Utility Week

Utility Week 1st November 2013

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Comment Utility Week expert view Karma Ockenden "Water companies seem to be underestimating the impact retail competition could have on their businesses, and are underpreparing for it" W ater companies: in three-and-a-half years, you'll be able to strut your stuff on the national stage and pinch business customers from your friends. Excited? A few of you, maybe. But according to research I have been working on over the summer and early autumn, published today, a cut-throat, sell-yourgranny-to-seal-the-deal marketplace (from incumbent retailers at least) it won't be. Specific findings are summarised in an article on pages 8-12, but here are some overall observations. 1. There is a lot of indecision out there, a lot of unpreparedness despite legislation containing provision for competitive business retail having started its journey through Parliament. This is not really surprising given relevant details (the Water Bill, Ofwat's final price review methodology, outputs from the Open Water programme) have only recently started to emerge in earnest. In itself, this unreadiness shouldn't be a problem. If they engage from now on, companies should have enough time to prepare before the 1 April 2017 market opening deadline. 2. That said, companies seem to be underestimating the impact retail competition could have on their businesses, and are underpreparing for it. They acknowledged that billing, call centre operation and account management would be heavily affected, but expected far less impact on other core retail areas including CRM and marketing. And that's without even getting into the new retail functions that will be needed (eg pricing different service propositions and providing quotes to would-be customers); new operational requirements (supply and service point registration, data exchange, financial settlement); and the need to build a dedicated wholesale capability (processing retailers' operational requests, interaction with the market operator, wholesale billing). 3. Defence is clearly being prioritised over attack and there is limited competitive ambition from a large chunk of the industry. Retaining existing business customers surfaced as the industry's number one priority, followed by building/reinforcing the local brand. Moreover, most respondents exhibited at least partial confidence in the ability of their existing systems to cope with the demands competition will throw at them. This suggests that firms have either as yet failed to grasp the extent of the challenges looking after customers in a competitive situation will throw up or that they are lacking in competitive ambition and imagination about what customers will want, and plan to build competitive offerings around existing systems and customer databases. A defensive stance is a valid choice. For many of the time and resource constrained water-only companies, for example, opting not to dive full pelt into the open market may be the most sensible decision. But such companies will have to watch that the more aggressive retailers don't cherry-pick their best customers. Taking the decision not to compete and consequently limiting investment in systems that would support a proactive competitive offering could leave firms unable to defend themselves, too. 4. While many companies occupy the defensive middle ground, pockets of enthusiasm and reaction are crystallising. Tata Consultancy Services, which partnered with Utility Week on the research, identifies four groupings in the research report: •  Aggressive acquisitive – those already active in the Scottish retail market and with an established retail entity; already upgrading staff, technology and processes to be fit to fight for customers en masse. •  Selective acquisitive – those working on their offerings and capabilities to deliver retail services effectively to selected customers. •  Retainers – working on a retail function, policies and offerings to retain existing customers; no interest outside their supply area. •  Reactive – those who will do the minimum to comply with the market, mostly those with a small contestable customer base. Such divisions are evident throughout the research findings: a small group usually answers very positively; a small group very negatively; and the bulk somewhere in between. In fact this pattern of differences in relation to appetite for competition feeds into a wider trend; there is more clear blue water between incumbents now than there used to be. Only last week, Moody's gave the industry at large a stable outlook rating, but warned of higher risk from PR14 for the more highly leveraged. And there are a good 20 points between SIM table leaders and losers. The outcome of PR14 will be particularly interesting in this context. With Ofwat and politics bearing down on prices, how much scope will poorer performing companies have to pull themselves up? By PR19, will there be even more clear blue water between frontier companies and followers? By then, we would have had two years of retail competition to look at. We'll be able to see if defensive strategies have paid off, or if those currently positioning themselves to acquire customers have been able to walk the walk as well as talk the talk. And whether they've been able to hold their own against more experienced retailers who come in from outside. UTILITY WEEK | 1st - 7th November 2013 | 7

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