Water retailers need to balance the opportunities that new competition brings with the risks it poses, and take lessons from the deregulation of the energy market.
The warning comes from Ian Newcombe, partner at national law firm Bond Dickinson, who said there is “no doubt” that the opening of the market presents both opportunities and risks for water suppliers.
“The already low margins in the industry will naturally be squeezed through competition,” he said. “But the race for new business could also drive behaviours that further damage suppliers’ profitability.”
From 1 April, when the non-household water retail market deregulates, retailers will move away from the current statutory charging schemes, and will supply non-domestic customers based on either an express supply agreement or a deemed contract.
Deemed contracts, Newcombe said, pose risks to retailers. For example, the retail exit code cites the different price requirements which will apply to inherited small- and medium-sized enterprise (SME) and non-SME customers. This poses a compliance risk because the Code defines an SME solely by reference to the number of employees – which must be fewer than 250 to qualify.
However, retailers often do not have access to this information, so cannot be certain whether a customer is genuinely an SME.
Retailer risks
Deemed contracts may also prove problematic in instances where the true occupier of premises, and therefore the actual counter-party to the deemed contract, is difficult to ascertain. Additionally, where there are multiple occupants or there is a shared supply between multiple premises, a supplier may have issues in enforcing the deemed contract and securing payment.
Other risks to retailers in the market may occur where a company becomes insolvent because, as an unsecured creditor, the retailer will receive little or no payment in respect of historic charges in this instance. Therefore, insolvency issues within the customer-base are likely to have a severe impact on the retailer’s bottom line.
Data protection is another area Newcombe highlighted as being problematic. “Navigating this area can be complex,” he said. “A contravention of the data protection regime can result in enforcement action by the information commissioner’s office.
“This could ultimately result in prosecution against the company and against its officers in certain circumstances. Data subjects are also able to bring civil proceedings.”
The law firm has offered advice to water retailers, to help them prepare for market opening. This includes the importance of understanding the risks inherent in deemed contracts, training staff to understand the fundamentals of contracts and different legal entities, and implementing robust due-diligence processes to avoid doing business with potential phoenix companies.