There’s a steely determination about John Reynolds; once his mind was made up to enter the English water retail market, there was no stopping him.
As a member of the Water Industry Commission for Scotland (Wics) prior to the announcement by the Department for Environment, Food and Rural Affairs (Defra) to deregulate the English retail market, he realised the focus in Scotland was “very much” on the price controls being developed at the time rather than the market itself.
“I was concerned that the market wasn’t working efficiently,” he tells Utility Week when we meet at one of Castle Water’s offices north of the border in Blairgowrie.
“There were large groups of customers who were missed out of the market that didn’t see the benefits. There were also some of the bad practices that had been seen in the early days of electricity and gas – particularly around effectively doorstep selling to small businesses,” he says.
Reynolds explains these issues were becoming “prevalent” and when Defra announced plans for the water market in England it prompted him to have a “not wholly serious” discussion with Wics chief executive Alan Sutherland about competing in the market.
The two mulled over whether the best way to make sure the English market worked was to be “involved in regulation” or to compete. “I ultimately decided that the much more interesting thing to do rather than take an involvement in regulating the English market was to compete in it,” Reynolds recalls.
And so Castle Water was founded in 2014 as the decision was made “very quickly” following the Water Bill being signed into law.
“There were only three years until market opening. In terms of establishing business systems, marketing expertise, sales expertise and transactioning processing expertise from scratch, that wasn’t very long – particularly given we knew we had to be ready for the market a year beforehand.
“I went from playing around with the idea to submitting a licence application probably in about the space of a week. If I was going to do it, I had to do it thoroughly and fast.”
And he meant business from the off. “We said early on that our target was to have over 10 per cent of the market in England in the first year. People who knew me took that seriously.”
The company entered the market with about a 20 per cent share on day one.
It wasn’t long before other people started to take him seriously too, as Castle Water acquired the business customers of Portsmouth Water when the latter became the first English incumbent to announce it would exit the market. In 2017, Castle Water also took over the business customers of Thames Water.
The company has since gone a step further by acquiring fellow non-domestic water retailer Cobalt Water and then more recently Invicta Water for an undisclosed sum.
Invicta traded as Water Choice in the market and the deal saw 50,000 business customers in South East Water’s service area transfer to Castle Water.
Rapid acquisitive growth seems to have had a positive impact on the company’s finances. Accounts published in January this year show it made a profit of £1.05 million up to March 2017 – a dramatic step up from the £730,000 loss it made the previous year.
Reynolds won’t be drawn on whether the company currently has its eye on any other retailers, though. “We will continue to evaluate things in the market,” he says.
The company describes itself as the leading independent water retailer in the UK and supplies hundreds of thousands of businesses, charities and public bodies throughout England and Scotland.
In November last year, Castle Water secured a national public sector contract in England through the Crown Commercial Service (CCS) framework, worth an estimated £28.9 million. It is continuing its growth trajectory and in the past couple of weeks announced it had won a second multi-million pound public sector contract through the CCS framework.
Reynolds says he set up Castle Water to be “a bit different”. He wanted to provide an alternative to the choice customers had of either “rather stodgy subsidiaries of the old vertically integrated companies” or those with very different looking sales propositions which customers could respond to but that came from companies “without much financial substance”.
“Generally, customers of a utility want to know that the service they are getting is backed by something substantive,” he says.
His career background puts him in good stead to appreciate the importance of financial backing, with senior positions in investment banking covering equity research, mergers and acquisitions and principal investment.
“Castle Water was set up to have the type of scale associated with the larger players in the market – so the subsidiaries of the likes of Severn Trent and Thames – and at the same time have the cost base, mindset and independence. And when I say mindset what I mean is developing a sales proposition and a platform in terms of service that customers actually wanted rather than opted for by default,” he says.
Reynolds takes pride in leading the way by doing things “first”. “People started to take us seriously when we announced the Portsmouth acquisition. Although it was small it was the first acquisition of customers. One thing about Castle Water is a lot of the things we have done, we have done first. We did the first Affinity Partnership, we had the first transfer of English customers. I’m pretty sure we have had the first customer referral scheme as well.
“We do things first and we like to keep coming up with new ways to both grow what we do and also help customers at the same time. Because the proposition for us is about customers. We’re very much very customer-orientated and a customer-facing business.”
Castle Water also aims to design everything to be fair, transparent and comprehensible to customers, which Reynolds describes as quite a “different approach from other retailers”.
But he’s not afraid of other retailers copying. “We expect people to copy what we do and to innovate and that’s healthy. If we are getting something right, people will want to follow. In the end it is a competitive market and if we have a proposition out there to customers our competitors will see it pretty much straight away.”
