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Congratulations must go to United Utilities (UU) and Severn Trent this week, which have together found an admirably pragmatic solution to the opening of the non-household water market next year. Their yet-to-be-named joint venture will be a formidable force in that market, starting life with a 26 per cent market share, and no doubt ambitions to grow far beyond that.
By working together, the two water companies will cut costs and overheads – all the more important given the tight margins in the retail space. While there are no compulsory job losses planned, there will likely be difficult decisions ahead as they combine their two non-household retail teams and back office operations, but as they take cost out of the business, the customer will ultimately benefit.
Every water company is currently in the process of deciding where they want to play. According to two straw polls conducted by Utility Week in recent weeks, the vast majority will be staying in the market. So far, of the water and sewerage companies (Wascs), only Southern Water has expressed doubts, while all the water-only companies (Wocs) barring Portsmouth, South East and Cambridge/South Staffordshire have said they’re in. Whether this picture will change on 2 April 2017 is another matter – after all, no-one will know the true value of a business customer until the market opens, and switching rates and other dynamics become clear. Those taking a long view will also be hoping that Ofwat follows the Scottish example and raises the retail margin in due course.
This makes UU and Severn Trent’s play all the more smart. In time, the business may become attractive as a standalone proposition, given the scale that neither company could have hoped to achieve alone. If it were to be sold or spun out, the parent companies would eventually realise greater value per customer than were they to have exited separately ahead of time.
Competitors with ambitions in the retail space, whether incumbents or new entrants, will be taking note. Partnerships, outsourcing arrangements and cost efficiencies are looking like the way to make this tricky market pay.
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