Retail margin drove UU-Severn Trent tie-up

One of the main reasons behind the joint venture between United Utilities and Severn Trent was the tight retail margin set by water regulator Ofwat, according to chief executive Sue Amies-King.

Ofwat has said it will hold the margin for the non-household retail market at 2.5 per cent, despite claims from industry that this will stifle competition when the market opens in 2017.

Amies-King told Utility Week: “If you’ve got margins like that then the best thing to do is to look for synergies with another player.”

She said that scale was important, “so that when you are investing – and clearly both the companies need to invest in order to be fit to compete – then you’re doing it once rather than twice”.

“That’s actually the rationale behind the JV,” she added.

New entrants, such as Scottish supplier Business Stream, have been calling for the margin in England to be increased, suggesting that there was uncertainty about the future market arrangements and that the margin should “reflect these uncertainties”.

However, in its most recent document, Ofwat said it had not found “any compelling evidence” that suggests it should revise the margin, and has stood firm at 2.5 per cent.

The regulator said evidence from the Competition and Markets Authority in its investigation of the energy sector supported a net margin of between 1 per cent and 3 per cent.

Additionally, the retail margin in Scotland prescribed by the Water Industry Commission for Scotland has, since 2008, risen from around 3 per cent to around 7 per cent.

The regulator said that, despite concerns that a 2.5 per cent net margin would be too low to attract new entrants into the market, “there are already signs of new entry”.

Market preparations

UU and Severn Trent announced at the beginning of March that they would team up to create a separate retail business to compete in the water market when it opens.

Earlier this week, the Competition and Markets Authority cleared the proposed JV, which the companies announced would be called Water Plus.

Amies-King told Utility Week the firm will be “agile and innovative” and bring in “fresh new ideas from the new people” being recruited.

She said Water Plus was planning to be a “winner in the market”, and wanted to be seen as the “go-to” company for business customers.

Read Utility Week’s Q+A with Sue Amies-King here

In January, Portsmouth became the first water company to reveal that it would exit the market when competition is introduced. The water-only company sold its business customer base to Scottish supplier Castle Water, which has subsequently applied to Ofwat for a water supply and sewerage licence and has set its sights on English market expansion.

Other Scottish suppliers, including Business Stream and new entrant Everflow, have told Utility Week they are considering buying into the English market when it opens.

And Scotland’s second largest water retailer, Clear Business Water, became the second supplier to apply for a licence late last month.

Of the WOCs, Affinity Water, Bristol Water, Essex and Suffolk Water, Sutton and East Surrey Water and Cholderton and District Water have all told Utility Week they plan to remain in the market, with South East Water and Cambridge/South Staffordshire Water refusing to comment.

And of the WASCs, eight of nine have said they will not exit the retail market, with Southern Water saying it is “undecided”.

English companies looking to stay have begun positioning themselves for market opening, with Northumbrian Water announcing a rebrand of its business retail arm to Wave, and South West Water teaming up with Bournemouth Water to create Pennon Water Services. Utility Week understands Anglian Water and at least one other WASC are set to follow suit.

Read Utility Week’s analysis: one year to market opening and WICS chief executive Alan Sutherland’s advice on how to prepare