This column is the edited version of a speech made by Lois Vallely at a Wateref masterclass about 'creating the digital story of water sector wholesale/retail separation’. This was held at the Arup offices in London on 23 November.

Hello everyone, my name is Lois Vallely and I am the features editor of Water.Retail, and Utility Week.

I’m sure everyone here knows of the Utility Week brand, but you may not be so familiar with Water.Retail – as it only launched this year, to coincide with the opening of the market.

Water.Retail is our high-value business intelligence and market insights newsletter, aimed at people who have an interest in the open water market. People like you, here in this room, and hopefully some of you are among our first subscribers.

Certainly, writing for Water.Retail on a day-to day basis over the past few months has allowed me to really get under the skin of this market and uncover many of the issues which participants are concerned about. And I think it gives me the perfect platform from which to provide you with a market-wide view of the issues and trends I’ve witnessed and written about.

My presentation today will cover three primary areas.

  1. Why did the market open in the first place? What was the thinking of government and Ofwat when the idea of an open market was first mooted?

  2. Has it been a success so far?

  3. What needs to be improved, and how can we work together to achieve this?

 

First off, I thought I would set the scene and give a few headline facts about the English open water market as it stands.

The market opened on the 1 April this year, allowing 1.2 million business customers to choose the supplier of their water retail services. And this has paved the way for a new set of players – the retailers. There are currently 22 retailers in the market. These are either retail arms of incumbent wholesalers, independent companies which have joined the market from Scotland, or entirely new players.

Serving those retailers are 16 wholesalers in the English market and, of course, Scottish Water in Scotland. There are also estimated to be more than 1,000 brokers, which have either joined from the energy market, or have started up to specialise in water.

And finally, a number which is often bandied about: the market is expected to deliver benefits of around £200 million to the UK economy.

There are a few headline facts to get you warmed up. But what about the benefits which the market is supposed to bring?

Ofwat has said the reasons for introducing competition were to:

  • Drive down prices.
  • Improve water efficiency, which we’ll touch on later.
  • Encourage innovation.
  • And improve customer service – the market is supposed to drive companies to provide better customer service to help it gain and retain customers.

 

The thinking was also that opening the market for non-domestic customers would force companies to think about, and improve, their service to domestic customers.

It is also no secret that both the government and the regulator are very much pro-competitive-markets, and many believe the non-domestic market was opened to fit with the ideological view that such markets should be competitive. And that it was opened as a precursor to the introduction of domestic competition, which I touch on later in this presentation.

How much activity has the market seen so far?

Well, a chart from MOSL shows that just over 71,000 supply points switched in the first seven months. The number has increased at a steady trajectory, which is encouraging. However, views on whether the rate of switching has been high enough have varied.

Of course, the number of actual customers which have switched will be a lot lower – probably about half of that number. And retailers should not be focussing purely on the number of SPIDs they gain, as the amount of water the business consumes is far more important.

In November, Water.Retail conducted a snap survey of market participants – retailers, brokers, wholesalers, regulators and other parties – to get some initial views on how the market is working.

This was by no means a formal, in-depth piece of research, but it does give an idea of what views are held across the market. And as you can see, opinions are wide-ranging.

The slim majority believe it has gone either “badly” or “very badly” – mostly because of the numerous teething issues the market has faced, as we’ll discuss later.

Most are neutral on the matter of whether respondents believe 71,000 switches constitutes success, which suggests most people don’t consider switching to be the sole measure of success.

As part of our survey, we asked what participants considered to be the most important service retailers offer to customers, to which the vast majority said billing.

One respondent even suggested retailers’ service to customers is worse than that of wholesalers before the market opened.

We also asked people their area of greatest concern. To which the majority responded – billing errors.

It is worrying that such a vital service is causing the market so much strife. And it is clear that this is an area which should be focused on in the short-term, so that companies get the basics right before added-value services, and the benefits the market is supposed to bring, can be fully realised.

The issue of billing has also shown to be of concern to customers. The Consumer Council for Water’s latest complaints survey found that complaints from non-domestic customers have trebled since the same period in 2016. And of these complaints, billing and charges made up the majority.

These are some of the other concerns which were flagged up in Water.Retail’s survey.

Lack of standardisation in wholesale charges. This is an issue which has been around for some time. This lack of standardisation means that retailers operating nationally are forced to create hundreds of tariff combinations to match the variations across different wholesale regions.

As an example, Business Stream chief executive Jo Dow told me that, in order to on-board 6 national customers, the company had to create 2,000 different tariff combinations. This is both time-consuming, and costly for retailers, not to mention confusing for customers.

Jo wrote a column for Utility Week in November, calling for the rationalisation of wholesale tariffs and more standardisation around wholesaler policies in general, which, she said would simplify market processes and significantly improve the experience for customers.

The retail margin is a well-trailed issue which has been a concern since long before the market opened.

