Introduction to the open water market

After years of planning and preparation, the English water market opened to competition for the first time on 1 April 2017. This means that non-domestic customers, comprising 1.2 million businesses – from the very largest multi-nationals to the very smallest SMEs – are now able to choose their water retailer according to their own needs and preferences.

In preparation, the UK water market underwent transformational change, with all water companies splitting out their wholesale and non-domestic retail businesses, and some – Portsmouth Water, Thames Water and Southern Water so far – exiting the market altogether.

The change is widely deemed the biggest in the water market since privatisation, and it has created the largest open water market of its kind in the world.

The reasons Ofwat gave for opening the market in the first place were to drive down prices for customers, as well as to improve water efficiency, encourage innovation and enhance customer service. There was also a logic that opening the market for non-domestic customers would force companies to think about, and improve, their service to domestic customers.

The advent competition paved the way for a new set of players – the retailers, of which there are currently 25 active in the market. These are either entirely new players, retail arms of incumbent wholesalers, or independent companies which have joined the market from Scotland – which was the first water market in the world to introduce competition in 2008. The retailers are essentially the customers of the 16 water wholesalers in the English market and Scottish Water in Scotland.

On 1 April 2018, the competitive water retail market turned one year old. In the time since it opened, some things have worked well and others not so well.

The market has so far experienced 112,155 supply point switches, representing about 4.5 per cent of a potential 2.6 million supply points estimated to be in the market. The switching level has divided opinion in terms of whether it constitutes success, especially since the number of actual customers which have switched is significantly lower than the supply point figure – 35,000 according to a recent Ofwat survey.

Then too, it’s arguable that switching alone should not be the primary measure of market dynamism. The amount of water business customers consume is far more important in the long term.

Many of the concerns aired about market mechanisms and other arrangements before the market opened – such as the tight retail margin, the extent to which the playing field would be level, and whether or not the data would be of a high enough quality and completeness – have materialised in some form or other. But such teething issues are the norm for any new market, as should not be blown out of proportion as indicators of market failure.

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Executive Summary

To mark the one-year anniversary of the competitive water market, Utility Week’s sister title Water.Retail carried out an exclusive piece of research which asked retailers to score each of the nine largest English wholesalers out of 10 on 11 different criteria. There are currently 25 companies which have been granted retail licences – water supply and sewerage (WSSL) or just water supply (WSL). However, only around 15 of these are actively engaging with customers and pursuing growth. We asked all 15 of these retailers to complete a survey anonymously and take part in a confidential interview regarding the performance of their wholesaler counterparts, a request to which 11 responded.

 

Our unique dataset shows little variation between the overall scores of wholesalers, with United Utilities ranking highest (7.35 out of 10), and Thames Water scoring lowest (6.21 out of 10). However, there was more variation between individual criteria. The area varied the greatest was portals, in which scores ranged from 4 out of 10 and 7.67 out of 10.

Many retailers which spoke to Water.Retail during the survey said they would like to see more consistency in the way wholesalers interact with them and the way they put together their pricing, as well as a common language and terminology.

One retailer suggested the wholesaler community should find a common ground and standards to help the market, as it sees no evidence of this already happening. Another retailer said bi-lateral forms for communication in the market are “inflexible” to any issue outside of business as usual, allowing wholesalers the opportunity to “hide behind false service level agreements without solving simple queries”. Looking at each wholesaler individually, however, more variation was found between scores for each criterion.

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Overall wholesaler scores

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Individual service criteria

Portals and bi-lateral forms

In the context of the water market, a portal is a tool which facilitates interaction between wholesalers and retailers. Such portals are commonly used by wholesalers in the open market. However, their use is not currently mandatory.

