This year, Castle Water unleashed itself on the English water market. In January, it revealed a deal with Portsmouth Water to take on its business customer base as that firm became the first to exit the competitive field for non-domestic water supply. In July, it grabbed headlines again with its acquisition of Thames Water’s non-household accounts.
That deal shocked the market. It saw Castle grow tenfold in an instant – from 30,000 to around 330,000 customers. It is now the second-largest retailer in the English market, after incumbent joint venture Water Plus.
At the head of this disruptive new player in the English market is John Reynolds, an ambitious and somewhat austere former banker.
Utility Week meets Reynolds at Castle Water’s stronghold – literally, for Castle Water actually has a castle to call home – and asks how the company is coping with its sudden growth. He pauses briefly to consider his answer. “It is a high level of growth from where Castle Water is now, but it’s not very big compared with the activities any of our management team have run before.” He points out that a quarter of a million customers is considered a small number in utility and financial services terms. “Our operations team, our finance team, our account management team all come from larger backgrounds, so we don’t see this as a massive challenge.”
The reason for the acquisition was simple: expansion in bulk. “With the economics in England, we don’t think the strategy for incremental growth is always going to be attractive. The way the market was developed has been very institutional, so the influence on the development of the market in England came from large organisations.”
In this seemingly incumbent-friendly landscape, Reynolds saw an urgent need to adopt a core customer base south of the border, and then to achieve scale. Its two acquisitions have answered the challenge perfectly.
“Portsmouth Water was a fantastic opportunity for us because it was a similar size to our customer base in Scotland, and relatively easy to manage as a first transaction,” says Reynolds. “We saw Thames Water’s as the most attractive customer base in England.”
Further acquisitions could be on the cards, but certainly not until after the market has opened. For now, the firm is entirely focused on making the shadow market work and then entering the national market in England. “In particular, we’re looking very closely at contract customer opportunities that relate to the whole market across England and Scotland,” says Reynolds.
Castle Water’s strategy across both competitive markets will unfold from its spectacular HQ. Perched on a hill just north of the village of Blairgowrie in rural Perthshire sits Craighall Castle – the imposing residence of Reynolds and, in the grounds, Castle Water.
Reynolds bought the castle, and the surrounding 180 acres of land, from the Baron of Rattray in 2010 after making his fortune in the City.
When Castle Water received its Scottish water supply and sewerage licence in 2014, he based the company at his home because he doesn’t like commuting.
“When we started it up, it was easy enough to start here. When we got a bit bigger we thought about whether to move to Perth, Dundee or further afield, but we decided we wanted to have a very specific identity of our own.”
But Castle Water’s imposing location gives the firm more than a quirky back story and something to hook its culture on, Reynolds adds. “What we aim to do is have a lower cost base, and it’s a relatively low-cost area to operate in, so we can always compete on price.”
This thriftiness has remained central as Castle has expanded. When it took on Portsmouth’s business customer base, it established a small, low-cost office locally, and is currently in the process of doing the same in London to serve those that have transferred from Thames.
Central customer services will all, however, continue to be based in Perthshire, which Reynolds says is a good environment to run these kind of operations from. “I don’t think it’s any accident that within the same area we have SSE and Aviva. There is quite a chunk of customer service activity that goes on in this area, on a large scale, for utilities and financial services.”
The company’s goal is to be open and deliver high-quality service transparently to customers. Reynolds says it does this by always disclosing its terms and conditions, and unit prices, and by not blocking switching. “The things that are problems in utility markets, we see as red flags. We want to behave in the way that customers want us to behave, and our staff are frequently reminded of this.”
Castle is actively promoting the market to customers, which is something Reynolds insists that all retailers should be doing. However, when Utility Week asks whether he believes they are, he retorts: “I’m not worrying about what other people are doing, I’m worrying about what I’m doing.”
For now, he points out, retailers are focused on the “nuts and bolts”, such as shadow market mechanisms and systems updates. “I suspect that that will flip over when we get to December and January. With three months of shadow market under their belts, companies will probably then have the confidence to go out into the market to sell.”
