine whether there is merit in either amending the threshold or dividing Group Two into smaller bandings with price protections being tailored according to the evidenced rates of market engagement.

We agree this approach remains appropriate for Group Three customers for the reasons Ofwat has provided. As well as the evidence of greater retailer focus in terms of competitive offerings for this group, our research evidence shows that larger businesses tend to have greater awareness of the market and higher engagement rates.

We also agree that any revisions to the Group Two boundary which results in some of those customers joining Group Three needs to be on the basis of robust evidence. It needs to show they are more likely to engage in the market, and therefore explicit price caps are not needed. We do not want any customers losing protection unnecessarily.

We support the approach that Ofwat has outlined in Appendix A1. A ‘top down’ approach to obtaining cost data strikes the right balance between ensuring Ofwat obtains detailed costs for their assessment, with the administration burden on retailers kept to a manageable level. We expect retailers to submit robust and accurate data.

In addition, we support Ofwat’s proposal to set prices based on the likely costs that a reasonably efficient retailer will incur. Our position remains that customers should not have to pay more to cover retailers’ inefficiencies. We therefore welcome this continued focus.

We agree with Ofwat’s approach to assessing retailer costs in terms of what should underpin Group 2 price caps. It is important that an evidence-based approach is used when setting price protections, with the customer interest and protection being the driving factor behind this. With this in mind, we would not support a harmonisation of the allowed gross margins for water and wastewater services based solely on grounds of simplicity. We therefore support Ofwat’s intention to fully understand the impacts on customers of such a decision, particularly as the review will also involve looking at the impacts on Group One customers at the boundary of Group Two.

We agree with the present position that non-price protections should be retained. Customers who are not engaged in the market should not be subject to any changes that are both outside their control and not in their interests. It is therefore important that where customer prices are capped under the REC, they are also not exposed to changes to terms and conditions which are likely to cause detriment.

We also agree it is important that the non-price protections continue to be applied in a way that does not prohibit retailers from initiating non-voluntary changes. Customers should be able to benefit from any changes to terms and conditions that could result in improvements to their level of service (e.g. a change that allows for more flexible payment arrangements). Requiring retailers to demonstrate that a proposed change will benefit them, or not cause detriment, is an important safeguard.

However, as customer detriment is currently determined by whether a customer is worse off than before market opening, we believe this needs updating.

As outlined above, we believe the ‘no worse off’ principle should be reviewed. As more than eight years have elapsed since market opening, framing whether changes to non-price terms will leave a customer ‘worse off’ compared to their terms prior to 1 April 2017 is outdated. For this reason, we cannot be confident that pre-market terms and conditions still represent the acceptable standard that proposed changes to current terms should be judged against. Instead, this could be redefined so retailers are required to demonstrate that any non-voluntary changes should result in customers being ‘no worse off’ than their current default terms and conditions. We believe this would make it easier for both customers and retailers to understand, and is also an appropriate reflection that the REC has provided enduring customer protection far beyond market opening.

We also believe a set of underpinning principles for what constitutes ‘no worse off’ would be helpful for customers to know what to expect, and for retailers to know what to assess before considering the introduction of non-voluntary changes. One suggested principle is that no unreasonable burden on the customer should be created as a result of a change. We are happy to work with Ofwat on developing a comprehensive set of principles to ensure the ‘no worse off’ principle is robust and transparent both for customers and retailers.

As we stated in our answer to Question 1, there should be limitations on how far the ‘improved resilience’ complementary objective should be explored under the REC. The REC is there to protect customers, so it is important this remains its primary purpose. That said, we agree that if the current structure of the price protections has created a disincentive for retailers on water efficiency, Ofwat should explore what needs to change. To ensure that customers are not disadvantaged by any changes to the price caps, Ofwat needs to ensure the disincentive is ‘real’ rather than just ‘perceived’, as is currently stated under the main objective for this section.

As Group One contains businesses with the lowest consumption in the market, there is a possibility that removing the link between retailers’ revenue and customers’ consumption (as is proposed for exploration) is unlikely to result in a significant uplift in water efficiency activity for this group. In addition, even if a customer’s consumption increases, the margin element of the retailer’s allowance is small compared to the existing fixed cost parts, which suggests the retailer’s financial gain would be insignificant. To understand this better, Ofwat needs to obtain evidence of the amount of water efficiency services being offered to customers using up to 0.5Ml per year on a negotiated contract where the retailer’s costs are entirely fixed. This will help demonstrate whether a disincentive is truly being removed by the introduction of an allowance that is completely fixed.

• For Group One customers, do you have any views on the option to replace margin allowances with fixed costs allowances across different consumption bands within a customer group outlined here and how those should be set out in greater detail to deliver positive outcomes? In particular:
  • Do you have any suggestions how current margin allowances could be replaced by fixed allowances?
  • Do you have any suggestions on setting relevant consumption bands for fixed allowances?
  • Do you have any views about whether such revisions risk introducing unintended consequences and what these might be?
• For Group Two customers, do you have any views about if and how to revise or replace the current gross margins structure?
• Do you have any alternative suggestions for revising the structure of the REC in relation to water efficiency or ways in which the REC price and non-price protections might be amended in ways that better support or achieve reduced water consumption

As stated in our answer to Question 13, Ofwat needs to explore whether there is enough evidence that a disincentive exists. Until then, we cannot express a definitive view on whether a fixed cost allowance is preferable to a margin allowance. However, calculating a fixed cost for customers across the Group One consumption band is likely to be complex. For example, a ‘one-size’ fixed margin may not reflect the variable costs in serving customers with multiple accounts, and those with seasonal consumption. We expect Ofwat to model the effects of fixed cost scenarios in order to understand the complexities of changing to this model, and the impacts on customers. Where adverse impacts have been identified, we would also expect an explanation of how these can be mitigated.

In terms of Group 2, we agree with Ofwat that given the size of the current consumption banding, it is likely to be too complex to set an appropriate fixed cost allowance. While the feasibility of this is currently an unknown for both Group One and Two, we do not believe that even modelling fixed cost options for Group Two is worth undertaking given the scale of the complexity.

A 3-5 year period seems reasonable as this should provide a significant period of certainty for customers as well as the market. We also support Ofwat’s commitment to re-visit price and non-price protections on the basis of any material developments. This will be particularly important in the event of a significant customer impact being identified, such as a significant market change.

We are concerned at the number of retailers who have been identified as non-compliant with the REC over the last two years. Customers have been overcharged as a result, which is particularly concerning given customers in these consumption bandings are likely to be the most financially vulnerable. We therefore support Ofwat’s view that existing compliance monitoring needs to evolve. Where retailers have been identified as non-compliant, more robust monitoring must take place. As a minimum, we would expect an increase in the frequency of assurance statements. In addition, we recommend Ofwat consider the use of targeted audits of retailers who have previously been non-compliant to help prevent any re-occurrences. Compliance is essential to ensure accurate customer charging and the application of protections.