Choice for households: an Opportunity for companies as well as customers?

Tony Conway responds to the announcement of government's ambition to see competition introduced the UK domestic water market. It shouldn't have come as a surprise, he says, and should be embraced as an opportunity to demonstrate what good customer service and choice from a utility really look like.

Last week’s Treasury announcement that domestic water customers could have a choice of retail supplier by 2020 could be good news for companies as well as customers.

The proposals will come as a surprise to very few people in the industry. The announcement is the culmination of years of policy consultation, beginning with Cave and Walker, which in turn lead to the Water White Paper in 2011 and the subsequent Water Act, which hit the statute books last year. And as these new proposals require primary legislation, there could be another Water Bill before too long.

These measures sit along side other Government initiatives to deregulate, reduce red-tape and introduce competition into markets as far as possible. In fact, the propsals were published as part of ‘A Better Deal: boosting competition to bring down bills for families and firms’, which itself is a result of the government’s review of UK productivity. A few years ago people would have laughed at the idea that the water industry would play a central role in increasing Britain’s productivity. But times have changed. 

The industry has been preparing for a competitive Anglo-Scottish market for business retail customers for well over a year. Through Open Water, Defra, Ofwat and incumbent firms are working to create a market that works efficiently, creating the framework to serve customers better. The companies themselves have established Market Operator Services Ltd to create the infrastructure – the IT networks, dispute resolution for instance – to make the system function.

All of this means that the industry has gone through a significant period of soul searching in recent years – looking to the future, thinking about what new markets will look like, and crucially what role individual companies will play in that future. The debates around legal and functional separation last year focused much of this thinking. And the more far-thinking firms have already moved toward functional separation of retail arms in preparation for the challenges ahead.

It’s clear that customers, as well as government, want more consumer choice in utilities. Although the Service Improvement Mechanism has provided a sea change in customer service. With change comes opportunity, and the companies have a big opportunity to create dynamic retail businesses, which can tap into a much larger market. Of course, service innovation will be at the heart of the new offering.

The Government has stated it will cut per capita consumption from 148 to 130 litres per person per day, with an aspiration to hit 120 litres a day depending on the available technology. So water efficiency will be the benchmarks of future success. And the challenge for retailers – new entrants and incumbent – will be to find ways to help their customers manage their water consumption better. The industry leaders in business retail have already picked up this mantle and it is central to their offering for manufacturing firms. In a water stressed future, the same approach will need to be applied to household customers.

In the drive for productivity, consolidation of retail businesses, and the subsequent economies of scale, offer a way forward. Defra’s risk assessment makes that clear. The new retail-only companies will not be affected by the Special Mergers Regime. That means that we could see the emergence of large players in the English water market. And if these new companies crack customer service, there is no reason why they could not enter other utility markets. The Government’s impact assessment has put the value of bundling other services together with water at £23 million. We know that heating water is the major component of energy bills – so it makes sense to think about the two together. We could see a future where customers go to one portal from one provider that combines all of their utility bills, showing real-time consumption across energy and water. That would drive consumption – and bills – down.

As things stand at the moment, water companies perform better on customer service than energy firms, so there is a real opportunity for them to steal a march. It will be a challenge – there will be offerings from other organisations – but incumbent expertise will not be matched, at least not at the outset. 

There is an opportunity here for companies as well as customers.