Additionally, until the PR16 tariffs are finalised, it is difficult for a company to pin down a unit price that it can offer the customer, which makes selling and entering contracts more challenging. “By doing so, you’re taking a risk. In a relatively low-margin environment, it is difficult to take even a small risk on tariff structures.”
Reynolds says that customers are already active. “We’re starting to get large numbers of specific enquiries and tenders coming through, which suggests a much higher level of awareness than is sometimes credited to the market. There are some quite sophisticated buyers out there, who are looking at some very different ways of approaching contracts and prices.
“The assumption up until now has been that the industry will lead in terms of marketing, rather than customers leading in terms of procurement.”
However, the tables are turning, and Reynolds says that some of the new procurement practices which are coming through are going to change the industry.
Despite rumbling concerns about delays to the Open Water programme, Reynolds is confident that the non-household market will open on time. “We have a shadow market, it’s working, and we have time to refine any systems – both centrally and individually.”
What’s more, all companies in the sector have made a high level of investment to hit the go-live date. “If the shadow market can open on time, I don’t see a systems reason why the main market can’t.”
Reynolds’ expectations for day one are tentatively optimistic. While he doesn’t believe 50 per cent of the market is going to switch in year one, he does believe there will be more switching in the first year than was the case in the Scottish market.
The primary issue that companies are likely to face is that customers may not switch if the price benefits are only modest. Reynolds argues that benefits come from more than just price. “Some of the benefits come from things like consolidation of bills. Customers may want to switch for service reasons and will do so. It may not be because of dissatisfaction but because they want to consolidate their administration in one place. Switching to just one retailer doesn’t necessarily mean dissatisfaction with others.”
The opening of the water market is not the first major deregulation process Reynolds has been involved in. He has a long-standing interest in deregulated markets and during his time in London as an investment banker he worked on the opening of electricity market, advising the 12 electricity companies on the development of the market. “It is amazing how many people who were around that process are now around the water process.”
Reynolds can see benefits from extending competition to households as the government has proposed, in England at least. “At the same time, I can see reason for questioning it, based on whether there was sufficient and valuable margin in the market. I don’t know the answer.” In Scotland, on the other hand, he believes household competition would be contentious because of the way water is charged alongside council tax. Unpicking that would be problematic, and he doesn’t see it as something which would be an obvious policy in Scotland.
In the run-up to the market opening, the industry has seen a large volume of deals, exits and rebrands. With a wry smile, Reynolds says: “A lot of companies think that if you change your name, you suddenly become a different company.”
However, there are those companies which are doing things differently, such as existing energy suppliers looking to enter the water market. For example, Regent Gas is a commercial gas supplier which has applied for a water supply and sewerage licence for its water subsidiary. This is potentially a new twist to the water market, says Reynolds. “When you talk about multi-products, it’s a pretty obvious place for them to come from.”
If the household market were to open to competition, gas and electricity suppliers may feel that they need to be in that water market so as not to risk losing market share to companies which offer multi-service solutions. Reynolds, therefore, believes energy-water link-ups are inevitable and are a sensible approach. However, he argues: “The problem comes not in the link-up and the sale, but in getting the benefit of single billing, which I think is a little way away.”
Castle Water’s most obvious rival in the English market is its Scottish counterpart Business Stream, which bought the business customers of Southern Water in June. Reynolds says the proximity of the two companies will mean they will keep each other under pressure, which will be good for the market and therefore for customers. “Business Stream does a good job, we aim to do a good job, and we all benefit from customers trusting the market.
“I am fascinated that we are both on the overlapping patch and neighbouring patch with Business Stream. That is a healthy situation to be in – two companies who are used to competing in a competitive market, who are committed to a competitive market, both being active and keeping each other under pressure.”
The competitive dynamic between these Scottish market peers as they seek to make their mark south of the border is likely to be a highlight of the newly opened market. Reynolds plays down the rivalry, however, saying both companies share a mutual interest in seeing well-functioning competition. “We all want customers to be able to trust the market and the behaviour of other retailers. We should all want customers to be able to trust that the switching process will go smoothly because that will encourage them to have confidence in the market.”
Going further to close ranks with Business Stream, Reynolds says he is glad to see it “putting its money where its mouth is and investing in competition”. Perhaps unlike incumbent players, he observes, “it is good to see people who are taking competition seriously”.