Two years after the non-domestic retail market opened to competition, Utility Week, in association with CGI, gathered industry leaders to discuss the extent to which it has delivered real value.

The opening of the non-domestic water market was a miraculous event – a good news story for the utilities industry.

Bang on time on 1 April 2017, the market opened its doors and systems and process – primed under shadow market operation – whirred into action. And they worked. Customers successfully switched suppliers, billing and settlement happened, hand-offs between wholesalers and retailers took place.

Two years down the line, it’s important not to lose sight of that success, but equally it is important for the market not to be content with it. While the open water market is working, Utility Week and CGI’s recent dinner debate with industry leaders highlighted that it is by no means operating to its best potential – and with customer satisfaction levels showing their first decline since market opening in the Consumer Council for Water’s recent Testing the Waters report, it seems customers are beginning to notice the imperfections.

Friction points

Encouragingly, it appears all the relevant players know what the friction points are, those points that are making it difficult to deliver better value in the open market. As event participants shared their key pain points and frustrations, heads around the room nodded in sympathy and there were no raised eyebrows or voices of dissent. What was less clear was what to do about these issues.

At the heart of the market’s challenges lies complexity. The collective determination to bundle it over the line in 2017 inevitably meant there was little time for streamlining industry codes and processes. Bits and pieces of good practice from the Scottish open water market and the UK energy sector were onboarded but without much opportunity to compare and contrast what was most relevant and what alterations might be best for the English non-domestic situation.

An elaborate set of codes inevitably led to an elaborate IT system to accommodate them and this was overlaid with a market governance panel which, it was broadly agreed, seems designed to prevent change rather than facilitate it.

In another market, this kind of complexity might not be so problematic. But in a low revenue, low margin environment, debate participants were clear it is hampering efforts to drive down cost to serve and innovate for customers.

Solutions

So, what can be done to iron out all this complexity and make room for real value creation? Attendees were clear that there is a big opportunity for industry to step up and resolve certain challenges through collaboration and co-operation. Complexity in wholesaler-retailer interactions and in wholesale tariffs, for example, could be significantly reduced through industry effort.

It was heartening to hear a range of examples over dinner about how this is already happening. But there was a strong feeling from market participants that market-led collaboration will only get so far in addressing complexity.

In order to engage less forward-thinking players and create whole-market benefits, there was clearly a hope and expectation that Ofwat, or the market operator MOSL, should intervene to co-ordinate and consolidate the simplification agenda. There were calls for the regulator to help establish an ideal structure for wholesale tariffs, for example, alongside hopes that it might consider rewriting the allocation of responsibility for meter reading and reconsider the incentives in place for wholesaler service to end customers.

Such expectations smack of a lingering regulated utility culture in a now competitive market, as one debate participant privately pointed out to Utility Week – one which tends towards dependency on regulator instruction. But it also highlights a sense of uncertainty in the open market about what the regulator wants from it and what the dynamic between this newly competitive part of the water sector and Ofwat ought to look like.

Arguably, the market operator could bridge this divide, but it was obvious from discussions that continuous senior management changes and office relocation challenges over the past year or so have impacted MOSL’s voice and position in the market. With another new chief executive now in place at the market operator, this time with strong water industry experience, the time may well be ripe for MOSL to reassert itself.

With participants struggling to grasp hold of the issues they know are undermining market potential, it would have been easy for this industry gathering to end on a negative note. But far from it. Buoyed by the chance to discuss challenges in a neutral environment, the event closed with strong expressions of optimism. With common agreement on the challenges at hand, only a spark is needed to reignite the spirit of co-operation and diligence which brought the market into being and build on its foundations.

Opinion

The measure of success is how much the market benefits customers

Graham Hainsworth, director, Consulting Water Sector

Two years after the opening of the competitive water market is an appropriate time to look back and assess its success. But also, and perhaps more importantly, it is a good time to look forward to see what more can be done.

The market opened, on time, in April 2017 which means that 1.2 million non-household customers can now choose their retailer of water and wastewater services. The market operator function has been set up, the Central Market Operating System (CMOS) is operational, the market participants are enacting the market codes, and importantly customers are switching. To get here has been a massive collaborative effort from many different parties. CGI played its part by building CMOS and acting as the data partner for MOSL. Most important all of the market participants had to be ready on time – and they were.

Let’s all take a collective pat on the back for that success. But looking forward, there is still more to be done.

More can be done to create friction-free market interactions. Smoother operational process will help participants to reduce their operating costs and potentially pass on these savings to customers. It will help provide a more joined-up service experience to customers. We see the introduction of the bilateral replacement solution as a major enabler in this area. Data quality can and should be improved and this too will help create smoother operational processes.

The market must also ensure that competition thrives and brings the innovation that was always anticipated. Perhaps the approach here is to create a more open market, a market in which new entrants, entrepreneurs and disruptors can bring new services: B2B services that will help the current market participant deliver their services more efficiently; or B2C services brought directly to customers. We believe that bilateral replacement could be the platform for this open market.

Ultimately though, when we judge the success of this market we must measure it in terms of customer benefit. As well as reductions in bills, this is about improved customer service and new, innovative services. It was reassuring that this focus was at the forefront of the debate.

We very much look forward to continuing our relationship with MOSL and the market participants in delivering a thriving competitive market, and ensuring that the benefits of that market work their way through to customers.

Key discussion points:

• Doing the right thing for customers: Wholesalers are frequently overriding complex codes for better customer outcomes; calls for principles-based code review; calls for better wholesaler incentives for end customer service; questions raised about the meaning of low market engagement among smaller customers; need for reanimation of awareness campaign.
• Market complexity and barriers to improvement: Calls for greater clarity of regulator market expectations and co-ordination of market-led collaboration efforts; appetite to review codes and panel governance.
• Meter reading and data quality: Controversy over the incentives for retailers to improve meter reading performance; meter reading operations inefficient and key challenge for driving down cost to serve; calls to reallocate meter reading responsibility to wholesalers who could derive valuable network insights through data collection.
• Tracking innovation benefits – including overspill to the domestic market: Key to defining market value but difficult to quantify. Lack of ownership for innovation benefits monitoring.