The idea is that the type of self-service model supported by portals keeps transaction costs lower for retailers than is the case if direct communications via emails or other means are used. The latter are relatively resource intensive and arguably tip the playing field in favour of bigger retailers – one market commentator suggested the continuation of requirements for direct communications between retailers and some wholesales is a barrier to new entrant and innovation in the market due to the amount of time and money required for administration. The provision of effective and usable portals is therefore a key factor in the smooth-running of the open water market. The fact that scores given showed great variation is of concern, and retailers which spoke to Water.Retail want the issue of ineffective portals to be sorted with urgency.

Portals showed a great deal of variation in the survey, with scores ranging from 3 to 10. One retailer even gave Thames Water a score of 0 for portals. One retailer said that although many of the portals look good, they don’t function properly, and the focus is too often on usability rather than effectiveness.

One retailer which took part in the survey suggested portals are a good indicator of overall approach to the market. For example, they said, those wholesalers with a well-organised, working portals tend to be more open in their relationships with retailers. Indeed, our scores align with this view, as the higher scorers for portals tended to be the higher-scorers overall.

Business Stream declined to score wholesalers individually as part of the survey. However, chief executive Jo Dow spoke to Water.Retail about issues between wholesalers and retailers in the market more generally.

Speaking about portals, Dow said: “At the moment we’ve got a complete mix of different means of interacting with the various wholesalers. Some of them have developed their own portals – Anglian Water, Southern Water. But for a lot of the other wholesalers, they don’t have portals, so we are communicating by email or by forms.

“In this day and age, it’s hugely ineffective to be passing requests on behalf of customers by email. One of the things that we’ve been trying to encourage is, even before the market opened, was to have some sort of industry-wide interface for wholesalers and retailers to use – a standard way for all market participants to interact.”

Her view is shared by other retailers which, during the course of the survey, made it clear that an industry-wide portal, or at least a common approach to interaction, was sorely needed.

Market Operator Services Limited (MOSL) has set up a digital strategy committee to review the processes currently in place and assess the appetite for an industry-wide portal.

Dow cautioned: “Whilst it’s good and positive that they are starting to look at it now, the reality is if it requires a system to be implemented then we’re certainly not going to get a quick fix.”

Credit arrangements

Credit arrangements are an important part of any market. If such arrangements are discriminatory or unclear, this could act as a barrier to entry to new players and reduce the levels of choice in the new market to the detriment of customers.

At present, retailers can sometimes choose to pre-pay wholesalers for the water their customers use, or they can choose to post-pay which includes providing a form of credit. This form of credit must cover the cost of supplying their customers for 50 days. However, it is not always a retailer choice, and can depend on the terms the wholesaler offers.

Some retailers, such as The Water Retail Company, have expressed concern that, with the tight margins available in the market the “extremely onerous” nature of existing credit arrangements can make participation in the non-domestic water market “unprofitable” for new entrants without a trading history.

Credit arrangements was another area where wholesaler scores varied widely. At the top end of the scale, Thames Water and Northumbrian came out favourably in this regard, both scoring 8 out of 10. Severn Trent, meanwhile, scored 5.4 out of 10 – the worst score by a long way.

Dow said a “real frustration” for licence-providers or retailers who are operating in the market is the fact that many of them are required to pay wholesalers in advance because the credit terms don’t allow them to pay in arrears or will only allow a certain proportion to be paid in arrears.

In January, Ofwat launched a review of the market codes which set out credit requirements for retailers, after questions were raised about whether the current requirements are “too stringent” and if this could be “dissuading” smaller, new entrants from competing in the market.

“We know that this is an issue that was raised to Ofwat previously and what it has now done is to ask KPMG to undertake a review, looking at the credit arrangements that exist and the effect that those credit arrangements are having on the market, in particular on new entrants,” said Dow.

Ofwat expects to publish “initial findings and next steps” by April 2018.

Wholesale tariffs

Wholesale charges are made up of a variety of different costs, some of which are regulated. It is important that wholesalers are transparent with retailers about what is included in these tariffs, so that retailers can relay this information to their customers.

The transparency of wholesale tariffs was an area of great concern for retailers and, again, scores varied considerably. Yorkshire Water and Northumbrian Water came joint top, each scoring 7.43, while Severn Trent, again, found itself trailing with a score of 5.86.

