H3O: Competitive streak – the evolution of the water retail market

Since the heralding of privatisation, efforts have been made to introduce elements of competition into the water sector.

However, it was a further 28 years before England’s non-domestic water retail market was opened. The move meant 1.2 million businesses, charities and public sector bodies were, for the first time, given choice over who supplies their water services.

But the demands of ensuring the market opened on time meant a number of compromises were made. While necessary initially, these have come to dog the market ever since, meanwhile customers have often found the process of switching cumbersome and frustrating.

The market operator, MOSL, has had a turbulent few years – going through four chief executives (including one interim) – as it struggled to find its voice in uncharted territory. It has faced a necessary – but costly – move out of the capital to its new base at Southampton, losing almost 90 per cent of its staff in the process.

While MOSL has worked to gets its house in order, the market has been beset by tensions between wholesalers and retailers and a feeling of a sector which was not collaborating and was struggling to fulfil the promises that had been made to businesses.

Friction points

These were among the concerns aired at a CEO forum held by MOSL earlier this month, which Utility Week was invited to attend. It shed light on the growing pains of the newest segment of the utilities sector and the work that is being done to get it back on track.

Chief executive Sarah McMath joined from Thames Water in June and if there was any doubt of the scale of the challenge facing her, it became clear in the lead-up to the forum. MOSL asked its members to rate its performance so far. The result was an NPS score of -52, an opinion which McMath understatedly admitted “was not where we wanted to be” but admitted “I get it”.

She went on to talk about the need to “reset” the market but also noted that attendees would have heard similar warm words from her predecessors.

So, what exactly is different about this particular reset? It seemed to me that this year’s event really did have the hallmarks of a turning point – with a room packed full of senior figures across the retail and wholesaler market, all seemingly keen to work together to find a solution to the problems they collectively face.

In a presentation which did not shy away from the issues still faced by the sector, McMath talked of “a feeling of collective amnesia” adding “There’s a lot of things we are facing today that we knew about in the run-up to market opening”.

She went on to say: “For the market to work we need to step beyond competition and move into a more collaborative approach. To really reset the agenda and look to the future.”

Responding to a MOSL survey chief executives identified four key issues:

• Legacy data quality issues (e.g. meter and customer asset data)
• Retailer margins and cost to serve
• Lack of standardisation across wholesalers (e.g. bilaterals, tariffs, payment policies)
• Maintenance and ownership of data (e.g. submission of meter reads and new connections)

The first of these will be a familiar complaint to operators in many areas of the utilities sector. Time and time again during the debates, the conversation came back to the fact that suppliers were coming into the market blind. The information simply was not there, or at least not in a form that was useable, and customers were understandably vexed that what had been sold as a smooth process that would ultimately save them money was proving to be far more complicated.

Similarly, cost to serve is a chief concern for operators across the spectrum. We heard from established operators that new entrants were eating away at margins both because of their business models and because of the prices they were willing to offer. It is a complaint all too familiar to any involved in energy retail.

The sheer complexity of the market was another oft-voiced concern, both in relation to MOSL and the huge spread of tariffs available in the industry. One CEO mentioned an acquisition of a customer base which brought with it more than 2,000 separate tariffs.

The final point perhaps goes to the heart of the problems in the water retail market – it remains a point of frustration as to who exactly is responsible for certain core functions.

Single view

One chief executive described it as: “There isn’t a single view between wholesalers and retailers on how we want it to develop. We have accepted that there were a series of compromises we accepted at market opening but we should now be in a position to make changes together on a common basis. Who should be reading meters? Should there be a central system versus lots of individual systems? We should be able to address these challenges but I get the sense that the biggest problem is that we are not coming together to think about what that future picture could look like.”

This, at least, seems to be a challenge the market is now finally rising to. This month’s event felt like a moment of catharsis where retailers and wholesalers recognised that the only way to solve the problems they face is through collaboration.

MOSL has a huge part to play in this and there is a recognition that a root and branch reform of the way the market operates is required.

As another leading figure put it: “The market was put together at breakneck speed. The code was copied from other utility markets, the contracts were copied from the Scottish market, which has a different set-up. We knew the market needed to change.” This is palpably yet to happen.

Meter culpa

One of the key frustrations, which ended up dominating much of the workshop debate later in the day, revolved around meter readings.

In a bid to kickstart the market in 2017, it was decided that the responsibility for collecting meter readings would lie with the retailers. This has proved a bone of contention ever since, with initial problems around incomplete data compounded by the challenge of finding and accessing many meters. Meanwhile, many wholesalers have reinitiated meter readings – without sharing the data with the retailers.

One solution that has been suggested is for the obligation to be reversed and for wholesalers to be mandated to offer a meter reading service.

At the MOSL event there was also much debate around the notion of a “single source of truth” for customers. One of the main selling points to businesses of giving them competition on their water supply was that they would have one point of contact, whereas it is clear this is often not happening.

Another perceived wider benefit of the opening of the market was that retailers would be able to offer businesses advise on cutting water consumption. This is a vital part of a wider national conversation on water efficiency, which is clearly a passion for many in the sector but has succumbed to more pressing short-term needs.

Under McMath, MOSL appears to have a leader who understands the frustrations of the market and has a vision to reach a solution. However, it will clearly not be an easy process and there will need to be sacrifices on all sides. McMath took a deep breath before announcing that the market operator would be seeking a 10 per cent increase in its budget for 2020/21 to make the changes necessary, including the cost of a project team which will be required to deliver a bilaterals solution. This will not be an easy sell, but then there seems to be a recognition that there are no easy answers.

Domestic competition

Any discussion of the evolution of the non-domestic water retail market inevitably leads to speculation about what it means for a move towards wider competition in the water sector.

On this point there was a definitive response from one executive who has a foot in both camps, saying: “(The experience) has taught us some lessons about the domestic market and how attractive it would be to be competitive. Moving into that direction, from what we know today, it would be hugely value distractive for the country. I’m not sure we have seen all the signals to say we should extend this further.”

The next few years will be a key test for how this introduction of competition has benefited the water sector as a whole. The challenges presented are far from insurmountable and with a collaborative approach a vibrant non-domestic water retail market can emerge. It is in everyone’s interests for this vision to become a reality.