Speaking at a Westminster Energy, Environment and Transport Forum event last week, Ofwat senior director for Water 2020 David Black said the regulator will not reassess the cost allocation between the retail and wholesale price controls set during PR14.
Black said: “In terms of the concern around the level of margin, we have thought about this quite hard during PR14. We have been through a robust process.
“To be very clear, we are not reopening wholesale controls, we are not reopening the retail household control, we are only reopening the retail non-household control.”
His comments have caused concern among potential market entrants, which say the margin needs to be higher to make entry and operation in the market viable.
Business Stream is leading the calls for the cost allocation to be looked at when the non-household price control is reopened in 2016, claiming the current determination is weighted too heavily towards wholesale activities.
Business Stream chief executive Johanna Dow said: “What is increasingly apparent when you’re looking at the cost allocation of the retail business, it doesn’t cover all the costs associated with running a retail business.
“The margins have to be reconsidered if we’re going to create a successful dynamic market.”
This was echoed by Thames Water director of strategy and regulation Nick Fincham, who said: “It is very difficult to see how enough headroom can be created in the current level of price control to provide the necessary returns to encourage efficient entry into the market.”
The water companies are expected to submit their plans for possible changes to their PR14 cost and margin allocations within the non-household retail determination in July 2016, with the final price control coming into effect on 1 April 2017, when the retail market is scheduled to open.