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UTILITY Week - 12th February 2016

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18 | 12TH - 18TH FEBRUARY 2016 | UTILITY WEEK Policy & Regulation Analysis P ortsmouth Water has laid its cards on the table, announcing plans to exit the business retail market. Now, the indus- try waits to see if others will follow suit. The market is due to open in April 2017, allowing 1.2 million customers of providers based mainly or wholly in England to choose their supplier of water and wastewater ser- vices. It will link with the existing market in Scotland, which opened to non-household customers in April 2008. The government introduced retail exit to the Water Act 2014 following a sustained lobbying effort by peers in the House of Lords, regulators and some water companies, who all believed that the proper functioning of a competitive mar- ket required companies to be able to exit if they wished. Portsmouth is the first water company to say it will not participate in the retail mar- ket, instead handing the baton to Scottish supplier Castle Water, which already serves 5,000 customers north of the border. Castle will bill, handle calls and carry out other retail activities for Portsmouth's business customers, initially carrying out these activi- ties on behalf of the water-only company (Woc), but taking full control from April 2017. At this point, when the competitive market is expected to open in England, Portsmouth will exit the market. Ascendency Water man- aging director Charles Vincent hails the deal as "a strong move from Portsmouth", which "gets everybody focusing on what they're best at". There are many reasons a company may look to exit the market. Whitman Howard utilities analyst Angelos Anastasiou says it "makes sense" that some companies will look to exit rather than compete, "for the sort of reasons that Portsmouth gives", such as lack of scale versus large competitors. "Some of the other Wocs might look to fol- low suit sooner rather than later," he tells Utility Week. "The odd Wasc [water and sew- erage company] might also look to focus on the wholesale side, but I would guess they may look to wait until the household market opens up, or get more clarity as to its open- ing up." What are the drivers for a water company looking to exit the market? Portsmouth managing director Neville Smith says working with a specialist provider "rep- resents the most sensible and cost-effective solution" for a company of Portsmouth Water's size and for its customers – the company supplies water to about 300,000 properties. However, Portsmouth's business customers make up just 5 per cent of its entire customer base, with retail revenue represent- ing just 1.6 per cent. This, Smith explains, means it would need a "huge investment" to be successful in the new market. Passing on its small business customer base, Portsmouth says, will enable it to concentrate on its core activity of the "reli- able supply of high quality water". A need to focus on bringing up standards in the wholesale business would be a big reason for a small Woc to consider leaving the retail market. Aer all, wholesale is where money is most easily made. However, the majority of both Wocs and Wascs say they fully intend to participate in the market, including the smallest, Chold- erton and District Water, whose regula- tory director Anthony Fry tells Utility Week the company "intends to continue provid- ing water to our existing customers for as long as they wish to retain us as their retail supplier". Sources have speculated that there are at least two or three water companies "in discussion" about exiting the market. Those refusing to comment on their plans are South East Water and South Staffordshire Water. Southern Water says it is "undecided" about whether it will exit, but is tipped in the industry as the Wasc most likely to go. Who are the most likely buyers of the customers of market exiters? Portsmouth says it chose Castle Water as its partner because it stands out as a company that "prides itself on offering high levels of service at a low price", and is therefore "ideally placed" to satisfy the retail needs of Portsmouth's business customers. The deal between them was agreed for an undisclosed amount and, until this point, the price the market places on a customer had not been determined. Buyers will be looking for the lowest price possible, and some have even suggested that a transaction should work the other way, with non-players paying players to take customers off their hands. A report carried out by Utility Week in association with CGI – Market Ready? UK water companies in the countdown to compe- tition – suggests that if companies fail to pre- pare for market opening on time, they face a penalty for missing the deadline and, in this scenario, customers may change hands for little or no money. The larger Wascs are likely buyers, be it through straight acquisition or partner- ing with a Woc, as is the case with Bristol Water, which says it will operate as a retailer through an existing joint venture – Water- 2Business – with Wessex Water. Players already in the competitive Scottish market – such as Castle Water – are another possibility. Castle Water chief executive John Reynolds says the firm was founded to par- ticipate in both the English and Scottish mar- kets for business water supplies. Buying into the English market would be a quick way in. Business Stream, another existing Scottish player, is one to watch. Chief executive Jo Dow says acquiring a business that has cho- sen to exit the market "would certainly be an option, provided it was the right decision for our business". She adds: "We are consider- ing a number of different opportunities for market entry into England post-2017." Energy companies may also show an interest. The business customer base of a Woc may not be a big enough meal to tempt the likes of the big six, but for smaller players in the energy market looking to enter the water market, buying business custom- ers from market exiters would be a good way in. For those that want to exit the non-house- hold market, time is short. Shadow market opening – the industry's 'practice run' – is due to happen in October this year, and com- panies without fully formed programmes now may find it difficult to be ready in time. Who's in and who's out? In the wake of Portsmouth Water announcing its exit from the business retail water market, Lois Vallely looks at which companies might follow its lead and what their drivers might be.

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