Utility Week

14 | 24TH - 30TH MAY 2019 | UTILITY WEEK Policy & Regulation Analysis S upplier failures have become increas- ingly common of late in the energy retail space, but the non-domestic water market had been a model of stability – until now. Last month Ofwat had to trigger its interim supply process for the first time – shortly a•er the open market's second anniversary – as Aquaflow Utilities entered liquidation on 9 April. Around 74 business customers were transferred to Clear Business Water, which was chosen by the regulator through what effectively is the equivalent to energy's sup- plier of last resort process. So far this year three energy retailers have ceased trading – Economy Energy, Our Power and Brilliant Energy. Ofgem chose Ovo Energy, Utilita and SSE, respectively, as sup- plier of last resort. The three companies the energy sector bid farewell to, join a long list of failed sup- pliers that exited the market last year. And more could be on the way in 2019. Water follows suit While Aquaflow is the first water retailer to bow out in such a way it probably will not be the last because the very nature of a competi- tive market dictates that there will be win- ners and losers. Chris Earle, chief executive of Verastar, the parent company of Clear Business Water, says it is "saddening, although not unpre- dictable" to see the first water retailer in England enter the interim supplier allocation process. He suggests the "tight retail margins set as part of PR16 [the 2016 non-household retail price review], combined with oner- ous working capital arrangements for non- associated retailers has made it incredibly difficult for businesses to enter and gain trac- tion in this market". Earle adds: "The anticipated wholesale cost reductions through PR19 provide Ofwat with a unique opportunity to correct this, enabling competition to enter the market and safeguarding customers by preventing a reoccurrence of this scenario on a potentially much larger scale." Responding to the challenge, a spokes- person for Ofwat tells Utility Week: "We are keen that customers are able to take advan- tage of the benefits that a competitive market can deliver, both in terms of the price they pay and the service they receive, and we con- tinue to be encouraged by new entrants into the business retail market. "We are aware of the concerns that some trading parties have raised with regards to the level of margin available. We are con- sidering this as part of our review of the retail exit code, on which we recently con- sulted on our proposed approach to future retail price protections that will apply from 1 April 2020." The regulator's senior director of custom- ers and casework, Emma Kelso, says it is difficult to see a company fail but acknowl- edges that not all retailers will "thrive" and it's possible that in the future others will leave the market too. She says: "There are many more retailers in the market offering increased benefits for business water customers, and we expect more to join in the coming months." Ofwat wasted no time in using its pow- ers under the interim supply code, which it published in March 2017 ahead of market opening. The code comes into effect when a licensee exits the market and its customers need to be allocated to another supplier. Speaking when news of Aquaflow's demise first came to light, a spokesperson for Ofwat told Utility Week: "The interim sup- ply code was put in place to ensure custom- ers are protected in situations such as this. This is the first time that we have had to use the interim supply process in the business retail water market and we can confirm that it is broadly equivalent to the supplier of last resort process in the energy market." Aquaflow's market entry Aquaflow applied to enter the non-domestic water retail market in England – the larg- est of its kind in the world – shortly a•er it opened to competition on 1 April 2017. In its licence application, the company said it was "committed to offering eligible businesses in England and Wales excep- tional levels of customer service, a highly competitive pricing strategy and a technol- ogy and efficiency driven approach to reduc- ing their water consumption". The company was granted its licence on 4 January 2018, which Ofwat's Kelso described as a "positive start" to the year. She said at the time that greater competition in the market will result in more choice and better deals for customers. Fast-forward a year and a few months and Aquaflow was forced to get in touch with Ofwat to highlight it was "likely to enter liquidation". Huw Powell, a partner at Begbies Traynor and joint liquidator of Aquaflow Utilities Limited, tells Utility Week: "The company's strategy was to build up a customer base of SMEs [small and medium-sized enterprises] and small industrial users, and it managed to secure in excess of 70 live customers within its first year of trading. "Unfortunately, it did not build a suffi- cient number of customers to generate the Aquaflow goes under With wafer-thin margins, perhaps the biggest surprise is that it's taken two years for an aspiring non-domestic water retail supplier to call it quits. Katey Pigden reports on the demise of Aquaflow Utilities.

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