Utility Week

UtilityWeek 5th August 2016

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UTILITY WEEK | 5Th - 11Th AUgUsT 2016 | 21 Customers Analysis H ot on the heels of the deal between Southern Water and Business Stream, Thames Water has announced it will exit the non-household water retail market when it opens and hand its business custom- ers over to Scottish independent retailer Cas- tle Water. But why? The decision appears to be a last-minute one, and took many in the industry by sur- prise. In its latest annual report Thames had stated it would transfer its non-household customers to an existing Kemble Group company – Thames Water Business Services – and subsequently applied to Ofwat for a water supply and sewerage licence. It now says not only will it exit the English business market, but it will also part with its existing Scottish business customers, which had been hard won from incumbent supplier Business Stream. Thames chief financial officer Stuart Sid- dall tells Utility Week that the agreement with Castle Water had been under discus- sion for just three months. He admitted it was "a short period" – aer all, Severn Trent and United Utilities had been in discussion for more than a year before they announced their joint venture. But he added that once the heads of terms had been reached, there was no time to lose. "We needed to keep the pressure on to do the deal, because there is a lot of work to do to get ready for shadow operation," Siddall says. "Every week we didn't do the deal was a week lost out of effectively a three-month period in moving up to shadow operation, so it was important that we pushed on." Perhaps the sector should have seen it coming. Aer all, Thames was forthright in lob- bying for retail exit to be intro- duced by the government in the first place. Another clue came in April, when the two heads of retail at Thames – Graham Southall and Rupert Kruger – mysteriously le the company. As with many of the deals seen around the opening of the water market, the reason- ing behind this one is principally about cus- tomers. Thames maintains that it was largely because of a desire to focus on household retail. The company is "very regionally focused", which Siddall said is good for household customers but not so good for non-household. "We were certainly pick- ing up very clear signals from our non-household client base that they were looking for national deals, including Scotland," he said. "Our view was that a nimbler, nation- ally focused organisation would be better able to serve customers." In other words, business customers with multiple sites across the country wanted a supplier that would be able to serve all its locations. But to be effective nationally, Thames would have had to incur additional costs on top of its existing cost base. The company has one of the highest costs-to-serve in the sector – a figure higher than Ofwat thinks it should be. "We con- cluded that our costs were high relative to others," said Siddall, "and particularly to new entrants that would come in, which were focused retailers." However, Siddall insists that Thames remains fully focused on its household customers. "We're installing a new billing system and a customer relationship manage- ment system for our household customers," he says. "We're spending north of £70 mil- lion on that. This deal will enable us to focus on that, and perhaps do things a bit faster for our household customer, and also be clearly focused on their needs." The non-household market is more com- plex than the household equivalent, because non-household customers have a broader range of tariffs and needs, Siddall added. Thames made its non-household exit announcement on the day Ofwat published the emerging findings in its cost-benefit review of a domestic retail market, which the Treasury is keen to see implemented as early as 2020. Concerns have been raised that Thames quits business retail After committing resources to capture business customers in the Scottish market, Thames Water has done a U-turn and will exit the non-household market altogether. Lois Vallely asks why. Bristol Water Severn Trent Water Anglian Water Cambridge Water Anglian Water Essex & Suffolk Water Southern Water Mid Kent Water South East Water Wessex Water Affinity Water Southern Water Sutton and East Surrey Water Southern Water Oxford Cirencester Swindon Banbury Aylesbury Slough Reading Newbury Basingstoke Godalming Guildford Crawley Croydon Sevenoaks Dartford London Bishops Stortord Stevenage Luton Sewerage area Water supply area Other water company boundary Thames WaTer supply area Key Numbers 5ml The English market is currently open for businesses using five megalitres or more of water a year. 29,000 Number of customers in the current business retail market. £540m Annual value of the current business retail market. 1.2m Number of customers in the new market. £2.5bn Annual value of the market after it opens. £200m Expected value of benefits the market will bring to customers. 2.5% Retail margin for the business market. 9 Number of incumbent water and sewerage companies in England. 7 Number of incumbent water-only companies in England. ☛

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