Wow, what a week.
I arrived in the office on Monday morning, fresh from a week-long holiday, to the news that newly appointed prime minister Theresa May had mercilessly axed the Department of Energy and Climate Change and completely reorganised the cabinet. What’s more, Ofwat chose that morning to release its eagerly-awaited emerging findings of a cost-benefit review into the residential water market, and the day took a turn for the bizarre as Thames Water – the UK’s largest water and wastewater company – announced its intention to exit the non-household market.
What did Decc do to deserve its demise?
It wasn’t exactly a surprise, and I suppose ‘demise’ isn’t the right word – the spirit of the department remains, lurking alongside the Department for Business, Innovation and Skills within the newly-formed ‘BEIS’ (Department for Business, Energy and Industrial Strategy) – which we have yet to work out how to pronounce.
To what extent will the decision affect the UK’s energy and climate change policy?
Energy and Climate Change Select Committee member James Heappey says he isn’t worried about its effect on climate policy. But, he said it “bothers” him that the “huge area of energy policy” will be handled as “just one string of a multi-focussed department”. Director of the UK Energy Research Centre Jim Watson, on the other hand, says the Decc-BIS merger is a “very, very good thing”.
In equally big news for anyone interested in the competitive water market, Ofwat’s initial findings suggest savings from competition will fall far short of customer expectations, prompting the question – is domestic competition really worth pursuing?
Ofwat chief executive Cathryn Ross insists it is. After all, there are other benefits of a competitive market, besides mammoth savings on bills. Such as… innovation and efficiency.
Ross says the opening of the residential water market would change the way the sector is regulated, and may even trigger an end to the setting of “ex-ante” price controls.
A distraction?
Concerns have been brewing that the Treasury’s domestic competition announcement may distract the sector from the slightly more pressing matter of introducing competition into the non-household market. These qualms have been quashed by Ross, who tells me ardently that “nothing” will distract companies from preparing for non-household market opening.
“The work in the non-household part of the market is proceeding apace, it’s going really well,” she says.
That is, until Thames Water unnerved the sector with the news of its shock departure. The company’s decision is baffling, not least because it is the UK’s largest water company, boasting a business customer base of around 250,000. It had also already applied to Ofwat for a water and sewerage supply licence.
The swift exit has left in its wake an effusion of unanswered questions (analysis to follow). Aside from the obvious “what was it thinking?” There is a question mark over what this means for competition. Three incumbent water companies have now left, and all of their customers have been taken by existing Scottish suppliers.
Make or break
Thames is a regulated business which is good at being a regulated business, and perhaps the fact that its two retail bosses left suddenly, and at the same time, should’ve been a clue that it would not be participating in a competitive market.
The company says the decision was made to allow it to “focus on its household customers” – a corporate line, or a clue that it is laying the foundations to compete in the domestic market, if (when) it opens?
Has Castle Water – the buyer of the London customers – bitten off more than it can chew? Hailing from sunny Blairgowrie, the hitherto small Scottish supplier has effectively nonupled in size overnight, and many of the customers it will have taken from Thames will be the smallest of the small, the ones that are of a significantly higher cost-to-serve.
It’s a bold move, that’s for sure, and one that will either make the company or break it.
I spoke to Castle Water’s business development director Richard Moore, who told me the company is very excited by the acquisition, but is unlikely to take on any more customers in the near future – probably wise.