Utility Week

UTILITY WEEK | 23RD FEBRUARY - 1ST MARCH 2018 | 27 Customers Retail competition in water: is the market fully switched on? Opinion Tom Kiedrowski T he first day I sat at my desk as the new director of market reform at Ofwat HQ overlooking most of Birmingham, I thought: "This is the toughest gig of my professional career." The work had already slipped by almost a year and the debate over whether choice for non-households was a good idea at all had been raging for more than three years. In the event, MOSL announced last month that more than 100,000 eligible business sites had switched water and sewerage supplier since the market opened in April 2017. That's no mean feat. I knew market opening would be more than a damp squib, not least when I had hands-on experience work- ing as an interim director at Bristol Water and I saw at first hand the medium-sized companies expressing an interest in switching back in 2016. There is huge relief at Ofwat that aer all the strug- gles the market is buoyant with 22 national retailers, 12 regional retailers, a couple of self-supply retailers and new retail licensee applicants being announced all the time. Of course, it's not all plane sailing: Ofwat is keen to see more transparency from retailers about offers available to customers. In terms of processes, MOSL continues to fine-tune market governance arrangements between wholesalers and retailers, with 32 changes already being considered in under a year. In terms of what market opening delivers to the customer, there are the savings in terms of management time and cost from bill consolidation but also demand for innovative solutions to achieve efficiencies with respect to water use and leakage. There is always going to be a lively debate over price, but it remains to be seen how much more room for manoeuvre there is given the majority of the wholesale cost is regulated. Wearing my other consultancy hat for a second, what a telecoms provider would say to a water retailer is they really need to up their game with respect to using technology if customers are going to receive any significant efficiencies. In his review, professor Martin Cave called for the legal separation of water company retail and wholesale businesses. In the end the govern- ment bottled this recommendation, but it is interesting the degree to which incumbents have done this anyway. This has produced a very interesting dynamic. Okay, it's not legal separation and it has not been systematically applied by every English water company, but when boards realised what retail competition entailed, some of them chose to exit the retail market or come up with solutions to deal with the new realities in innovative ways. When I was developing credible scenarios for market entry at Ofwat, I envisaged incumbent water companies competing out of area alongside entrants either from other utility sectors or from existing water retailers mov- ing into new markets south of the Border. What I didn't foresee was that companies like Business Stream and Castle Water would buy the retail business customers of incumbents, leaving companies like Thames and South- ern to increasingly focus on their wholesale businesses. Other companies have followed Bristol Water's and Wessex Water's lead and formed joint ventures, as in the case of Water Plus (between United Utilities and Severn Trent) – and Wave (Anglian and Northumbrian). What was expected at Ofwat Towers prior to market opening, was that the small water companies would be taken over by their larger brethren, but it's still early days to see this turning from a trickle into a flood. We have seen Pennon take over South Staffs Water and Severn Trent take over Dee Valley Water. Whatever the uncertainties about water sector of the next few years, further joint ventures and acquisitions are likely. It's also likely that, as we have seen in other sectors, some more companies will exit the market. If the Conservatives where re-elected and extended competition to households, the utilities sector would most likely see even more profound change as compa- nies started to see the logic of bundling gas, electricity and water, and perhaps even broadband, based on their large and overlapping customer databases. It would also put pressure on the government to remove any exist- ing limits on mergers in the water sector as the case of benchmarking as a substitute for competition would be severely weakened. If, on the other hand, we face the prospect of a post- Brexit Labour government, would they really wipe the slate clean and start all over again? Some renationalisa- tions might prove popular, but in these cash-strapped times borrowing billions to renationalise water, while possible, might not be a priority. Once non-household customers get used to switching and the benefits it brings, would Labour really want to throw all that away? Perhaps, but aer ten years of struggle and final delivery it would be great pity to see it go to waste. Tom Kiedrowski, managing director, Cedar Tree Advisory Service Full article online at: utilityweek.co.uk

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