The English water market is moving slowly towards reform in April 2017 but there is much that could be done now within the scope of the existing structure to improve choice for customers.
It’s a new year and already we’re at the next stage of reforming the English water market. The Water Bill had its third reading in the House of Commons on 6 January, taking us one step closer to market opening. All being well, that will happen in April 2017. The Open Water Programme published its blueprint on how the market will work on 2 January – there’s a real sense of momentum.
Customers, we’ve been assured, are at the centre of the plans for reform of the non-domestic water market – how that ultimately looks will be in the hands of policymakers, regulators and industry participants.
But let’s assume April 2017 brings a reformed market set up for the benefit of customers who have long suffered water services being done to rather than with them. That’s great news for businesses in England, but what happens in the meantime?
If a week is a long time in politics, three years is a lifetime in business. Can we maintain the momentum for three years? I suspect that anyone not directly involved with the water industry will start to lose interest after a while. We have in effect taken businesses to the altar but aren’t ready to say “I do”.
But there are things that could be done now to maintain and even increase customer engagement in reform while delivering early benefits to businesses without having to change any legislation. They could be implemented within the existing market structure as long as all parties work together and focus on the needs of the end customer.
To understand what can be achieved, we first need to consider what an effective competitive market looks like compared with where we are today.
First, there needs to be an attractive market that participants can freely enter and in which they can expand. Under the current five megalitre threshold, only 27,000 sites (out of an estimated one million) are eligible to switch, and there is no data on contestable sites. Even if a challenger company can identify a site, it must negotiate a wholesale price (called an access price) with the incumbent, which doesn’t tend to produce a commercially viable margin for the new retailer.
Second, market facilitation costs need to be low. Currently, customer switching is a laborious and expensive process, due to things such as the negotiation of customer contracts with incumbents.
Third, customers need to know what’s on offer and that offering must deliver value. Customers must be aware they have a choice. A key driver for reform is that existing provisions don’t create the conditions for these things to happen. With such a small and unappealing market, and eligible services limited to water only (ie, not sewage), retailers don’t compete and customers don’t have a choice.
Finally, market structures must provide a level playing field. As it stands, everything is weighted in favour of the incumbent, from the switching threshold and negotiated market access to poor visibility of customer data and the lengthy switching process.
As competition goes, it isn’t a great picture right now. So the ongoing parliamentary process is clearly welcome. The good news is there are plenty of steps within the scope of the current system that could be implemented now and in the lead-up to 2017 to move us towards a customer-centric market.
In December 2011, Ofwat reduced the switching threshold from 50 megalitres to five, increasing the size of the market tenfold – even if only to the 27,000 customers referenced above. We need to make switching as attractive as possible for these customers. They would be more likely to consider switching if waste water was an eligible service, reducing the added administrative burden to customers of splitting water and waste and increasing the opportunity for the new retailer to add value.
To overcome the problems of market visibility, creating and publishing a market data set with customer information would make it easier, cheaper and quicker for retailers to sharpen up their service offerings with a clearer view of their preferred customers.
Creating the conditions for a proper commercial margin will also provide greater incentive for retailers to get involved in the market – again, this could be done prior to 2017. It would require the cost principle to be abolished and a regulated pricing structure to be put in place. Similarly, it would be possible to establish a system of regulated access for new entrants, including a more streamlined switching process, which would inject much-needed verve into the market.
But what of customers themselves? Experience in Scotland tells me that a successful non-domestic water and waste water market cannot operate on the basis that if you build it they will come.
Although I’m sure it pains those of us working in the sector, water will never be at the top of the priority list for most businesses. However, that doesn’t mean the appetite for choice isn’t there, and time and again customer insight demonstrates there is a desire for change.
Whether change comes now, a year from now, or if nothing happens until 2017, making customers aware that choice is available will be a fundamental part of the success of a competitive market. That has taken time in Scotland, and it will take time in England. It will also require serious effort.
None of this should be interpreted as impatience. Creating a properly functioning market doesn’t happen overnight, and needs to be taken seriously if we’re to get it right. But in turn that shouldn’t unduly delay reform if there’s an opportunity to get things moving before 2017. We should give customers the time to get used to choice before the market opens completely.
As far as I can see – and most definitely from a customer perspective – there’s no reason to delay. We should do everything we can to accelerate the wheels of reform now so customers don’t have to wait any longer for the choice they want and deserve.
Mark Powles, chief executive, Business Stream