However, it was the way tariffs vary across different wholesale regions, rather than individual wholesaler transparency and helpfulness, which was flagged as the biggest issue.

Dow said she doesn’t believe there is transparency on wholesale tariffs, which makes it “incredibly difficult” for retailers to publish a schedule of rates or tariffs for customers. “I think that’s one of the main reasons why we’re seeing virtually no switching of SME customers in the market, is that retailers are struggling to pull together a list of prices for each of the different regions because of the complexity,” she said.

Communications

The Water.Retail survey also looked at other aspects to do with how wholesalers communicate with retailers, for example telephone service, account management, and how fast they respond to queries.

Both speed of response to queries and dealing with formal complaints were low-scoring categories. United Utilites and Northumbrian Water jointly received the highest score of 7.11 out of 10 for speed of response, while Thames Water found itself trailing with a score of 6.08. For formal complaints, South West Water came bottom with a score of 5 out of 10, and Yorkshire Water came out on top with a score of 7.5. It should be pointed out that not all retailers had lodged a formal complaint with every wholesaler.

Meanwhile account management was a high-scoring category. One retailer suggested good account managers were, in many cases, covering up poor processes. United Utilities received the highest score for account management – 8.13 out of 10, while Thames Water again received the lowest score in the category – 6.91 out of 10.

Emergency response

Now that wholesalers no longer have direct contact with end customers, it is particularly important that they keep retailers fully up to date with what’s going on during both planned and unplanned network events or supply interruptions.

Water.Retail’s survey found a great deal of variation between the performance of different wholesalers.

United Utilities scored particularly highly on dealing with emergencies, with a total of 8.2 out of 10 – by far the highest of any wholesaler. One retailer remarked that this was because the wholesaler has had experience dealing with emergency incidents such as flooding and the 2015 cryptosporidium incident.

Wessex Water and Southern, too, scored well in this category. Anglian Water scored just above average, despite claims from some retailers that is “industry leading” for use of tools such as SMS and apps, and dealing with incidents.

One retailer stated that Yorkshire has a set up a specific portal for dealing with emergency incidents. However, another noted that a lack of push notifications for events and incidents made it “difficult” for retailers to track issues.

In the case of planned and unplanned events, one retailer pointed out that push notifications are an “excellent innovation” which save retailers time and ultimately lead to better end-customer outcomes, and yet just two wholesalers have so far adopted this approach.

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Conclusion

This exclusive Water.Retail survey demonstrates a lack of variation between the overall performance of wholesalers on their service to customers. One industry commentator told Water.Retail they worry that the lack of distance between the total scores of the best-performing and worst-performing wholesalers, along with a lack of formal incentives from the regulator, could mean companies are not pushed to improve their service to retailers. They suggest that, as part of its next price review – PR19 – Ofwat should do more to push wholesalers to perform better.

However, there is a lot more variation between scores in individual categories, which highlights the need for wholesalers to step up their performance on certain aspects of the service they provide to retailers.

Especially worrying was that service varied so widely on the main industry concerns – portals, credit arrangements and wholesale tariffs, which some participants suggested would have the biggest bearing on the functioning of the market.

Portals showed a great deal of variation in the survey, with scores ranging from 3 to 10. One retailer even gave Thames Water a score of 0 for portals.

Credit arrangements was another area where wholesaler scores varied widely. At the top end of the scale, Thames Water and Northumbrian came out favourably in this regard, both scoring 8 out of 10. Severn Trent, meanwhile, scored 5.4 out of 10 – the worst score by a long way.

For transparency of wholesale tariffs – another area of great concern for retailers – scores varied considerably. Yorkshire Water and Northumbrian Water came joint top, each scoring 7.43, while Severn Trent, again, found itself trailing with a score of 5.86.

This variation suggests different wholesalers have approached the market differently and have clearly focused their efforts on different aspects. Additionally, it means no wholesaler is doing everything well.

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