Analysis: 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.

Hot 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 customers over to Scottish independent retailer Castle Water. But why?

The decision appears to be a last-minute one, and took many in the industry by surprise. 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 Siddall tells Utility Week that the agreement with Castle Water had been under discussion for just three months. He admitted it was “a short period” – after all, Severn Trent and United Utilities had been in discussion for more than a year before they announced their joint venture. But he adds 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. After all, Thames was forthright in lobbying for retail exit to be introduced 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 left the company.

As with many of the deals seen around the opening of the water market, the reasoning behind this one is principally about customers. Thames maintains that it was largely because of a desire to focus on household retail.

The company is “very regionally focused”, which Siddall says is good for household customers but not so good for non-household.

“We were certainly picking up very clear signals from our non-household client base that they were looking for national deals, including Scotland,” he says. “Our view was that a nimbler, nationally 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.

Source: Thames Water

The company has one of the highest costs-to-serve in the sector – a figure higher than Ofwat thinks it should be. “We concluded that our costs were high relative to others,” says 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 management system for our household customers,” he says. “We’re spending north of £70 million 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 complex than the household equivalent, because non-household customers have a broader range of tariffs and needs, Siddall adds.

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 quitting non-household retail could hinder a company’s chances in the household market – if, or when, it opens. However, Siddall says that the decision will actually make it easier to compete in the household market, as billing systems will be simpler.

So why Castle Water? Siddall says Thames admired the secrecy surrounding the Scottish supplier’s deal with Portsmouth Water. As the company responsible for serving the capital, Thames is scrutinised to a much greater extent than some of the other, smaller water companies. That, Siddall explained, makes it “very difficult to work out who you can share your information with”.

He says that a more general tender basis would have risked information being leaked, which would have been damaging to the business and its staff. “It is altogether a very clean deal,” he says. “We felt that it was within everyone’s interest that we chose Castle Water.”

Analysts at consultancy firm Frost and Sullivan believe other companies are likely to follow Thames Water and exit the non-household market, as the retail margin is not big enough to attract the largest utilities.

“Even with the opening of the market there is little margin that the retail water service companies can secure with the non-household customers,” said Frederick Royan, Frost and Sullivan’s vice president of global environment, water and waste management practice.

He believes that utilities should “focus on their household customers” in the coming years so they can be “better equipped in capitalising on the retail opening of the household market”, which could happen as early as 2020.

Thames Water is the third incumbent to have exited the market, after Portsmouth Water in January and Southern Water in June. All three have sold their customer bases to existing Scottish suppliers, and others are eyeing the market hungrily.

But amid all the mergers, joint ventures, acquisitions and rebrands, the sector has yet to see a truly ‘new’ English entrant.

Read Utility Week’s Q&A with Thames chief financial officer Stuart Siddall here