He points out things he doesn’t think are always fair in the market such as water charges not being explained properly to customers, the blocking of switches and the issue around back-billing, which he describes as an “ugly” change to the market.
“The old vertically integrated players come from a background where water charges are a statutory obligation and effectively the view is if they say something is correct it’s correct.
“We take the view that that is not good enough and we need to be fair to customers. At the same time a lot of independents have terms and conditions that look more like something from the broadband reselling background and have got more catches in associated with other charges and perhaps trying to keep a percentage of savings if there is a reduction in bills. We don’t ask for that.”
He says Castle Water has reduced wholesale costs for its customers by about £15 million to date and it doesn’t ask customers to give the firm a percentage of that saving.
But it’s not always been plain sailing for Castle Water as earlier this year it was warned by the Consumer Council for Water (CCWater) to address “unacceptable levels” of customer complaints.
The water watchdog said it had been “increasing the pressure” on Castle Water after several months of high complaint levels from businesses and other non-household customers.
Castle Water accounted for around 44 per cent of the 1,630 complaints CCWater received about retailers operating in the open market between 1 September 2017 and the end of February 2018. Complaints about it were more than double the industry average, when considering the total number of supply points, the watchdog revealed.
Reynolds admits: “We had a problem a year ago. In September 2017 we had started invoicing the waste-only customers that we had transferred from Thames. And it was that particular group of customers where there was a particular data problem.
“The thing originates from the fact the market codes are very badly written for separate water and waste, particularly when there are data issues that need to be corrected.
“We hit a series of significant issues of incorrect CMOS data, which is not retailer data, so it’s not data that we set that needed resolving that customers were unhappy about from a critical mass of customers.”
By “critical mass”, he explains he is talking about 1 per cent of the company’s customer base.
“The complaints we have now are down by two-thirds from that level” and the problem has now been solved, he says.
“It was reputationally damaging, at the same time what would we have done differently?” he questions, immediately answering: “There isn’t much we could have done differently on that because it was to do with data transfer that was outside of our control.”
But he says with hindsight he wished the company had “understood how badly the codes were designed for separate water and waste earlier on. It’s a failing by the industry generally that there are areas of the codes that are very badly designed and that is one of them”.
In September last year, 100 per cent of Castle Water’s Trustpilot reviews were one star, and now the company is running at about 90 per cent five star, Reynolds says.
“We’ve got more five-star reviews on Trustpilot than all other retailers added together. That’s telling me what individual customers en masse think of our service.”
A standout moment in the sector is the fact that the English market opened on time, he suggests. “I can’t think of another utility market that opened on time. I think that is very impressive actually and the collective work and co-ordination between Ofwat, Defra and MOSL and the project management at that level was very strong.”
Luckily, he didn’t place a bet on it. “Market opening happening on time was probably the single biggest surprise in the market and I think that was a huge achievement by all the parties involved and is probably the one thing I would have bet against happening,” he admits.
And he says market operator MOSL has performed “surprisingly” well too. “There have been no major problems in terms of the operation of the market. There has been no major dissent from members with the operation and CMOS has been a very stable platform.”
But it is by no means perfect, he tells Utility Week.
“There are things that need to be tidied up in the market. I think the approach to the quality of how customers are dealt with against the risk of abuses from things like commission-only agents is where problems have been seen in energy markets and in the Scottish water market. I think there is more that can be done to protect customers in terms of nuts and bolts.
“It’s difficult to read too much into the first 18 months of the market and the issue isn’t so much the bedding down period but what happens in the next stage,” he says.
Reynolds says the first major hurdle the market needs to overcome is having a customer-facing presence online that customers want to engage with and compares well with what they see in other sectors.
“Because water tariffs are generally unique and uniquely complicated it is hard to produce as much in terms of price comparison, for example, as customers would like. And tariff simplification is something regulators could help with significantly. Ofwat should have a focus on this,” he insists.
He is also certain we will see more players enter the market: “I see significant scope for more niche retailers to enter, which will really change the nature of what’s being offered.” But currently customers “really struggle” to tell the difference between one retailer and another and that’s a problem,” he concedes. “I think it’s a test for the retailer, it’s not good enough for a retailer to simply be good at what they do – nuts and bolts. They have to be good at telling customers what it is otherwise they are letting customers down.”
Perhaps the next retailer to shake up the industry will also enter the market after a semi-joking conversation.
For now, having grown his team from two to 350 in just four years, Reynolds is king of the castle.