The Treasury’s announcement in November that domestic water competition could be a reality in 2020 has suddenly thrown in another significant factor to consider, both for those already involved in the market and outsiders looking in.
While domestic competition has always been the natural progression in the long term, most organisations saw it as being too far out to significantly impact their short to medium term decision making, putting it in the “wait and see” category. With domestic market opening potentially just over four years away, that ceases to be a defendable position for most, especially when you consider that non-household planning and implementation has been ongoing for significantly longer than that.
The first area of consideration is how can the market be effectively operated? This actually is one of the simpler challenges. In most cases, domestic properties are just like simple non-household properties, with many of the complications such as trade effluent and bulk meters (usually caused by landlord-tenant relationships) removed, although social water tariffs are a uniquely domestic complication. As a result, the systems currently being implemented by Market Operator Services Ltd (MOSL) should be able to be enhanced to provide a single market for domestic and non-household properties.
It also has, if implemented and managed correctly, the potential to help improve data quality by allowing a full match of all properties to an external database reference such as the Unique Property Reference Number (UPRN). This will help to ensure that all properties are billed and remove most of the issues of market eligibility caused by properties either switching from domestic to non-household or being ambiguous in nature (such as care homes and student halls accommodation).
The real impact for planning, however, surrounds two intertwined points: The target operating model for water companies; and the competitive strategy for existing water companies and new entrants, including merger and acquisition strategy.
In terms of target operating model, Ofwat gave water companies three options:
1. remain fully legally integrated;
2. functional separation or outsourcing within the current appointment;
3. transfer non-household customers to an associated licensed retailer through the exit mechanism.
While not all water companies have declared their final model, most appear to be favouring option two, where a separate legal entity is created that manages its non-household retail activity, leaving its domestic “retail” activity fully integrated with the operations of the “wholesale” side of the business. This produces significant challenges, particularly in terms of billing systems, where the billing system needs to be split into domestic and non-household, with the non-household system being integrated with the new market. With domestic market opening coming sooner than expected, the ability to transition domestic customers to this new entity (or a separate one) needs to be considered when designing the solution. It will also impact those who may be opting for option one who did not believe there was sufficient scale to justify separating out.
By far the biggest consideration, but also the one which water companies have the least control over, is the predicted behaviour of the “sleeping giants” also known as the big six energy companies, as well as their small but growing group of competitors. It is now widely predicted, including most recently by PwC’s Richard Laikin – who said if domestic competition is introduced, the “era of converging utility retail may be a step closer” – that their interest in water will be significantly increased by the domestic opportunity. If this happens, the competitive strategy for water companies’ retailers will be significantly impacted as it is extremely unlikely that it will be a water retailer vs water retailer competition. It will become a water retailer proposition vs multi-utility retailer proposition, with all the potential efficiencies in both sales and operations that such a proposition brings.
It also means that water retailers will have a larger opportunity to sell their whole businesses to multi-utility providers who are likely to want both to generate initial market share and gain important market insight through acquisition. Planning for this eventuality may have significant impact on the competitive strategy, customer proposition and target operating model as any companies considering this option are likely to want to structure their business to allow for this to occur easily.
Overall, bringing domestic customers into the market will undoubtedly increase the size of the prize and hence the competition to win it, which in turn will force everyone involved to up their game if they want to survive. In the long run, that will achieve what the government and Ofwat want, which is to improve service and reduce prices for all customers – be they domestic or non-household. Competition itself wins again.
Charles Vincent, managing director, Ascendancy Water