Domestic water retail

Chief executive’s view: Cathryn Ross, Ofwat

Ofwat’s initial thoughts are that water competition could deliver real benefits to consumers.

The government is interested in introducing choice to the residential retail water market in England and asked Ofwat to “provide an assessment by summer 2016 of the costs and benefits” of doing so. Having spent a number of months analysing this, what do the prospects look like?

Our initial view is that benefits are on offer in five broad areas. The first thing people want to know is the financial impact. Our research suggests competition could generate £2.3 billion of benefits – just over £6 per customer, per year.

Second, it could make customers’ lives easier. Multi-service bundles could be introduced, meaning you could buy energy and water, or broadband and water, from one provider. There is a greater role for technology to play too. At the moment, only a couple of water companies have an app to help you manage your account, which doesn’t suggest a sector at the cutting edge.

Third, a competitive market should see companies understanding their customers better, which could be powerful in helping to identify customers who are struggling and doing so earlier. This would help them and help to tackle bad debts, too. Competition could also drive down customer switching costs, and improve customer service.

Fourth, we see benefits for resilience and the environment. I think a competitive market could deliver real improvements in water efficiency with retailers helping conserve water and so cutting everyone’s costs. I also think there is potential on the wastewater side for retailers to work with customers to help reduce their surface water run-off. We haven’t yet quantified these benefits – but this is an important area given the impact of climate change on our rainfall.

Fifth, and importantly, customers tell us they want this, with more than half saying choice is a good thing. And even though, unsurprisingly, they want to save a lot – and, frankly, more than is realistically available – half are interested in switching and a little under half say they would switch for new offers and services, even if there was no price saving. They also want the ability to vote with their feet if their service provider falls short.

Last month, we hosted a workshop at which customer representatives and CCG chairs, company cheif executives, investors, and potential entrants gave us some really valuable feedback and new ideas.

I think there was broad agreement that potential benefits are on offer. The question is how big are the benefits and how do you secure them? In particular, how do you ensure customers are empowered, engaged, and, where appropriate, protected?

Of course, the benefits are not guaranteed. If competition isn’t effective, costs could outweigh benefits and customers could be worse off.

One thing people have stressed is the need to learn from the opening of the non-household market to retail competition in April 2017. As it will open the world’s largest competitive retail water market, they are right. Delivering that is no mean feat and it is progressing well; companies are engaging and customers are becoming more aware of the opportunities it will open for them. We also need to learn from the experience of other sectors, especially about the role of regulation in overseeing competitive markets.

This is an exciting time for the sector. In one way or another, change seems to the constant. As we work through these issues, the one thing you will hear us say to companies, investors, the government – and to ourselves – is that customers’ interests must be at the heart of what we all do. That is the way in which, collectively, we can secure their trust and confidence.

Customers

Chief executive’s view: Cathryn Ross, Ofwat

The need for change was clear 25 years ago, when the water sector was privatised. A panel debate to mark the anniversary will look back at successes and challenges, and forward to future strategy.

Next week, some familiar figures from across the water industry will take part in a panel debate to mark the 25th anniversary of the privatisation of the sector. The debate promises to be a lively one, with participants looking back at the successes – and the challenges – of the past two-and-a-half decades, and looking forward to the future.
Twenty-five years ago, the need for change was clear. It was a time when increased environmental demands were being made on the water industry – from a public pushing for higher standards and from European legislation. A lack of investment was taking its toll on service levels, pollution incidents and river quality. In response, the government first published its proposals in a discussion paper on water privatisation in 1986 and three years later the Water Act of 1989 provided the mechanism for the privatisation of the industry.
The benefits of investment in the water sector over the past 25 years have been well documented, but the forthcoming debate is unlikely to be a complacent one. While that debate will take place on a public platform, in recent weeks Ofwat has been having similar discussions with water and wastewater companies, with investors and the different environmental and customer groups who have an interest in the water industry today and in the years ahead. Those conversations, which are helping to shape our new corporate strategy, have thrown up a clear consensus: we are not looking to turn a corner from the past, but to build on it.
Some clear themes stand out and will be at the centre of our future strategy. Most important is maintaining public confidence in the provision of an essential public service. Society cannot function without water and water companies recognise the enormous responsibility they have to safeguard services for now and the future. From engineers to chief executives to the staff answering the phones to customers, companies have spoken of an ethos of providing a public service and serving local communities. This sense of common purpose is at the core of our thinking about the future of the water sector.
The service is an essential one, but customer expectations about the service they receive are also setting the future agenda. Customers want a safe, secure, reliable service and, if things go wrong, they should be put right quickly, with the customer kept informed. For customers, familiar high street brands are a benchmark for how their water company performs. Companies are utilising the potential for technology to respond to these expectations, from avatars on websites to automated text messages warning people of outages in their local areas. On a recent visit to a water company, I stood in the control room, watching the flickering screens which detailed the incoming calls from customers. Despite an incident affecting several thousand households, the number of calls coming in was a single digit. As the call centre manager explained, the company’s proactive contact with its customers – by phone, text message and social media – had kept customers informed and reassured.
The company business plans submitted to Ofwat as part of our ongoing price review highlight this change of approach. Here, we have seen evidence of a real change of focus, with companies going to great lengths to engage with their customers and to develop plans that reflect their priorities. I have no doubt that the plans are significantly more customer-focused than in previous price controls. The success of customer engagement through the price review sets a new standard for the sector going forward and a platform on which our future strategy will build.
Customers expect companies that provide an essential public service to operate to high standards of governance and leadership. This is important for us as a regulator too, because those high standards help to give us assurance about company decision-making that is important if we are to allow companies greater flexibility. It has been great to see companies signing up to new board, leadership and transparency principles which allow the water sector in England and Wales to show that it recognises and fully meets the responsibilities that come from providing an essential public service. I’m pleased that we can use a self-regulatory approach, where companies’ boards take the lead in setting out how they meet or exceed our principles. Principles of transparency, having an effective board with independent representation and structures that are explained in a way that is clear and simple to understand will all help to ensure that the priorities described here are embedded in the way companies operate over the next decade and beyond.
Our role is to regulate in a way that can allow companies to focus on more innovative and sustainable ways of delivering for customers, while ensuring financeability. We are looking closely at our potential for incentivising and facilitating dialogue, not just with customers, but across and between companies and their supply chain. We are looking at ourselves too, to ensure that we are as efficient and effective as we can be, to build on the current price review and respond to a climate in which we all need to do more with less.
These ambitions are shared by others. Last week, the chief executives of the UK’s nine economic regulators launched the UK Regulators’ Network, tasked with improving co-ordination across regulated sectors to enhance investment and efficiency for the benefit of consumers. It will allow regulators to work more closely together and to learn lessons across industries which help to improve regulation and ensure that markets work well for consumers.
A 25-year anniversary is a good opportunity to look both back, and forward. We’re keen to carry on the debate and conversations in the months ahead and I’m delighted that so many people from across the sector are joining us to set the agenda for the future.
See www.sustainabilitylive.com for details of the debate and to book your place

Cathryn Ross, chief executie, Ofwat

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