As this article went to press on 3 December, Business Stream chief executive Mark Powles was giving evidence to the committee scrutinising the Water Bill in the House of Commons. The committee was wise to invite him; as incumbent retailer in Scotland but new entrant in England, he can offer a unique insight into retail competition from both sides of the fence.
Speaking to me at Business Stream’s Edinburgh HQ last week, he is clearly excited by the Water Bill’s retail competition plan. For five-and-a-half years he has had to deal with the possibility of his Scottish customers switching supplier, without a real mirror opportunity to win customers in the English market. So he is understandably full-square behind the principle of the legislation that will enable all non-household customers south of the border to choose their supplier from 2017.
Needless to say, not everything in the garden is rosy, but Powles will be picking his battles carefully when he gives evidence. “If you ask for too many changes, you run the risk that the Bill gets delayed. That would be tragic because customers have been taken to the altar so many times ,” he says. “I don’t think they’d forgive us so much if we jilted them again. We need to get the Bill through.”
His priority battleground looks set to be ensuring there is a level playing field for new entrants in the English market. He clarifies: “Creating a level playing field is about making sure the incumbent doesn’t have an unfair advantage: can’t cross-subsidise, can’t find back doors, can’t do deals. It’s price, service and behaviour.” He argues that following the Scottish model more closely on level playing field issues would be a smart move.
First, there is the matter of separation. Defra favours retaining the current vertically integrated structure of the English water companies so as not to shake investor confidence. But Powles believes legal separation as in Scotland (where his company was fully split from its parent and wholesaler Scottish Water) is the cleanest, simplest way to ensure the retail arms of incumbents don’t get preferential treatment. He cautions: “If you don’t have at least functional separation, you’ve got to put a very robust and a quite Draconian compliance regime in place. You can’t just rely on competition courts. If there’s one thing we’ve learned from the Albion experience, it’s that they take a long time and a lot of cost, and that can’t be right.”
Alongside separation, Powles would also like to see licence conditions imposed on incumbent retailers to limit the advantage that stems from their ownership of 100 per cent of the market on day one. Business Stream is subject to six such conditions in Scotland, including a requirement to publish the tariffs it agrees with customers so other retailers can view them; to ensure charges are cost-reflective to prevent loss-leading deals that would price entrants out of the market; and to comply with financial ratios agreed with regulator Wics.
Also under the level playing field banner, Powles wants access to the English market to be regulated, not negotiated. That means something similar to the Scottish system, under which the regulator agrees a wholesale price with Scottish Water (negotiations for 2015-21 are currently underway) and that’s the price all retailers pay. And it comes with a set of minimum service standards they can expect from the wholesaler.
Powles notes: “There’s a lot of talk about bilateral agreements. Having done it now with a number of customers in England, it’s time-consuming, it’s costly and it’s slow. One million customers spread across 22 wholesalers doesn’t sound that confusing but it could be… if you’re trying to serve a multi-site retailer, say, with branches in all 22 regions, how do you get to a point where you can give them one electronic bill on a monthly basis that’s easy for them to understand? If we don’t address some of these issues, we’ll put more cost in for retailers, which will minimise the benefits to customers.”
Powles would like incumbents to be free to quit the retail market should they wish. He explains: “If you don’t create an exit clause, you end up with people that neither have the appetite nor the resources nor the skills to be good retailers but have been press-ganged into it –that’s got to lead to sub-standard customer service or the potential for gaming.”
Powles clearly holds the Scottish retail model in high regard. Is it flawless? “No market is perfect,” he says, but there is a rolling programme of improvement. “Probably up to 100 changes have been made to improve things and tweak things.” He continues: “From a structural point of view, I think the market is fair. I think it’s customer-focused. Customer protection sits at the heart. The wholesale price creates transparency in that everyone buys at the same price. The wholesale service agreements – there’s a template that everyone can get access to, that then you can negotiate and tweak with the wholesaler to suit yourselves. There’s a regulated retail price – the maximum we can charge. If you think what’s happened in other markets with price volatility, we’ve had none of that in water so the customer is protected. And the codes that provide the rules around it are quite simple to understand.”
The one structural aspect Powles takes issue with is developer services, which he feels would naturally sit better as a wholesale activity. “That was the one area I don’t believe was designed with the customer in mind. It’s quite a clunky, bureaucratic process that we’re working quite hard to fix.” He adds: “Personally, I didn’t think developer services should have been included in the definition of retail for England, but it has.”
I ask Powles how the first five years as a retailer in Scotland have been. The early days, he says, were “a little bit of a phoney war, in that the competitors didn’t come in. But at that stage the English water industry was trying to convince everybody competition was bad. It would have looked a little bit strange if they went and got a licence in Scotland.”
New entry started in earnest when the Water White Paper was published, but it’s really only been in the past year, since the draft Water Bill was published, that the market has really come alive. Powles admits: “We’ve lost more customers in the last 12 months than we’ve lost before, and that’s a reflection of the fact there are now 13 competitors in the market and probably more to come.”
Somewhere between 5 and 10 per cent of eligible customers have left Business Stream. Powles takes it on the chin: “You can’t be an advocate of competition and then bitch when you lose a customer. You’ve got to take the rough with the smooth. I’ve done 30 years in competitive retail markets and that’s what drives you to do better.”
He says there is a healthy variety of offerings from the 13 licensed providers and that businesses are engaged by the possibilities competition presents. Seventy per cent of the market is off the maximum retail price now, says Powles, because “they’ve chosen to engage in a different way, whether that’s taking a discount for direct debit, going onto ebilling, or a different type of service”.
As for Business Stream itself, Powles reminds me that when we first met (around the time of Scottish market opening), I asked him whether all he would be doing is managing decline. He delights in refuting my early assumption. Sure, the company has lost some customers, but it has swollen from a team of 130 to over 300; it has made some headway in the English market despite the current less-than-conducive conditions (working, for example, for Bernard Matthews and Marks and Spencer); and when work is put to tender, it wins as many accounts as it loses on the back of the customer insight it has developed over the past half-decade and the suite of value-added services it has honed.
Particular success stories, says Powles, include a strong self-serve digital platform called My Business Stream, which over half of its customers have taken up, and a redesigned, easy-to-understand bill. Beyond that, some of the company’s added services reach beyond retail. Powles explains: “On water, we can do everything from auditing through to greywater recycling, to rainwater harvesting to boreholes. In waste treatment, we can design, build, operate and maintain a range of plants. We’ve now got a fleet of temporary treatment plants that do different things.”
All this has been done with an eye to expanding beyond Scotland – an opportunity that the Water Bill puts within reach. Says Powles: “We’ve been building our capabilities for five-and-a-half years – systems, processes, innovations. Yes, we’re focused on retention in Scotland because that’s what pays the bills and creates the investment, but we’ve been doing it with one eye on what we can do in other markets, whether that’s in England or elsewhere.”
He describes the incoming English market as “a game changer”. “I didn’t come into this business to manage decline. We’ve built a strong set of insights into what customers want, what locks in loyalty, whether they’re price-led or services-led, and we’re working hard to identify those customers in England, because the characteristics are the same. We’ve got people based in England now – starting small but we’ll win business and build it as we go along.”
Powles clearly has a full strategy mapped out, but understandably won’t tell me the details. But I think we can expect to see Business Stream in the English market targeting specific types of customer – those it can serve best and get the best return from – while retaining its universal service identity in Scotland.