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16 | 5TH - 11TH JUNE 2015 | UTILITY WEEK Research Policy & Regulation panies have just completed one of the tough- est price reviews since privatisation and are now in the early stages of delivering on their commitments under AMP6, a very different kind of price control. One chief executive said: "The big share- holder value is still in the regulated busi- ness, around delivering AMP6, and finding a way of outperforming on what was a very tight review. That dwarfs anything we might do on business retail." Another said: "AMP6 is a challenge. We've got to get on with it, and that's the priority." But interviewees recognised the opportu- nities for cultural and organisational change, and the importance to the industry's repu- tation for delivering on time. As one inter- viewee said: "This is happening – and we've got to get it right." Company approaches Water companies are nominally free to decide which of four legal approaches to take to separate their wholesale and retail businesses, thus providing a level playing field on which non-incumbent retailers can interact with the wholesale business. • Stay vertically integrated, putting in place Chinese walls between the retail and wholesale business. • Separate legally within the same licence. This approach could cause complications for companies with an out-of-area, non-household retail busi- ness, because it would have to operate separately to the in-area business. • Exit the licence for non-household customers, retaining those customers outside the regulatory ring fence. A consequence of exit provisions added to the Water Bill, this option allows compa- nies to consolidate their existing and new non-domestic retail customers. • Hard exit. This is for companies that want to make full use of the exit option, selling or otherwise disposing of their non-domestic customers to a third party. Of the six English WASCs interviewed, one was preparing for option one. One was preparing for a hard exit, if buyers emerge at the right price. Two had settled on option three. Two had not yet decided between options two and three. Companies agreed for the most part that option three makes it easier to create a level playing field for new entrants, and the regu- latory authorities have hinted that it is their preferred route, under which companies will be subject to less scrutiny – there will be less need to defend the rights of new entrants. The company that is planning to stay vertically integrated acknowledged the pres- sure to demonstrate separation of the retail and wholesale businesses: "We've created a completely separate unit, it's going to be virtually isolated." The company's approach "was under constant review" as more infor- mation about the other options comes from the regulator: "We don't understand exactly what exit entails or what the nature of the engagement with customers would be, we're standing back on that one and assuming at least by market opening we will be integrated." Market approaches The companies interviewed can be separated into three broad groups in terms of their approach to the non-household market: Aggressive players • Have restructured business to maximise opportunity of market opening • Likely to be established players in the Scottish market • Not necessarily larger companies. This route has obvious benefits for larger companies, but not all aggressive players are at the larger end of the WASC scale. One interviewee said: "If you look at the energy sector, the experience was that sometimes the 'fat incumbents', the ones with the deepest pockets, weren't necessarily the winners. In the retail space in energy, the medium sized, sharper, fleet of foot companies did best." The aggressive players acknowledge that the cost-benefit analysis does not necessarily stack up, but take the view that given market opening is happening, they should seek to benefit from it as much as possible. One said: "There will be winners and losers – why should we be a loser?" Defensive players • Number one priority to retain existing customers • Expansion in the first instance by build- ing on relationships with existing cus- tomers out of area • Cautious approach to new out-of-area relationships dependent on cost-benefit analysis. The second group also sees opportunity in market opening, to a lesser degree. They may in some cases already have an business or brand for non-household customers, per- haps part of a wider group structure. One interviewee from a defensive player said: "We start with hanging on to what we've got. The second bit is where you've got customers on our patch with a national presence, focusing on getting that national presence. Then the third bit, potentially, is competing in other places." Exit at a later date is not out of the ques- tion for these companies, but would depend on the emergence of buyers. Meanwhile, they intend to build value in their non-household retail businesses to benefit their sharehold- ers directly, or by building value for a sale. Non-players • Plan to exit – if there are buyers at the right price • Plan B is to defend existing business and build value while waiting for buyers • Will still have to invest considerable time and money preparing for market opening. These companies do not see a major opportunity in the non-household retail mar- ket, and would rather focus on their whole- sale business. However, under the current governance arrangements, these companies still have to go through the lengthy and expensive process of preparing a non-house- hold retail business in preparation for mar- ket opening, as well as making the necessary changes to their wholesale businesses. The key questions for companies looking to exit the market completely will be whether they can sell their customers at a price that realises value for their shareholders. A Plan B is to defend the existing business, and perhaps grow it modestly (for example, through the absorption of non-domestic cus- tomers of water-only companies in-patch), while waiting for buyers to emerge. One inter- "There will be winners and losers – why should we be a loser?"