However, despite concerns from retailers that it is not sufficient for them to be able to make money and offer a reasonable discount to customers…
Ofwat maintains that a 2.5 per cent net margin for retail activity remains broadly appropriate.

Other concerns include:

  • Service to SME customers
  • Lack of innovation
  • Lack of focus on service
  • Wholesalers being slow to adapt their mindset
  • Lack of clear processes for retailers and wholesalers to interact

 

The final concern which I thought was interesting to highlight was that the market is being undermined and put down before it’s had a chance to really take off.

This brings me neatly onto my next point: even though there have clearly been numerous teething issues in the first eight months of the market, it’s not all doom and gloom, and there are reasons to be optimistic about this market.

For one thing, evidence from the Scottish market suggest things will pick up. This market had a much slower start than the English market has had.

One market participant who responded to our survey said that, while nearly 3-4 per cent of SPIDS have switched in England, only 2 per cent switched in the first five years of the Scottish market, where there has now been nearly 60 per cent market churn.

If the English market is to follow the same trajectory – and it has already made a quicker start – then switching rates are likely to snowball.

However, there are things that market players can do to speed up this snowball effect.

The Water.Retail survey asked participants what they consider to be the biggest success in the open market. The majority see customer awareness and customer engagement as big wins.

This view does match up with the latest figures from CCWater, which found that 4 in 10 small business customers know they can switch their water retailer. This is an increase on the 3 in 10 which were aware of the market in late 2016, and the 1 in 10 in early 2016 – and suggests that awareness is on the rise. If, slowly.

If awareness of being able to switch is up, but the rate of switching is still relatively low, what does this tell us?

It suggests that customers aren’t aware of the BENEFITS of the market, and it is up to all market participants to promote these.

CCWater research conducted in August found that most SMEs who are unlikely to take any action in the market, don’t feel the need to as they don’t use much water or are already satisfied with the price they pay. This suggests they can’t see the other ways that competition can benefit them.

If we look at what some of the big customers which have taken the plunge and switched say, it is not all about getting a quick discount on their bills.

For example, when House of Fraser, which has 11 sites, switched to Business Stream, it said it hoped the deal would help it to develop its sustainability strategy.

Sustainability is something which has risen much higher on the agendas of businesses – what with the Paris climate change agreement, and numerous other government commitments…

This is definitely an area where retailers should be focusing, as a true focus on water efficiency and sustainability is the sort of thing that could set them apart from their competitors.

David Lloyd is another high-profile switcher. It has 84 sites, and chose Water Plus as its retailer. Talking about its reasons for switching, David Lloyd said it would like to see efficiency, as well as cost, savings – and that consolidated billing was another major driver.

As highlighted by these two customers, the benefits extend far beyond shaving money off the annual bill. Once customers are aware of that, they are much more likely to switch.

I wanted to highlight a couple of the key benefits for customers. Firstly, water efficiency.

Once the market has the basics, such as billing, down to a tee… water efficiency will, in my opinion, be one of the key drivers for businesses to engage with this market.

On this, it is worth flagging up a few headline stats.

In the first five years of water deregulation in Scotland, Business Stream claims to have achieved more than £35 million in water efficiency savings for customers. Water Plus claims to have saved organisations more than £2.6 million since the market opened – through leak detection and repair. And Wave says it has saved customers £2.7 million since last year, £2.4 million of which came from efficiency savings.

One new entrant retailer whose entire offering is based on water efficiency is The Water Retail Company – headed up by Lord Redesdale and Jacob Tompkins.

When I met them earlier in the year, they told me the reason for them launching the company was because they were concerned about a lack of focus on water efficiency in the market.

We can see from the latest MOSL figures, the company’s strategy is paying off – as it is slowly but surely gaining SPIDs. Not bad going for a company of about four employees.

Another huge draw for customers is the convenience of consolidated billing, which has the potential to dramatically cut their administrative costs.

So, what does the future hold for competition?

As I mentioned earlier, one school of thought is that non-domestic competition was supposed to pave the way for the introduction of domestic competition.

We haven’t heard anything on this for a while, although government assures us it hasn’t forgotten… it is unsurprising that everything else currently going on in the political sphere has pushed the issue to the side-lines.

However, the government can’t stay silent on this forever, and it is certainly one to keep an eye on.

Concluding points

There are differing views on whether or not the market has been a success so far, but no one can dispute that there have been many teething issues – such as numerous billing errors – which need to be sorted out quickly.

Switching has been on a steady – if somewhat stunted – trajectory since the market opened. But this should start to pick up as the market gains momentum, as happened in the Scottish market, but there are things we can do to speed up the process.

Namely, raise awareness among customers of the benefits above discounts on their bill – which are likely to be miniscule in the short-term.
These benefits include water efficiency and consolidated billing.

I think there’s a real opportunity to make sure this market is one that sets a benchmark for future competitive markets.

But, no matter what happens in the future – and whether or not domestic competition is brought in – the market opened to benefit customers, and it is vital that it does.

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